SVB Financial Group
SVB FINANCIAL GROUP (Form: 8-K, Received: 07/21/2011 16:06:49)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 21, 2011

 

 

SVB Financial Group

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   000-15637   91-1962278

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

3003 Tasman Drive, Santa Clara, CA 95054-1191

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 654-7400

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.142-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 


Item 2.02. Results of Operations and Financial Condition.

On July 21, 2011, SVB Financial Group (the “Company”) announced its financial results for the second quarter ended June 30, 2011. A copy of the release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. The information in this report shall not be treated as “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933 or the Securities Act of 1934, except as expressly stated by specific reference in such filing.

 

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit
No.

  

Description

99.1    Release, dated July 21, 2011, announcing the Company’s financial results for the second quarter ended June 30, 2011.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: July 21, 2011     SVB FINANCIAL GROUP
    By:  

/s/ KAMRAN HUSAIN

    Name:   Kamran Husain
    Title:   Chief Accounting Officer and Principal Accounting Officer


Exhibit Index

 

Exhibit
No.

  

Description

99.1*    Release, dated July 21, 2011, announcing the Company’s financial results for the second quarter ended June 30, 2011.

 

* This exhibit is intended to be furnished and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934.

 

1

Exhibit 99.1

LOGO

3003 Tasman Drive, Santa Clara, CA 95054

www.svb.com

 

For release at 1:00 P.M. (Pacific Time)              Contact:
July 21, 2011             Meghan O’Leary
            Investor Relations
NASDAQ: SIVB             (408) 654-6364
           

SVB FINANCIAL GROUP ANNOUNCES 2011 SECOND QUARTER FINANCIAL RESULTS

SANTA CLARA, Calif. — July 21, 2011 — SVB Financial Group (NASDAQ: SIVB) today announced financial results for the second quarter ended June 30, 2011.

Consolidated net income available to common stockholders for the second quarter of 2011 was $65.8 million, or $1.50 per diluted common share, compared to $33.0 million, or $0.76 per diluted common share, for the first quarter of 2011, and $21.1 million, or $0.50 per diluted common share, for the second quarter of 2010. Consolidated net income for the second quarter of 2011 included gains of $22.5 million (net of tax) from the sale of certain available-for-sale securities and gains of $1.9 million (net of tax) from the early extinguishment of debt and the termination of corresponding interest rate swaps. Excluding these gains, net income for the second quarter of 2011 was $41.4 million or $0.95 per diluted common share. (See non-GAAP reconciliation under section “Use of Non-GAAP Financial Measures” provided below.)

“We delivered an outstanding quarter with strong core earnings, solid client acquisition, and continued momentum across the board,” said Greg Becker, President and CEO of SVB Financial Group. “Our second quarter results validate that we have the right strategy and are effectively executing on it. We now have achieved four consecutive quarters of strong loan growth and six quarters of high credit quality. We are delivering these results against a backdrop of record-high client liquidity, and solid gains from improving venture capital markets.”

Second quarter 2011 results (compared to first quarter 2011, unless otherwise noted) reflected strong performance across all areas of our business and included:

 

   

Strong growth in our business with record highs in loan balances of $6.0 billion, deposit balances of $16.3 billion and available-for-sale securities balances of $9.6 billion.

 

   

Continued strong overall credit quality, which resulted in a reduction of our allowance for loan losses as a percentage of loans to 1.36 percent from 1.44 percent in the first quarter.

 

   

An increase in net interest income (fully taxable equivalent basis) of $10.1 million, primarily due to increases in interest-earning assets and a decrease in interest expense due to the maturity of $250 million of our 3.875% Convertible Notes in April 2011.

 

   

A provision for loan losses of $0.1 million, primarily due to an increase in period-end loans, largely offset by a decrease in the reserve for our performing loans due to the strong overall credit quality of our clients.

 

   

Net gains on equity warrant assets of $13.9 million in the second quarter of 2011, compared to $4.0 million in the first quarter of 2011, primarily due to increased IPO and M&A activity in the market.

 

   

Gains of $37.3 million from sales of $1.4 billion of certain available-for-sale securities in the second quarter of 2011.

 

   

Net gains of $3.1 million from the repurchase of $312.6 million of our 5.70% Senior Notes and 6.05% Subordinated Notes and the termination of the corresponding portions of interest rate swaps.

