SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 05/06/2011 16:16:56)
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 March 31, 2011

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 April 29, 2011, 42,886,953 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I - FINANCIAL INFORMATION      3   
Item 1.   Interim Consolidated Financial Statements (unaudited)      3   
  Interim Consolidated Balance Sheets (unaudited) as of March 31, 2011 and December 31, 2010      3   
  Interim Consolidated Statements of Income (unaudited) for the three months ended March 31, 2011 and 2010      4   
  Interim Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2011 and 2010      5   
  Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 2011 and 2010      6   
  Interim Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2011 and 2010      7   
  Notes to Interim Consolidated Financial Statements (unaudited)      8   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      67   
Item 4.   Controls and Procedures      68   
PART II - OTHER INFORMATION      68   
Item 1.   Legal Proceedings      68   
Item 1A.   Risk Factors      69   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      69   
Item 3.   Defaults Upon Senior Securities      69   
Item 4.   (Removed and Reserved)      69   
Item 5.   Other Information      69   
Item 6.   Exhibits      69   
SIGNATURES      70   
INDEX TO EXHIBITS      71   

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

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

   March 31,
2011
    December 31,
2010
 

Assets

    

Cash and due from banks

   $ 2,073,848      $ 2,672,725   

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

     276,212        403,707   
                

Cash and cash equivalents

     2,350,060        3,076,432   
                

Available-for-sale securities

     9,500,828        7,917,967   

Non-marketable securities

     798,064        721,520   
                

Investment securities

     10,298,892        8,639,487   
                

Loans, net of unearned income

     5,651,170        5,521,737   

Allowance for loan losses

     (82,051     (82,627
                

Net loans

     5,569,119        5,439,110   
                

Premises and equipment, net of accumulated depreciation and amortization

     46,161        44,545   

Accrued interest receivable and other assets

     354,034        328,187   
                

Total assets

   $ 18,618,266      $ 17,527,761   
                

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 9,524,698      $ 9,011,538   

Negotiable order of withdrawal (NOW)

     70,242        69,287   

Money market

     2,369,820        2,272,883   

Money market deposits in foreign offices

     95,019        98,937   

Time

     315,835        382,830   

Sweep

     2,954,705        2,501,466   
                

Total deposits

     15,330,319        14,336,941   
                

Short-term borrowings

     35,415        37,245   

Other liabilities

     200,768        196,037   

Long-term debt

     1,204,733        1,209,260   
                

Total liabilities

     16,771,235        15,779,483   
                

Commitments and contingencies (Note 11)

    

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; 42,697,828 shares and 42,268,201 shares outstanding, respectively

     43        42   

Additional paid-in capital

     443,453        422,334   

Retained earnings

     860,838        827,831   

Accumulated other comprehensive income

     9,240        24,143   
                

Total SVBFG stockholders’ equity

     1,313,574        1,274,350   

Noncontrolling interests

     533,457        473,928   
                

Total equity

     1,847,031        1,748,278   
                

Total liabilities and total equity

   $ 18,618,266      $ 17,527,761   
                

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Three months ended
March  31,
 

(Dollars in thousands, except per share amounts)

   2011     2010  

Interest income:

    

Loans

   $ 89,776      $ 73,942   

Available-for-sale securities:

    

Taxable

     41,382        32,267   

Non-taxable

     941        970   

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

     2,002        2,840   
                

Total interest income

     134,101        110,019   
                

Interest expense:

    

Deposits

     3,105        3,665   

Borrowings

     10,697        5,514   
                

Total interest expense

     13,802        9,179   
                

Net interest income

     120,299        100,840   

(Reduction of) provision for loan losses

     (3,047     10,745   
                

Net interest income after provision for loan losses

     123,346        90,095   
                

Noninterest income:

    

Gains on investment securities, net

     51,337        16,004   

Foreign exchange fees

     10,497        8,861   

Deposit service charges

     7,117        7,225   

Credit card fees

     3,817        2,687   

Client investment fees

     3,661        3,940   

Letters of credit and standby letters of credit income

     2,710        2,511   

Gains on derivative instruments, net

     551        1,982   

Other

     10,264        6,063   
                

Total noninterest income

     89,954        49,273   
                

Noninterest expense:

    

Compensation and benefits

     75,632        59,830   

Professional services

     12,987        12,098   

Premises and equipment

     5,912        5,784   

Business development and travel

     5,653        4,286   

Net occupancy

     4,650        4,688   

FDIC assessments

     3,475        5,049   

Correspondent bank fees

     2,163        1,948   

Reduction of provision for unfunded credit commitments

     (900     (1,507

Other

     7,863        6,400   
                

Total noninterest expense

     117,435        98,576   
                

Income before income tax expense

     95,865        40,792   

Income tax expense

     22,770        11,582   
                

Net income before noncontrolling interests

     73,095        29,210   

Net income attributable to noncontrolling interests

     (40,088     (10,653
                

Net income available to common stockholders

   $ 33,007      $ 18,557   
                

Earnings per common share—basic

   $ 0.78      $ 0.45   

Earnings per common share—diluted

     0.76        0.44   

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     Three months ended
March  31,
 

(Dollars in thousands)

   2011     2010  

Net income before noncontrolling interests

   $ 73,095      $ 29,210   

Other comprehensive income, net of tax:

    

Change in cumulative translation gains:

    

Foreign currency translation gains

     965        1,520   

Related tax expense

     (395     (620

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

    

Unrealized holding (losses) gains

     (26,159     27,226   

Related tax expense (benefit)

     10,723        (10,559

Reclassification adjustment for gains included in net income

     (62     (27

Related tax benefit

     25        11   
                

Other comprehensive (loss) income, net of tax

     (14,903     17,551   
                

Comprehensive income

     58,192        46,761   

Comprehensive income attributable to noncontrolling interests

     (40,088     (10,653
                

Comprehensive income available to common stockholders

   $ 18,104      $ 36,108   
                

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

      

 

Common Stock

     Additional
Paid-in
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Income
    Total SVBFG
Stockholders’
Equity
    Noncontrolling
Interests
     Total
Equity
 

(Dollars in thousands)