Consolidated net income available to common stockholders for the six months ended June 30, 2011 was $98.8 million, or $2.27 per diluted common share, compared to $39.7 million, or $0.94 per diluted common share, for the comparable 2010 period. Non-GAAP net income available to common stockholders for the six months ended June 30, 2011, excluding gains from the sale of certain available-for-sale securities and gains from the early extinguishment of debt and the termination of corresponding interest rate swaps, was $74.4 million, or $1.71 per diluted common share. (See non-GAAP reconciliation under section “Use of Non-GAAP Financial Measures” provided below.)


Second Quarter 2011 Summary

 

    Three months ended     Six months ended  
          % change from                    

(Dollars in millions, except share data and ratios)

  June 30,
2011
    March 31,
2011
    June 30,
2010
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
    %
Change
 

Income statement:

               

Diluted earnings per common share

  $ 1.50      $ 0.76      $ 0.50        97.4     NM   $ 2.27      $ 0.94        141.5

Net income available to common stockholders

    65.8        33.0        21.1        99.4        NM        98.8        39.7        148.9   

Net interest income

    130.5        120.3        106.4        8.5        22.7        250.8        207.3        21.0   

Provision for (reduction of) loan losses

    0.1        (3.0     7.4        (103.3     (98.6     (2.9     18.2        (115.9

Noninterest income

    123.7        90.0        40.2        37.4        NM        213.7        89.4        139.0   

Noninterest expense

    121.0        117.4        104.2        3.1        16.1        238.5        202.8        17.6   

Non-GAAP net income available to common stockholders (1)

    41.4        33.0        20.5        25.5        102.0        74.4        39.0        90.8   

Non-GAAP diluted earnings per common share (1)

    0.95        0.76        0.48        25.0        97.9        1.71        0.92        85.9   

Non-GAAP noninterest income, net of noncontrolling interests and excluding gains on sales of available-for-sale securities (1)

    59.8        46.4        36.1        28.9        65.7        106.2        71.5        48.5   

Non-GAAP noninterest expense, net of noncontrolling interests (1)

    121.5        114.0        101.3        6.6        19.9        235.5        196.6        19.8   

Fully taxable equivalent:

               

Net interest income (2)

  $ 130.9      $ 120.8      $ 106.9        8.4     22.5   $ 251.7      $ 208.3        20.8   

Net interest margin

    3.13     2.96     3.20     5.7        (2.2     3.04     3.25     (6.5

Shares outstanding:

               

Common

    43,136,209        42,697,828        41,886,197        1.0     3.0     43,136,209        41,886,197        3.0

Basic weighted average

    42,923,955        42,482,037        41,720,015        1.0        2.9        42,704,216        41,558,102        2.8   

Diluted weighted average

    43,739,743        43,426,306        42,475,959        0.7        3.0        43,559,345        42,339,867        2.9   

Balance sheet:

               

Average total assets

  $ 18,254.5      $ 17,950.2      $ 14,554.3        1.7     25.4   $ 18,103.2      $ 14,062.6        28.7

Average loans, net of unearned income

    5,532.8        5,312.1        4,112.0        4.2        34.6        5,423.1        4,113.8        31.8   

Average available-for-sale securities

    9,513.3        8,725.2        5,191.3        9.0        83.3        9,121.4        4,604.0        98.1   

Average noninterest-bearing demand deposits

    9,551.7        9,147.5        7,204.7        4.4        32.6        9,350.7        6,959.2        34.4   

Average interest-bearing deposits

    5,718.1        5,519.0        4,700.7        3.6        21.6        5,619.1        4,479.7        25.4   

Average total deposits

    15,269.7        14,666.5        11,905.4        4.1        28.3        14,969.8        11,438.9        30.9   

Average short-term borrowings

    26.1        39.9        45.7        (34.6     (42.9     33.0        45.2        (27.0

Average long-term debt

    770.3        1,210.3        863.6        (36.4     (10.8     989.1        863.0        14.6   

Period-end total assets

    19,366.7        18,618.3        14,904.0        4.0        29.9        19,366.7        14,904.0        29.9   

Period-end loans, net of unearned income

    5,978.6        5,651.2        4,450.2        5.8        34.3        5,978.6        4,450.2        34.3   

Period-end available-for-sale securities

    9,580.9        9,500.8        5,338.2        0.8        79.5        9,580.9        5,338.2        79.5   

Period-end non-marketable securities

    875.2        798.1        616.3        9.7        42.0        875.2        616.3        42.0   