   Shares      Amount                 

Balance at December 31, 2009

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

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

     187,733         1         5,064        —           —          5,065        —           5,065   

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

     —           —           779        —           —          779        —           779   

Net income

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

Capital calls and (distributions), net

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

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

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

Foreign currency translation adjustments, net of tax

     —           —           —          —           900        900        —           900   

Stock-based compensation expense

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

Other-net

     —           —           (19     8         —          (11     —           (11
                                                                    

Balance at March 31, 2010

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

Balance at December 31, 2010

     42,268,201       $ 42       $ 422,334      $ 827,831       $ 24,143      $ 1,274,350      $ 473,928       $ 1,748,278   
                                                                    

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

     429,627         1         14,433        —           —          14,434        —           14,434   

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

     —           —           2,476        —           —          2,476        —           2,476   

Net income

     —           —           —          33,007         —          33,007        40,088         73,095   

Capital calls and (distributions), net

     —           —           —          —           —          —          19,441         19,441   

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

     —           —           —          —           (15,473     (15,473     —           (15,473

Foreign currency translation adjustments, net of tax

     —           —           —          —           570        570        —           570   

Stock-based compensation expense

     —           —           4,210        —           —          4,210        —           4,210   
                                                                    

Balance at March 31, 2011

     42,697,828       $ 43       $ 443,453      $ 860,838       $ 9,240      $ 1,313,574      $ 533,457       $ 1,847,031   
                                                                    

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Three months ended
March 31,
 

(Dollars in thousands)

   2011     2010  

Cash flows from operating activities:

    

Net income before noncontrolling interests

   $ 73,095      $ 29,210   

Adjustments to reconcile net income to net cash provided by operating activities:

    

(Reduction of) provision for loan losses

     (3,047     10,745   

Reduction of provision for unfunded credit commitments

     (900     (1,507

Changes in fair values of derivatives, net

     (1,008     518   

Gains on investment securities, net

     (51,337     (16,004

Depreciation and amortization

     6,519        5,599   

Amortization of premiums on available-for-sale securities, net

     2,570        5,956   

Tax benefit (expense) from stock exercises

     310        (313

Amortization of share-based compensation

     4,243        3,291   

Amortization of deferred loan fees

     (14,246     (11,581

Deferred income tax expense

     4,309        1,236   

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

     —          24   

Changes in other assets and liabilities:

    

Accrued interest receivable and payable, net

     (8,596     4,114   

Accounts receivable

     (1,099     1,370   

Income tax receivable, net

     9,890        8,550   

Prepaid FDIC assessments and amortization

     3,180        2,443   

Accrued compensation

     (39,760     (8,477

Foreign exchange spot contracts, net

     15,609        12,258   

Other, net

     6,391        421   
                

Net cash provided by operating activities

     6,123        47,853   
                

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (2,213,193     (878,579

Proceeds from sales of available-for-sale securities

     74        714   

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

     601,092        489,932   

Purchases of nonmarketable securities (cost and equity method accounting)

     (12,868     (8,332

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

     5,413        1,769   

Purchases of nonmarketable securities (investment fair value accounting)

     (42,448     (18,101

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

     24,639        4,859   

Net (increase) decrease in loans

     (123,975     331,492   

Proceeds from recoveries of charged-off loans

     6,793        6,256   

Proceeds from sale of other real estate owned

     —          196   

Payment for acquisition of intangibles, net of cash acquired

     —          (360

Purchases of premises and equipment

     (5,611     (6,763
                

Net cash used for investing activities

     (1,760,084     (76,917
                

Cash flows from financing activities:

    

Net increase in deposits

     993,378        1,181,357   

(Decrease) increase in short-term borrowings

     (1,830     1,140   

Capital contributions from noncontrolling interests, net of distributions

     19,441        19,260   

Tax benefit from stock exercises

     2,166        1,092   

Proceeds from issuance of common stock

     14,434        5,065   
                

Net cash provided by financing activities

     1,027,589        1,207,914   
                

Net (decrease) increase in cash and cash equivalents

     (726,372     1,178,850   

Cash and cash equivalents at beginning of period

     3,076,432        3,512,853   
                

Cash and cash equivalents at end of period

   $ 2,350,060      $ 4,691,703   
                

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest

   $ 14,601      $ 5,618   

Income taxes

     4,891        1,129   

Noncash items during the period:

    

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

   $ (15,473   $ 16,651   

Net change in fair value of interest rate swaps

     (5,525     3,137   

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

 

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SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

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

The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2011 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, 2010 (“2010 Form 10-K”).

The accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data-Note 2-“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2010 Form 10-K.

The preparation of unaudited 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 entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity or a variable interest entity. All significant intercompany accounts and transactions have been eliminated.

Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant decisions relating to the entity’s operations. For these types of entities, the Company’s determination of whether it has a controlling interest is based on ownership of the majority of the entities’ voting equity interest or through control of management of the entities.

Variable interest entities (“VIEs”) are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We determine whether we have a controlling financial interest in a VIE by considering whether our involvement with the VIE is significant and designates us as the primary beneficiary based on the following:

 

  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.

Voting interest entities in which the Company has a controlling Financial interest or VIEs in which the Company is the primary beneficiary are consolidated into our financial statements.

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. We perform on-going reassessments of whether facts or circumstances have changed in relation to previously evaluated voting interest entities and our involvement in VIEs which could cause the Company’s consolidation conclusion to change.

 

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Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (ASU No. 2011-02), which requires new disclosures and provides additional guidance to creditors for determining whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered TDR’s. The new disclosures and guidance are effective for interim and annual reporting periods beginning on or after June 15, 2011, with retrospective disclosures required for all TDR activities that have occurred from the beginning of the annual period of adoption. This standard clarifies how TDR’s are determined and increases the disclosure requirements for TDR’s. We are currently assessing the impact of this guidance on our financial position, results of operations or stockholders’ equity.

Reclassifications

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

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

Earnings Per Share

Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options and restricted stock units and awards outstanding under our equity incentive plans, our Employee Stock Purchase Plan (“ESPP”), our 3.875% convertible senior notes (“3.875% Convertible Notes”) and associated convertible note hedge and warrant agreement. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be anti-dilutive. The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2011 and 2010, respectively:

 

     Three months ended March 31,  

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

   2011      2010  

Numerator:

     

Net income available to common stockholders

   $ 33,007       $ 18,557   

Denominator:

     

Weighted average common shares outstanding-basic

     42,482         41,405   

Weighted average effect of dilutive securities:

     

Stock options and ESPP

     707         751   

Restricted stock units

     149         135   

3.875% Convertible Notes

     88         —     
                 

Denominator for diluted calculation

     43,426         42,291   
                 

Net income per common share:

     

Basic

   $ 0.78       $ 0.45   
                 

Diluted

   $ 0.76       $ 0.44   
                 

The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three months ended March 31, 2011 and 2010, respectively:

 

     Three months ended March 31,  

(Shares in thousands)

   2011      2010  

Stock options

     78         7   

Warrant associated with Capital Purchase Program (1)

     —           38   
                 

Total

     78         45   
                 

 

(1) In June 2010, we repurchased in its entirety the warrant previously issued to the U.S. Treasury in connection with our previous participation in the Capital Purchase Program.

 

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In addition to the above, at March 31, 2011, 4.7 million shares of warrants associated with our 3.875% Convertible Notes were outstanding but also excluded from the diluted EPS calculation as they were deemed to be anti-dilutive. Concurrent with the issuance of our 3.875% Convertible Notes, we entered into a convertible note hedge and warrant agreement. For more information on our 3.875% 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 2010 Form 10-K.

Our 3.875% Convertible Notes matured on April 15, 2011. Refer to Note 16-“Subsequent Events” for further details.

3. Share-Based Compensation

For the three months ended March 31, 2011 and 2010, we recorded share-based compensation and related tax benefits as follows:

 

     Three months ended March 31,  

(Dollars in thousands)

   2011     2010  

Share-based compensation expense

   $ 4,243      $ 3,291   

Income tax benefit related to share-based compensation expense

     (1,033     (772

Unrecognized Compensation Expense

At March 31, 2011, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized
Expense
     Average Expected
Recognition
Period - in Years
 

Stock options

   $ 10,123         2.66   

Restricted stock units

     9,835         2.26   
           

Total unrecognized share-based compensation expense

   $ 19,958      
           

Share-Based Payment Award Activity

The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2011:

 

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

Money Options
 

Outstanding at December 31, 2010

     3,112,253      $ 37.88         

Granted

     14,174        53.82         

Exercised

     (440,459     34.18         

Forfeited

     (2,787     43.05         

Expired

     (1     26.06         
                

Outstanding at March 31, 2011

     2,683,180        38.56         3.36       $ 49,300,734   
                

Vested and expected to vest at March 31, 2011

     2,582,770        38.49         3.27         47,652,444   
                

Exercisable at March 31, 2011

     1,588,623        38.00         2.02         30,078,071   
                

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $56.93 as of March 31, 2011. The total intrinsic value of options exercised during the three months ended March 31, 2011 was $8.9 million, compared to $3.2 million for the comparable 2010 period.

 

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The table below provides information for restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2011:

 

     Shares     Weighted Average
Grant Date Fair
Value
 

Nonvested at December 31, 2010

     395,950      $ 43.49   

Granted

     5,829        53.84   

Vested

     (4,593     43.36   

Forfeited

     (1,072     42.79   
          

Nonvested at March 31, 2011

     396,114        43.64   
          

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

The following table details the securities purchased under agreements to resell and other short-term investment securities at March 31, 2011 and December 31, 2010, respectively:

 

(Dollars in thousands)

   March 31, 2011      December 31, 2010  

Securities purchased under agreements to resell

   $ 19,687       $ 60,345   

Short-term agency discount notes

     234,215         330,370   

Other short-term investment securities

     22,310         12,992   
                 

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

   $ 276,212       $ 403,707   
                 

In addition, as of March 31, 2011 and December 31, 2010, $1.5 billion and $2.2 billion, respectively, of our cash and due from banks was deposited with the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $265.3 million and $246.3 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 March 31, 2011 and December 31, 2010 are as follows:

 

    March 31, 2011     December 31, 2010  

(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

  $ 25,365      $ 836      $ —        $ 26,201      $ 25,408      $ 1,002      $ —        $ 26,410   

U.S. agency debentures

    2,908,023        4,508        (23,855     2,888,676        2,844,973        7,077        (16,957     2,835,093   

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

    2,036,597        11,963        (2,935     2,045,625        1,234,120        15,487        (1,097     1,248,510   

Agency-issued collateralized mortgage obligations - fixed rate

    1,545,677        23,903        (189     1,569,391        806,032        24,435        (1     830,466   

Agency-issued collateralized mortgage obligations - variable rate

    2,848,852        2,228        (4,493     2,846,587        2,870,570        10,394        (1,439     2,879,525   

Commercial mortgage-backed securities

    25,416        —          (119     25,297        —          —          —          —     

Municipal bonds and notes

    96,364        2,791        (681     98,474        96,381        2,164        (965     97,580   

Equity securities

    525        74        (22     577        358        34        (9     383   
                                                               

Total available-for-sale securities

  $ 9,486,819      $ 46,303      $ (32,294   $ 9,500,828      $ 7,877,842      $ 60,593      $ (20,468   $ 7,917,967   
                                                               

Non-marketable securities:

               

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

               

Venture capital and private equity fund investments (1)

          464,377              391,247   

Other venture capital investments (2)

          108,525              111,843   

Other investments (3)

          995              981   

Non-marketable securities (equity method accounting):

               

Other investments (4)

          68,335              67,031   

Low income housing tax credit funds

          26,759              27,832   

Non-marketable securities (cost method accounting):

               

Venture capital and private equity fund investments (5)

          116,022              110,466   

Other venture capital investments

          13,051              12,120   
                           

Total non-marketable securities

          798,064              721,520   
                           

Total investment securities

        $ 10,298,892            $ 8,639,487   
                           

 

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(1) The following table shows the amount of venture capital and private equity fund investments by the following consolidated funds and our ownership of each fund at March 31, 2011 and December 31, 2010:

 

     March 31, 2011     December 31, 2010  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