Period-end noninterest-bearing demand deposits

    10,683.9        9,524.7        7,206.1        12.2        48.3        10,683.9        7,206.1        48.3   

Period-end interest-bearing deposits

    5,594.5        5,805.6        4,934.3        (3.6     13.4        5,594.5        4,934.3        13.4   

Period-end total deposits

    16,278.5        15,330.3        12,140.4        6.2        34.1        16,278.5        12,140.4        34.1   

Off-balance sheet:

               

Average total client investment funds

  $ 17,759.2      $ 16,812.1      $ 15,503.5        5.6     14.5   $ 17,285.6      $ 15,286.1        13.1

Period-end total client investment funds

    18,158.7        17,035.4        16,003.2        6.6        13.5        18,158.7        16,003.2        13.5   

Total unfunded credit commitments

    6,697.3        6,317.2        5,279.4        6.0        26.9        6,697.3        5,279.4        26.9   

Earnings ratios:

               

Return on average assets (annualized) (3)

    1.44     0.75     0.58     92.0     148.3     1.10     0.57     93.0

Return on average common SVBFG stockholders’ equity (annualized) (4)

    18.78        10.18        7.06        84.5        166.0        14.65        6.77        116.4   

Asset quality ratios:

               

Allowance for loan losses as a percentage of total gross loans

    1.36     1.44     1.60     (5.6 )%      (15.0 )%      1.36     1.60     (15.0 )% 

Gross charge-offs as a percentage of average total gross loans (annualized)

    0.31        0.33        0.69        (6.1     (55.1     0.32        1.38        (76.8

Net charge-offs (recoveries) as a percentage of average total gross loans (annualized)

    0.00        (0.19     0.38        (100.0     (100.0     (0.09     0.91        (109.9

Other ratios:

               

Total risk-based capital ratio

    14.97     16.85     19.98     (11.2 )%      (24.5 )%      14.97     19.98     (24.5 )% 

Operating efficiency ratio (5)

    47.53        55.72        70.82        (14.7     (32.9     51.24        68.10        (24.8

Period-end loans, net of unearned income, to deposits

    36.73        36.86        36.66        (0.4     0.2        36.73        36.66        0.2   

Average loans, net of unearned income, to deposits

    36.23        36.22        34.54        0.0        4.9        36.23        35.96        0.8   

Non-GAAP ratios:

               

Tangible common equity to tangible assets (1)

    7.42     7.05     8.29     5.2     (10.5 )%      7.42     8.29     (10.5 )% 

Tangible common equity to risk-weighted assets (1)

    13.72        13.13        15.95        4.5        (14.0     13.72        15.95        (14.0

Non-GAAP return on average assets (annualized) (1)

    0.91        0.75        0.56        21.3        62.5        0.83        0.56        48.2   

Non-GAAP return on average SVBFG stockholders’ equity (annualized) (1)

    11.81        10.18        6.84        16.0        72.7        11.03        6.66        65.6   

Non-GAAP operating efficiency ratio (1)

    63.72        68.16        70.81        (6.5     (10.0     65.80        70.28        (6.4

Other statistics:

               

Period-end SVB prime lending rate

    4.00     4.00     4.00     —       —       4.00     4.00     —  

Average SVB prime lending rate

    4.00        4.00        4.00        —          —          4.00        4.00        —     

Average full-time equivalent employees

    1,416        1,389        1,277        1.9        10.9        1,403        1,274        10.1   

Period-end full-time equivalent employees

    1,428        1,396        1,289        2.3        10.8        1,428        1,289        10.8   

 

(1) To supplement our unaudited condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP measures. A reconciliation of non-GAAP calculations to GAAP is provided below under the section “Use of Non-GAAP Financial Measures.”
(2) Interest income on non-taxable investments is presented on a fully taxable equivalent basis using the federal statutory income tax rate of 35.0 percent. The taxable equivalent adjustments were $0.5 million for each of the quarters ended June 30, 2011, March 31, 2011, and June 30, 2010.
(3) Ratio represents annualized consolidated net income available to common stockholders divided by quarterly and year-to-date average assets.

 

2


(4) Ratio represents annualized consolidated net income available to common stockholders divided by quarterly and year-to-date average SVBFG stockholders’ equity.
(5) The operating efficiency ratio is calculated by dividing noninterest expense by total taxable equivalent net interest income plus noninterest income.

Net Interest Income and Margin

Net interest income, on a fully taxable equivalent basis, was $130.9 million for the second quarter of 2011, compared to $120.8 million for the first quarter of 2011 and $106.9 million for the second quarter of 2010. The following table provides a summary of changes in interest income and interest expense attributable to both volume and rate from the first quarter to the second quarter of 2011. Changes that are not solely due to either volume or rate (principally changes in the number of days from quarter to quarter) are allocated in proportion to the percentage changes in average volume and average rate:

 

     Q2’11 compared to Q1’11  
     Increase (decrease) due to change in  

(Dollars in thousands)

   Volume     Rate     Total  

Interest income:

      

Short-term investment securities

   $ (697   $ 290      $ (407

Available-for-sale securities

     4,049        (1,303     2,746   

Loans

     4,521        (831     3,690   
                        

Increase in interest income, net

     7,873        (1,844     6,029   
                        

Interest expense:

      

Deposits

     109        (655     (546

Short-term borrowings

     (5     (2     (7

Long-term debt

     (4,001     460        (3,541
                        

Increase (decrease) in interest expense, net

     (3,897     (197     (4,094
                        

Increase in net interest income

   $ 11,770      $ (1,647   $ 10,123   
                        

The increase in net interest income, on a fully taxable equivalent basis, from the first quarter to the second quarter of 2011, was primarily attributable to the following:

 

   

An increase in interest income of $3.7 million from our loan portfolio, primarily due to an increase in average loan balances of $220.8 million, partially offset by a decrease in the overall yield on our portfolio.

 

   

A decrease of $3.5 million in interest expense on borrowings mainly attributable to the maturity of $250 million of our 3.875% Convertible Notes in April 2011.

 

   

An increase in interest income of $2.7 million from our available-for-sale securities portfolio, primarily due to an increase in average balances of $788.1 million as a result of our continued deposit growth. This increase was partially offset by lower market rates available upon re-investment of paydowns and sales during the second quarter of 2011.

Net interest margin, on a fully taxable equivalent basis, was 3.13 percent for the second quarter of 2011, compared to 2.96 percent for the first quarter of 2011 and 3.20 percent for the second quarter of 2010. The increase from the first quarter to the second quarter of 2011 was primarily due to the maturity of $250 million of our 3.875% Convertible Notes in April 2011 and a shift in our overall asset mix to a higher proportion of loans and available-for sale securities (higher-yielding assets) relative to cash. Additionally, our net interest margin has increased due to decreases in rates paid on deposits reflective of current market rates.

For the second quarter of 2011, 71.0 percent, or $4.1 billion, of our average outstanding gross loans were variable-rate loans that adjust at prescribed measurement dates upon a change in prime-lending rates or other variable indices. This compares to 71.8 percent, or $3.9 billion, for the first quarter of 2011 and 70.9 percent, or $3.0 billion, for the second quarter of 2010. For the second quarter of 2011, average variable-rate available-for-sale securities were $2.8 billion, or 29.2 percent of our available-for-sale securities portfolio, compared to $2.9 billion, or 33.3 percent in the first quarter of 2011. These securities have variable coupons that are indexed to and change with movements in the one-month LIBOR rate.

 

3


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.

Available-for-Sale Securities

Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed to maximize portfolio yield over the long-term in a manner consistent with our liquidity, credit diversification and asset/liability strategies.

Average available-for-sale securities increased by $788.1 million to $9.5 billion for the second quarter of 2011, compared to $8.7 billion for the first quarter of 2011 and $5.2 billion for the second quarter of 2010. Period-end available-for-sale securities were $9.6 billion at June 30, 2011, compared to $9.5 billion at March 31, 2011 and $5.3 billion at June 30, 2010. The increase in period-end available-for-sale securities of $80.1 million from the first quarter to the second quarter of 2011 was attributable to purchases of $2.1 billion in new investments, offset by sales of securities of $1.4 billion and paydowns of $721.5 million. The sales of securities of $1.4 billion were comprised entirely of agency-issued mortgage securities.

Non-Marketable Securities

Our non-marketable securities portfolio primarily represents venture capital investments managed by SVB Capital, investments in debt funds and other strategic investments. They include funds of funds, co-investment funds, fund investments and debt funds, as well as direct equity investments in portfolio companies.