SVB Strategic Investors Fund, LP

   $ 45,686         12.6   $ 44,722         12.6

SVB Strategic Investors Fund II, LP

     110,476         8.6        94,694         8.6   

SVB Strategic Investors Fund III, LP

     165,965         5.9        146,613         5.9   

SVB Strategic Investors Fund IV, LP

     61,935         5.0        40,639         5.0   

SVB Capital Preferred Return Fund, LP

     32,622         20.0        23,071         20.0   

SVB Capital—NT Growth Partners, LP

     33,884         33.0        28,624         33.0   

SVB Capital Partners II, LP (i)

     4,555         5.1        4,506         5.1   

Other private equity fund (ii)

     9,254         58.2        8,378         60.6   
                      

Total venture capital and private equity fund investments

   $ 464,377         $ 391,247      
                      

 

  (i) At March 31, 2011, 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 March 31, 2011, we had a direct ownership interest of 41.5% and an indirect ownership interest of 12.6% and 4.1% in the fund through our ownership interests of SVB Capital—NT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively.

 

(2) The following table shows the amount of other venture capital investments by the following consolidated funds and our ownership of each fund at March 31, 2011 and December 31, 2010:

 

     March 31, 2011     December 31, 2010  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

Silicon Valley BancVentures, LP

   $ 22,385         10.7   $ 21,371         10.7

SVB Capital Partners II, LP (i)

     48,032         5.1        51,545         5.1   

SVB India Capital Partners I, LP

     37,344         14.4        38,927         14.4   

SVB Capital Shanghai Yangpu Venture Capital Fund

     764         6.8        —           —     
                      

Total other venture capital investments

   $ 108,525         $ 111,843      
                      

 

 

  (i) At March 31, 2011, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership of SVB Strategic Investors Fund II, LP.

 

(3) 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 both March 31, 2011 and December 31, 2010 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.

 

(4) The following table shows the carrying value and our ownership percentage of each investment at March 31, 2011 and December 31, 2010:

 

     March 31, 2011     December 31, 2010  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 17,755         9.3   $ 17,826         9.3

Gold Hill Capital 2008, LP (ii)

     12,520         15.5        12,101         15.5   

Partners for Growth II, LP

     9,735         24.2        10,465         24.2   

Other investments

     28,325         N/A        26,639         N/A   
                      

Total other investments

   $ 68,335         $ 67,031      
                      

 

  (i) At March 31, 2011, 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%.
  (ii) At March 31, 2011, we had a direct ownership interest of 11.5% in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0%. Our aggregate direct and indirect ownership in the fund is 15.5%.

 

(5)

Represents investments in 334 and 343 funds (primarily venture capital funds) at March 31, 2011 and December 31, 2010, respectively, where our ownership interest is less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships operating and financial policies. For the three months ended

 

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March 31, 2011, we recognized other-than-temporary impairment (“OTTI”) losses of $0.1 million resulting from other-than-temporary declines in value for 8 of the 334 investments. The OTTI losses are included in net gains on investment securities, a component of noninterest income. For the remaining 326 investments at March 31, 2011, we concluded that declines in value, if any, were temporary and as such, no OTTI was required to be recognized. At March 31, 2011, the carrying value of these venture capital and private equity fund investments (cost method accounting) was $116.0 million, and the estimated fair value was $129.8 million.

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 March 31, 2011:

 

     March 31, 2011  
     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

   $ 2,036,865       $ (23,855   $ —         $ —        $ 2,036,865       $ (23,855

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

     303,168         (2,935     —           —          303,168         (2,935

Agency-issued collateralized mortgage obligations—fixed rate

     63,786         (189     —           —          63,786         (189

Agency-issued collateralized mortgage obligations—variable rate

     1,893,369         (4,493     —           —          1,893,369         (4,493

Commercial mortgage-backed securities

     25,297         (119     —           —          25,297         (119

Municipal bonds and notes (1)

     19,018         (658     3,500         (23     22,518         (681

Equity securities

     428         (22     —           —          428         (22
                                                   

Total temporarily impaired securities (1)

   $ 4,341,931       $ (32,271   $ 3,500       $ (23   $ 4,345,431       $ (32,294
                                                   

 

(1) As of March 31, 2011, we identified a total of 193 investments that were in unrealized loss positions. Based on the underlying credit quality of the investments, we do not intend to sell any of our securities prior to recovery of our adjusted cost basis and as of March 31, 2011, 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 March 31, 2011 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, 2010:

 

     December 31, 2010  
     Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

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

U.S. agency debentures

   $ 1,731,639       $ (16,957   $ —         $ —        $ 1,731,639       $ (16,957

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

     32,595         (1,097     —           —          32,595         (1,097

Agency-issued collateralized mortgage obligations—fixed rate

     322         (1     —           —          322         (1

Agency-issued collateralized mortgage obligations—variable rate

     506,104         (1,439     —           —          506,104         (1,439

Commercial mortgage-backed securities

     —           —          —           —          —           —     

Municipal bonds and notes

     25,699         (893     3,451         (72     29,150         (965

Equity securities

     148         (9     —           —          148         (9
                                                   

Total temporarily impaired securities

   $ 2,296,507       $ (20,396   $ 3,451       $ (72   $ 2,299,958       $ (20,468
                                                   

 

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The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of March 31, 2011. 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 classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure.