Period-end non-marketable securities were $875.2 million ($331.6 million net of noncontrolling interests) as of June 30, 2011, compared to $798.1 million ($310.1 million net of noncontrolling interests) as of March 31, 2011 and $616.3 million ($254.3 million net of noncontrolling interests) as of June 30, 2010. The increase from the first quarter to the second quarter of 2011 was primarily attributable to additional capital calls for fund investments in the second quarter of 2011, as well as increased valuations from our managed funds of funds. Reconciliations of our non-GAAP non-marketable securities, net of noncontrolling interests, are provided below under the section “Use of Non-GAAP Financial Measures.”

Loans

Average loans, net of unearned income, were $5.5 billion for the second quarter of 2011, compared to $5.3 billion for the first quarter of 2011 and $4.1 billion for the second quarter of 2010. Period-end loans, net of unearned income, were $6.0 billion at June 30, 2011, compared to $5.7 billion at March 31, 2011 and $4.5 billion at June 30, 2010. The increase in average loan balances from the first quarter to the second quarter of 2011 came primarily from software industry and Private Bank clients.

Our nonperforming loans totaled $36.3 million at June 30, 2011, compared to $34.5 million at March 31, 2011 and $51.2 million at June 30, 2010. The allowance for loan losses related to impaired loans was $6.2 million, $6.9 million and $8.3 million for June 30, 2011, March 31, 2011, and June 30, 2010, respectively.

 

4


The following table provides a summary of loans (individually or in the aggregate) to any single client, equal to or greater than $20 million, by industry sector at June 30, 2011, March 31, 2011 and June 30, 2010:

 

     Loans (individually or in the aggregate) to any  single
client, equal to or greater than $20 million at
 

(Dollars in thousands, except ratios and client data)

   June 30,
2011
    March 31,
2011
    June 30,
2010
 
      

Commercial loans:

      

Software

   $ 525,333      $ 321,461      $ 301,568   

Hardware

     163,224        97,215        96,320   

Clean technology

     88,348        94,107        —     

Venture capital/private equity

     361,129        416,459        187,254   

Life science

     205,358        210,175        177,544   

Premium wine (1)

     5,300        6,200        13,677   

Other

     110,513        111,744        —     
                        

Total commercial loans

     1,459,205        1,257,361        776,363   
                        

Real estate secured loans:

      

Premium wine (1)

     77,726        47,022        61,193   

Consumer loans (2)

     —          19,960        20,308   
                        

Total real estate secured loans

     77,726        66,982        81,501   
                        

Consumer loans (2)

     38,200        40,121        40,000   
                        

Total

   $ 1,575,131      $ 1,364,464      $ 897,864   
                        

Loans individually equal to or greater than $20 million as a percentage of total gross loans

     26.1     23.9     20.0

Total clients with loans individually equal to or greater than $20 million

     51        43        29   

Loans individually equal to or greater than $20 million on nonaccrual status

   $ —        $ —        $ 20,308   

Loans individually equal to or greater than $20 million on nonaccrual status as a percentage of total loans greater than $20 million

     —       —       2.3

 

(1) Premium Wine clients can have loan balances included in both commercial loans and real estate secured loans, the combination of which are equal to or greater than $20 million.
(2) Consumer loan clients can have loan balances included in both real estate secured loans and other consumer loans, the combination of which are equal to or greater than $20 million.

Credit Quality

The following table provides a summary of our allowance for loan losses:

 

     Three months ended     Six months ended  

(Dollars in thousands, except ratios)

   June 30,
2011
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Allowance for loan losses, beginning balance

   $ 82,051      $ 82,627      $ 68,271      $ 82,627      $ 72,450   

Provision for (reduction of) loan losses

     134        (3,047     7,408        (2,913     18,153   

Gross loan charge-offs

     (4,293     (4,322     (7,133     (8,615     (28,313

Loan recoveries

     4,263        6,793        3,243        11,056        9,499   
                                        

Allowance for loan losses, ending balance

   $ 82,155      $ 82,051      $ 71,789      $ 82,155      $ 71,789   
                                        

Provision for (reduction of) as a percentage of total gross loans (annualized)

     0.01     (0.22 )%      0.66     (0.10 )%      0.82

Gross loan charge-offs as a percentage of average total gross loans (annualized)

     0.31        0.33        0.69        0.32        1.38   

Net loan charge-offs (recoveries) as a percentage of average total gross loans (annualized)