 

     March 31, 2011  
     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

   $ 26,201         2.39   $ —           —     $ 26,201         2.39   $ —           —     $ —           —  

U.S. agency debentures

     2,888,676         1.51        81,067         1.74        2,782,531         1.48        25,078         4.07        —           —     

Residential mortgage-backed securities:

                         

Agency-issued mortgage-backed securities

     2,045,625         3.28        —           —          —           —          1,021,110         2.76        1,024,515         3.79   

Agency-issued collateralized mortgage obligations—fixed rate

     1,569,391         3.23        —           —          —           —          —           —          1,569,391         3.23   

Agency-issued collateralized mortgage obligations—variable rate

     2,846,587         0.80        —           —          —           —          —           —          2,846,587         0.80   

Commercial mortgage-backed securities

     25,297         2.70        —           —          —           —          —           —          25,297         2.70   

Municipal bonds and notes

     98,474         6.02        554         4.92        7,476         5.37        45,163         5.92        45,281         6.22   
                                                       

Total

   $ 9,500,251         2.01      $ 81,621         1.76      $ 2,816,208         1.50      $ 1,091,351         2.92      $ 5,511,071         2.10   
                                                       

The cost of investment securities is determined on a specific identification basis. The following table presents the components of gains and losses on investment securities for the three months ended March 31, 2011 and 2010:

 

     Three months ended March 31,  

(Dollars in thousands)

   2011     2010  

Gross gains on investment securities:

    

Available-for-sale securities, at fair value

   $ 63      $ 31   

Marketable securities (investment company fair value accounting)

     442        51   

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

    

Venture capital and private equity fund investments

     45,499        19,792   

Other venture capital investments

     4,948        484   

Other investments

     20        27   

Non-marketable securities (equity method accounting):

    

Other investments

     3,384        1,543   

Non-marketable securities (cost method accounting):

    

Venture capital and private equity fund investments

     255        315   

Other investments

     173        —     
                

Total gross gains on investment securities

     54,784        22,243   
                

Gross losses on investment securities:

    

Available-for-sale securities, at fair value

     (1     (4

Marketable securities (investment company fair value accounting)

     (808     —     

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

    

Venture capital and private equity fund investments

     (2,056     (4,336

Other venture capital investments

     (244     (1,561

Non-marketable securities (equity method accounting):

    

Other investments

     (199     (1

Non-marketable securities (cost method accounting):

    

Venture capital and private equity fund investments

     (139     (337
                

Total gross losses on investment securities

     (3,447     (6,239
                

Gains on investment securities, net

   $ 51,337      $ 16,004   
                

Gains attributable to noncontrolling interests, including carried interest

   $ 43,385      $ 12,778   
                

 

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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 SVB Private Bank. These products and services include real estate secured home equity lines of credit, which may be used to finance real estate investments and loans 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 secured real estate loans to eligible employees through our Employee Home Ownership Program (“EHOP”).

We also provide community development loans made as part of our responsibilities under the Community Reinvestment Act. These loans are included within “Construction loans” below and are primarily secured by real estate.

The composition of loans, net of unearned income of $47.7 million and $45.5 million at March 31, 2011 and December 31, 2010, respectively, is presented in the following table:

 

(Dollars in thousands)

   March 31, 2011      December 31, 2010  

Commercial loans:

     

Software

   $ 1,824,113       $ 1,820,385   

Hardware

     566,359         561,610   

Clean technology

     212,168         159,502   

Venture capital/private equity

     1,012,572         1,036,077   

Life science

     597,660         568,739   

Premium wine (1)

     130,431         144,972   

Other

     321,360         303,492   
                 

Commercial loans (2)

     4,664,663         4,594,777   
                 

Real estate secured loans:

     

Premium wine (1)

     310,986         312,255   

Consumer loans (3)

     416,734         361,704   
                 

Real estate secured loans

     727,720         673,959   
                 

Construction loans

     62,695         60,178   

Consumer loans

     196,092         192,823   
                 

Total loans, net of unearned income

   $ 5,651,170       $ 5,521,737   
                 

 

(1) Included in our premium wine portfolio are gross construction loans of $121.1 million and $119.0 million at March 31, 2011 and December 31, 2010, respectively.
(2) Included within our commercial loans portfolio are business credit card loans to commercial clients. At March 31, 2011 and December 31, 2010, our business credit card loans portfolio totaled $37.4 million and $32.5 million, respectively.
(3) Consumer loans secured by real estate at March 31, 2011 and December 31, 2010 were comprised of the following:

 

(Dollars in thousands)

   March 31, 2011      December 31, 2010  

Loans for personal residence

   $ 243,197       $ 189,039   

Loans to eligible employees

     94,731         88,510   

Home equity lines of credit

     78,806         84,155   
                 

Consumer loans secured by real estate

   $ 416,734       $ 361,704   
                 

 

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The activity in the allowance for loan losses for the three months ended March 31, 2011 and 2010 was as follows:

 

     Three months ended March 31,  

(Dollars in thousands)

   2011     2010  

Allowance for loan losses, beginning balance

   $ 82,627      $ 72,450   

(Reduction of) provision for loan losses

     (3,047     10,745   

Gross loan charge-offs

     (4,322     (21,180

Loan recoveries

     6,793        6,256   
                

Allowance for loan losses, ending balance

   $ 82,051      $ 68,271   
                

Credit Quality

The composition of loans, net of unearned income, broken out by portfolio segment (which we have identified as our commercial and consumer loan categories) and class of financing receivable (which we have identified as our client industry segments of hardware, software, etc.) as of March 31, 2011 and December 31, 2010, is as follows:

 

(Dollars in thousands)

   March 31, 2011      December 31, 2010  

Commercial loans:

     

Software

   $ 1,850,490       $ 1,820,680   

Hardware

     669,469         641,052   

Venture capital/private equity

     1,012,670         1,036,201   

Life science

     604,091         575,944   

Premium wine

     441,417         457,227   

Other

     460,207         436,106   
                 

Total commercial loans

     5,038,344         4,967,210   
                 

Consumer loans:

     

Real estate secured loans

     416,734         361,704   

Other consumer loans

     196,092         192,823   
                 

Total consumer loans

     612,826         554,527   
                 

Total loans, net of unearned income

   $ 5,651,170       $ 5,521,737   
                 

 

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The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of March 31, 2011 and December 31, 2010:

 

(Dollars in thousands)

   30 - 59 Days
Past Due
     60 - 89 Days
Past Due
     Greater
Than 90
Days Past
Due
     Total Past
Due
     Current      Loans Past Due
90 Days or More
Still Accruing
Interest
 

March 31, 2011:

                 

Commercial loans:

                 

Software

   $ 4,576       $ 940       $ 13       $ 5,529       $ 1,861,661       $ 13   

Hardware

     47         12         —           59         669,774         —     

Venture capital/private equity

     171         —           —           171         1,023,089         —     

Life science

     155         199         —           354         608,682         —     

Premium wine

     2,645         —           —           2,645         437,033         —     

Other

     99         —           —           99         462,757         —     
                                                     

Total commercial loans

     7,693         1,151         13         8,857         5,062,996         13   
                                                     

Consumer loans:

                 

Real estate secured loans

     —           —           —           —           396,500         —     

Other consumer loans

     —           806         —           806         195,233         —     
                                                     

Total consumer loans

     —           806         —           806         591,733         —     
                                                     

Total gross loans excluding impaired loans

     7,693         1,957         13         9,663         5,654,729         13   
                                                     

Impaired loans

     1,107         241         2,510         3,858         30,648         —     
                                                     

Total gross loans

   $ 8,800       $ 2,198       $ 2,523       $ 13,521       $ 5,685,377       $ 13   
                                                     

December 31, 2010:

                 

Commercial loans:

                 

Software

   $ 674       $ 239       $ 17       $ 930       $ 1,834,897       $ 17   

Hardware

     89         819         27         935         642,786         27   

Venture capital/private equity

     —           —           —           —           1,046,696         —     

Life science

     157         —           —           157         578,208         —     

Premium wine

     —           —           —           —           451,006         —     

Other

     —           —           —           —           438,345         —     
                                                     

Total commercial loans

     920         1,058         44         2,022         4,991,938         44   
                                                     

Consumer loans:

                 

Real estate secured loans

     —           —           —           —           341,048         —     

Other consumer loans

     —           —           —           —           192,771         —     
                                                     

Total consumer loans

     —           —           —           —           533,819         —     
                                                     

Total gross loans excluding impaired loans

     920         1,058         44         2,022         5,525,757         44   
                                                     

Impaired loans

     323         913         7,805         9,041         30,385         —     
                                                     

Total gross loans

   $ 1,243       $ 1,971       $ 7,849       $ 11,063       $ 5,556,142       $ 44   
                                                     

 

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The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by portfolio segment and class of financing receivable as of March 31, 2011 and December 31, 2010:

 

(Dollars in thousands)

   Impaired loans for
which there is a
related allowance
for loan losses
     Impaired loans for
which there is no
related allowance
for loan losses
     Total unpaid
principal of
impaired loans
 

March 31, 2011:

        

Commercial loans:

        

Software

   $ 2,654       $ —         $ 2,654   

Hardware

     6,637         —           6,637   

Life science

     1,124         248         1,372   

Premium wine

     206         1,354         1,560   

Other

     1,158         1,004         2,162   
                          

Total commercial loans

     11,779         2,606         14,385   
                          

Consumer loans:

        

Real estate secured loans

     20,121         —           20,121   
                          

Total consumer loans

     20,121         —           20,121   
                          

Total

   $ 31,900       $ 2,606       $ 34,506   
                          

December 31, 2010:

        

Commercial loans:

        

Software

   $ 2,958       $ 334       $ 3,292   

Hardware

     3,517         307         3,824   

Life science

     2,050         1,362         3,412   

Premium wine

     2,995         3,167         6,162   

Other

     1,158         1,019         2,177   
                          

Total commercial loans

     12,678         6,189         18,867   
                          

Consumer loans:

        

Real estate secured loans

     20,559         —           20,559   
                          

Total consumer loans

     20,559         —           20,559   
                          

Total

   $ 33,237       $ 6,189       $ 39,426   
                          

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during the three months ended March 31, 2011 and 2010, respectively:

 

     Three months ended March 31,  

(Dollars in thousands)

   2011      2010  

Average impaired loans:

     

Commercial loans:

     

Software

   $ 2,775       $ 6,767   

Hardware

     4,526         13,485   

Life science

     2,498         5,835   

Premium wine

     3,684         190   

Other

     2,167         2,480   
                 

Total commercial loans

     15,650         28,757   
                 

Consumer loans:

     

Real estate secured loans

     20,125         21,208   

Other consumer loans

     —           414   
                 

Total consumer loans

     20,125         21,622   
                 

Total average impaired loans

   $ 35,775       $ 50,379   
                 

 

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The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2011, broken out by portfolio segment:

 

Three months ended March 31, 2011 (dollars in thousands)

   Beginning
Balance
December 31,
2010
     Charge-offs     Recoveries      (Reduction of)
Provision
    Ending
Balance
March 31,
2011
 

Commercial loans:

            

Software

   $ 29,288       $ (1,104   $ 5,281       $ (2,986   $ 30,479   

Hardware

     14,688         (15     280         887        15,840   

Venture capital/private equity

     8,241         —          —           (809     7,432   

Life science

     9,077         (3,191     623         1,588        8,097   

Premium wine

     5,492         —          140         (1,128     4,504   

Other

     5,318         (12     70         1,057        6,433   
                                          

Total commercial loans

     72,104         (4,322     6,394         (1,391     72,785   
                                          

Consumer loans

     10,523         —          399         (1,656     9,266   
                                          

Total allowance for loan losses

   $ 82,627       $ (4,322   $ 6,793       $ (3,047   $ 82,051   
                                          

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of March 31, 2011 and December 31, 2010, broken out by portfolio segment:

 

     March 31, 2011      December 31, 2010  

(Dollars in thousands)

   Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
 

Commercial loans:

           

Software

   $ 1,212       $ 29,267       $ 986       $ 28,302   

Hardware

     2,646         13,194         1,348         13,340   

Venture capital/private equity

     —           7,432         —           8,241   

Life science

     450         7,647         346         8,731   

Premium wine

     80         4,424         438         5,054   

Other

     155         6,278         122         5,196   
                                   

Total commercial loans

     4,543         68,242         3,240         68,864   
                                   

Consumer loans

     2,339         6,927         3,696         6,827   
                                   

Total allowance for loan losses

   $ 6,882       $ 75,169       $ 6,936       $ 75,691   
                                   

Credit Quality Indicators

For each individual client we establish an internal credit risk rating for that loan, which is used for assessing and monitoring credit risk as well as performance of the loan and the overall portfolio. Our internal credit risk ratings are also used to summarize the risk of loss due to failure by an individual borrower to repay the loan. For our internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk-rated 1 through 4 are performing loans and translate to an internal rating of “Pass”, with loans risk-rated 1 being cash secured. Loans risk-rated 5 through 7 are loans that are performing loans, however, we consider them as demonstrating higher risk which requires more frequent review of the individual exposures; these translate to an internal rating of “Performing (Criticized)”. A majority of our performing (criticized) loans are from our SVB Accelerator practice, serving our emerging or early stage clients. Loans risk-rated 8 and 9 are loans that are considered to be impaired and are on nonaccrual status. Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), or when we have determined, based upon most recent available information, that the timely collection of principal or interest is not probable. (For further description of nonaccrual loans, refer to Note 2- “Summary of Significant Accounting Policies” under Part II, Item 8 of our 2010 Form 10-K); these loans are deemed “Impaired”. Loans rated 10 are charged-off and are not included as part of our loan portfolio balance. We review our credit quality indicators for performance and appropriateness of risk ratings as part of our evaluation process for our allowance for loan losses. The following table summarizes the credit quality indicators, broken out by portfolio segment and class of financing receivables as of March 31, 2011 and December 31, 2010:

 

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(Dollars in thousands)

   Pass      Performing
(Criticized)
     Impaired      Total  

March 31, 2011:

           

Commercial loans:

           

Software

   $ 1,683,139       $ 184,051       $ 2,654       $ 1,869,844   

Hardware

     600,226         69,607         6,637         676,470   

Venture capital/private equity

     1,009,430         13,830         —           1,023,260   

Life science

     531,398         77,638         1,372         610,408   

Premium wine

     392,972         46,706         1,560         441,238   

Other

     429,165         33,691         2,162         465,018   
                                   

Total commercial loans

     4,646,330         425,523         14,385         5,086,238   
                                   

Consumer loans:

           

Real estate secured loans

     390,795         5,705         20,121         416,621   

Other consumer loans

     184,531         11,508         —           196,039   
                                   

Total consumer loans

     575,326         17,213         20,121         612,660   
                                   

Total gross loans

   $ 5,221,656       $ 442,736       $ 34,506       $ 5,698,898   
                                   

December 31, 2010:

           

Commercial loans:

           

Software

   $ 1,717,309       $ 118,518       $ 3,292       $ 1,839,119   

Hardware

     575,401         68,320         3,824         647,545   

Venture capital/private equity

     1,031,373         15,323         —           1,046,696   

Life science

     520,596         57,769         3,412         581,777   

Premium wine

     400,519         50,487         6,162         457,168   

Other

     415,381         22,964         2,177         440,522   
                                   

Total commercial loans

     4,660,579         333,381         18,867         5,012,827   
                                   

Consumer loans:

           

Real estate secured loans

     337,087         3,961         20,559         361,607   

Other consumer loans

     181,561         11,210         —           192,771   
                                   

Total consumer loans

     518,648         15,171         20,559         554,378   
                                   

Total gross loans

   $ 5,179,227       $ 348,552       $ 39,426       $ 5,567,205   
                                   

Troubled Debt Restructurings

Included in the $34.5 million of impaired loans at March 31, 2011 are loans modified in TDRs, where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. As of March 31, 2011, we had TDRs of $30.9 million (all of which were considered impaired), which were comprised of $19.2 million in consumer loans secured by real estate, $6.6 million in hardware loans, $2.5 million in software loans, $2.2 million in other commercial loans, $0.2 million in premium wine loans and $0.2 million in life science 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 material commitments available for funding to any of the clients associated with these TDRs as of March 31, 2011.

 

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7. Short-Term Borrowings and Long-Term Debt

The following table represents outstanding short-term borrowings and long-term debt at March 31, 2011 and December 31, 2010:

 

(Dollars in thousands)

  

Maturity

   Principal value      March 31, 2011      December 31, 2010  
Short-term borrowings:            

Other short-term borrowings

   (1)    $ 35,415       $ 35,415       $ 37,245   
                       

Total short-term borrowings

         $ 35,415       $ 37,245   
                       
Long-term debt:            

5.375% senior notes

   September 15, 2020      350,000       $ 347,648       $ 347,601   

5.70% senior notes (2)

   June 1, 2012      250,000         263,102         265,613   

6.05% subordinated notes (3)

   June 1, 2017      250,000         282,947         285,937   

3.875% Convertible Notes

   April 15, 2011      250,000         249,900         249,304   

7.0% junior subordinated debentures

   October 15, 2033      50,000         55,504         55,548   

4.99% long-term notes payable

   (4)      5,632         5,632         5,257   
                       

Total long-term debt

         $ 1,204,733       $ 1,209,260   
                       

 

(1) Represents cash collateral received from counterparties for our interest rate swap agreements related to our 5.70% Senior Notes and 6.05% Subordinated Notes.
(2) At March 31, 2011 and December 31, 2010, included in the carrying value of our 5.70% Senior Notes are $13.2 million and $15.7 million, respectively, related to the fair value of the interest rate swap associated with the notes.
(3) At March 31, 2011 and December 31, 2010, included in the carrying value of our 6.05% Subordinated Notes are $33.3 million and $36.3 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, and was payable beginning April 30, 2009 with the last payment due in April 2012.

Interest expense related to short-term borrowings and long-term debt was $10.7 million and $5.5 million for the three months ended March 31, 2011 and 2010, respectively. Interest expense shown is net of the cash flow impact from our interest rate swap agreements related to our 5.70% Senior notes and 6.05% Subordinated notes. The weighted average interest rates associated with our short-term borrowings as of March 31, 2011 and December 31, 2010 were 0.10 percent and 0.13 percent, respectively.

Senior Notes and Subordinated Notes

On May 15, 2007, the Bank issued 5.70% Senior Notes, due June 1, 2012, in an aggregate principal amount of $250 million and 6.05% Subordinated Notes, due June 1, 2017, in an aggregate principal amount of $250 million (collectively, the “Notes”). On May 3, 2011, the Bank repurchased $108.6 million of our 5.70% Senior Notes and $204.0 million of our 6.05% Subordinated Notes. Refer to Note 16- “Subsequent Events” for further details.