     0.00        (0.19     0.38        (0.09     0.91   

Allowance for loan losses as a percentage of period-end total gross loans

     1.36        1.44        1.60        1.36        1.60   

Total gross loans at period-end

   $ 6,030,966      $ 5,698,898      $ 4,485,562      $ 6,030,966      $ 4,485,562   

Average total gross loans

     5,579,271        5,355,895        4,144,210        5,468,200        4,146,683   

We had a provision for loan losses of $0.1 million for the second quarter of 2011, compared to a reduction of provision of $3.0 million for the first quarter of 2011. The provision of $0.1 million was due to an increase in allowance for the increase in period-end loans, largely offset by a decrease in the reserve for our performing loans due to the strong credit quality of our clients. Gross loan charge-offs of $4.3 million for the second quarter of 2011 were primarily from our other commercial loans portfolio. Loan recoveries of $4.3 million for the second quarter of 2011 were primarily from our software client portfolio.

Our allowance for loan losses as a percentage of total gross loans decreased from 1.44 percent at March 31, 2011 to 1.36 percent at June 30, 2011, primarily due to a reduction in the reserve for our performing loans. Our allowance for loan losses for total gross performing loans as a percentage of total gross performing loans was 1.27 percent at June 30, 2011, compared to 1.33 percent at March 31, 2011.

 

5


Deposits

Average deposits were $15.3 billion for the second quarter of 2011, compared to $14.7 billion for the first quarter of 2011 and $11.9 billion for the second quarter of 2010. Period-end deposits were $16.3 billion at June 30, 2011, compared to $15.3 billion at March 31, 2011 and $12.1 billion at June 30, 2010. The increase in average deposits from the first quarter to the second quarter of 2011 came primarily from increases in our noninterest bearing demand deposits, which increased by $404.2 million to $9.6 billion. The overall increase in our deposit balances was primarily due to growth from new clients and the continued lack of attractive market investment opportunities for our deposit clients.

Long-term Debt

3.875% Convertible Notes

Our $250 million 3.875% Convertible Notes matured on April 15, 2011. All of the notes were converted prior to maturity and we made an aggregate $260.4 million conversion settlement payment. We paid $250.0 million in cash (representing total principal) and $10.4 million through the issuance of 187,760 shares of our common stock (representing total conversion premium value). In addition, in connection with the conversion settlement, we received 186,736 shares of our common stock, valued at $10.3 million, from the exercise of call options under a call-spread arrangement we entered into with third-parties at the time the notes were issued. Accordingly, there was no significant net impact on our total stockholders’ equity with respect to settling the conversion premium value.

5.70% Senior Notes and 6.05% Subordinated Notes

We repurchased $108.6 million of our 5.70% Senior Notes and $204.0 million of our 6.05% Subordinated Notes through a tender offer transaction on May 2, 2011. These repurchases resulted in a gross loss from extinguishment of debt of approximately $33.9 million, which included the payment of the repurchase premiums, transaction fees, and discount and origination fee accretion related to the notes. In connection with these repurchases, we terminated corresponding amounts of the interest rate swaps associated with these notes, resulting in a gross gain on swap termination of approximately $37.0 million. The net gain from the note repurchases and the termination of corresponding portions of the interest rate swaps was approximately $3.1 million (on a pre-tax basis), and was recognized during the second quarter of 2011 as a reduction in noninterest expense which is included in the line item “Other”.

 

6


Noninterest Income

Noninterest income was $123.7 million for the second quarter of 2011, compared to $90.0 million for the first quarter of 2011 and $40.2 million for the second quarter of 2010. Non-GAAP noninterest income, net of noncontrolling interests and excluding gains on sales of certain available for sale securities was $59.8 million for the second quarter of 2011, compared to $46.4 million for the first quarter of 2011 and $36.1 million for the second quarter of 2010. Reconciliations of our non-GAAP noninterest income and non-GAAP net gains on investment securities, both of which exclude amounts attributable to noncontrolling interests, are provided below under the section “Use of Non-GAAP Financial Measures.”

The increase of $33.7 million in noninterest income (on a GAAP basis) from the first quarter to the second quarter of 2011 was primarily driven by the following factors:

 

   

Net gains on investment securities of $71.7 million for the second quarter of 2011, compared to net gains of $51.3 million for the first quarter of 2011. Net of noncontrolling interests, net gains on investment securities were $45.2 million for the second quarter of 2011, compared to $8.0 million for the first quarter of 2011. The net gains, net of noncontrolling interests, of $45.2 million for the second quarter of 2011 were primarily attributable to the following:

 

   

Gains of $37.3 million from sales of $1.4 billion of certain available-for-sale securities. These securities were sold as part of our portfolio management strategy of managing duration risk.