3.875% Convertible Notes

In April 2008, we issued our 3.875% 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 3.875% Convertible Notes were $6.8 million, and the net proceeds from the offering were $243.2 million. We used $141.9 million of the net proceeds to settle the principal value of our Zero-Coupon Convertible Notes, which matured in June 2008. All remaining proceeds were used for general corporate purposes. The 3.875% 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 3.875% 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 3.875% Convertible Notes, we entered into a convertible note hedge and warrant agreement (see Note 8- “Derivative Financial Instruments”), which effectively increased the economic conversion price of our 3.875% Convertible Notes to $64.43 per share of common stock. The terms of the hedge and warrant agreement are not part of the terms of the notes and will not affect the rights of the holders of the notes.

 

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The effective interest rate for our 3.875% Convertible Notes for both the three months ended March 31, 2011 and 2010 was 5.78 percent, and interest expense was $3.6 million and $3.5 million, respectively. At March 31, 2011, the unamortized debt discount totaled $0.1 million, and will be amortized over the remaining contractual term of the debt.

On April 15, 2011, our 3.875% Convertible Notes matured. Refer to Note 16- “Subsequent Events” for further details.

Available Lines of Credit

We have certain facilities in place providing us access to short-term borrowings on a secured basis (using available-for-sale securities as collateral) and on an unsecured basis. These include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of March 31, 2011, we had not borrowed against any of our repurchase lines or any of our uncommitted federal funds lines. We also pledge securities to the Federal Home Loan Bank of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the Federal Home Loan Bank of San Francisco (comprised entirely of U.S. agency debentures) at March 31, 2011 totaled $1.5 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 March 31, 2011 totaled $85.3 million, all of which was unused and available to support additional borrowings.

8. 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 often obtain equity warrant assets giving us the right to acquire stock in primarily private, venture-backed companies in the technology and life science industries.

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 6.05% Subordinated Notes, we entered into fixed-for-floating interest rate swap agreements at the time of debt issuance based upon London Interbank Offered Rates (“LIBOR”) with matched-terms. We use the shortcut method to assess hedge effectiveness and evaluate the hedging relationships for qualification under the shortcut method requirements for each reporting period.

For more information on our 5.70% Senior Notes and 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 2010 Form 10-K.

Net cash benefits associated with our interest rate swaps are recorded in “Interest expense - Borrowings,” a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Increases from changes in fair value are included in other assets and decreases from changes in fair value are included in other liabilities. Any differences associated with our interest rate swaps that arise as a result of hedge ineffectiveness are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

On May 3, 2011, the Bank repurchased $108.6 million of our 5.70% Senior Notes and $204.0 million of our 6.05% Subordinated Notes, and we terminated corresponding amounts of the associated interest rate swaps. Refer to Note 16- “Subsequent Events” for further details.

Currency Exchange Risk

We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk related to our loans that are denominated in foreign currencies to our clients, primarily in Pound Sterling and Euro. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Changes in currency rates on the loans are included in other noninterest income, a component of noninterest income. We may experience ineffectiveness in the economic hedging relationship, because the loans are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Equity Market Price Risk

We have convertible debt instruments that contain conversion options that enable the holders to convert the instruments, subject to certain conditions. Specifically, we have outstanding our 3.875% 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

 

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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 a 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 3.875% Convertible Notes, we entered into a convertible note hedge and warrant agreement at a net cost of $20.6 million, which effectively increased the economic conversion price from $53.04 per common share to $64.43. For the three months ended March 31, 2011 and 2010, there were no note conversions or exercises under the warrant agreement as the notes were not convertible.

For more information on the 3.875% 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 2010 Form 10-K.

On April 15, 2011, our 3.875% Convertible Notes matured. Refer to Note 16- “Subsequent Events” for further details.

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 on derivative instruments, in noninterest income, a component of consolidated net income.

Loan Conversion Options

In connection with negotiating certain credit facilities through our relationship with management of one of our sponsored debt funds, we occasionally extend loan facilities which have convertible option features. The convertible loans may be converted into a certain number of shares determined by dividing the principal amount of the loan by the applicable conversion price. Because our loan conversion options have underlying and notional values, had no initial net investment, and can be net settled, these assets qualify as derivative instruments. We value our loan conversion options using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. Loan conversion options are recorded at fair value in other assets, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Other Derivatives

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

We sell interest rate contracts to clients who wish to mitigate their interest rate exposure. We economically reduce the interest rate risk from this business by entering into opposite way contracts with correspondent banks. We do not designate any of these contracts (which are derivative instruments) as qualifying for hedge accounting. 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 derivatives is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Counterparty Credit Risk

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

 

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The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at March 31, 2011 and December 31, 2010, respectively, were as follows:

 

(Dollars in thousands)

 

Balance Sheet
Location

  March 31, 2011     December 31, 2010  
    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      $ 46,492      $ 35,415      $ 11,077      $ 500,000      $ 52,017      $ 37,245      $ 14,772   
                                                     

Derivatives not designated as hedging instruments:

                 
Currency exchange risks:                  

Foreign exchange forwards

  Other assets     12,093        189        —          189        33,046        459        —          459   

Foreign exchange forwards

  Other liabilities     52,913        (1,085     —          (1,085     26,764        (280     —          (280
                                                     

Net exposure

        (896     —          (896       179        —          179   
                                                     
Other derivative instruments:                  

Equity warrant assets

  Other assets     132,392        51,273        —          51,273        126,062        47,565        —          47,565   
                                                     

Other derivatives:

                 

Foreign exchange forwards

  Other assets     347,344        10,171        —          10,171        291,243        9,408        —          9,408   

Foreign exchange forwards

  Other liabilities     326,315        (9,313     —          (9,313     267,218        (8,505     —          (8,505

Foreign currency options

  Other assets     75,896        900        —          900        118,133        1,482        —          1,482   

Foreign currency options

  Other liabilities     75,896        (900     —          (900     118,133        (1,482     —          (1,482

Loan conversion options

  Other assets     10,450        3,281        —          3,281        10,175        4,291        —          4,291   

Client interest rate derivatives

  Other assets     22,500        51        —          51        —          —          —          —     

Client interest rate derivatives

  Other liabilities     22,500        (51     —          (51     —          —          —          —     
                                                     

Net exposure

        4,139        —          4,139          5,194