 

   

Net gains of $4.2 million from our managed funds of funds, primarily due to the continued trend of increased valuations and liquidity events from companies in the underlying funds, largely driven by internet and social networking companies.

 

   

Net gains of $3.5 million from our strategic and other investments, which included gains of $2.3 million from the sale of shares of a company that had an IPO during the quarter. These shares were originally acquired through the exercise of equity warrant assets.

As of June 30, 2011, we held investments, either directly or through eleven of our managed investment funds, in 449 funds that are primarily venture capital funds, 100 companies and five debt funds.

The following tables provide a summary of net gains on investment securities, net of noncontrolling interests, for the three months ended June 30, 2011 and March 31, 2011, respectively:

 

     Three months ended June 30, 2011  

(Dollars in thousands)

   Managed
Funds Of
Funds
     Managed  Co-
Investment
Funds
    Debt Funds     Available-For-Sale
Securities
    Strategic
and Other
Investments
     Total  

Total gains (losses) on investment securities, net

   $ 31,984       $ (1,840   $ 814      $ 37,221      $ 3,501       $ 71,680   

Less: income (loss) attributable to noncontrolling interests, including carried interest

     27,752         (1,066     (249     —          —           26,437   
                                                  

Net gains (losses) on investment securities, net of noncontrolling interests

   $ 4,232       $ (774   $ 1,063      $ 37,221      $ 3,501       $ 45,243   

Less: gains on sales of certain available-for-sale securities

     —           —          —          (37,314     —           (37,314
                                                  

Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests and excluding gains on sales of certain available-for-sale securities

   $ 4,232       $ (774   $ 1,063      $ (93   $ 3,501       $ 7,929   
                                                  
     Three months ended March 31, 2011  

(Dollars in thousands)

   Managed
Funds Of
Funds
     Managed Co-
Investment
Funds
    Debt Funds     Available-For-Sale
Securities
    Strategic
and Other
Investments
     Total  

Total gains on investment securities, net

   $ 43,392       $ 3,946      $ 2,288      $ 62      $ 1,649       $ 51,337   

Less: income attributable to noncontrolling interests, including carried interest

     39,210         3,886        289        —          —           43,385   
                                                  

Non-GAAP net gains on investment securities, net of noncontrolling interests

   $ 4,182       $ 60      $ 1,999      $ 62      $ 1,649       $ 7,952   
                                                  

 

7


   

Net gains on derivative instruments were $13.7 million for the second quarter of 2011, compared to net gains of $0.6 million for the first quarter of 2011. The following table provides a summary of our net gains on derivative instruments:

 

     Three months ended     Six months ended  

(Dollars in thousands)

   June  30,
2011
    March  31,
2011
    June  30,
2010
    June  30,
2011
    June  30,
2010
 
          

(Losses) gains on foreign exchange forward contracts, net:

          

Gains on client foreign exchange forward contracts, net

   $ 315      $ 475      $ 327      $ 790      $ 619   

(Losses) gains on internal foreign exchange forward contracts, net (1)

     (483     (2,568     1,332        (3,051     3,378   
                                        

Total (losses) gains on foreign exchange forward contracts, net

     (168     (2,093     1,659        (2,261     3,997   

Change in fair value of interest rate swap

     (67     —          —          (67     —     

Net gains (losses) on other derivatives

     25        (1,352     —          (1,327     —     

Net gains (losses) on equity warrant assets

     13,861        3,996        (333     17,857        (689
                                        

Total gains on derivative instruments, net

   $ 13,651      $ 551      $ 1,326      $ 14,202      $ 3,308   
                                        

 

(1) Represents the change in fair value of foreign exchange forward contracts used to economically reduce our foreign exchange exposure related to certain foreign currency denominated loans. Revaluations of foreign currency denominated loans are recorded in the line item “Other” as part of noninterest income, a component of consolidated net income.

The key changes in factors affecting net gains on derivative instruments from the first quarter to the second quarter of 2011 were as follows:

 

   

Net gains on equity warrant assets of $13.9 million for the second quarter of 2011, compared to net gains of $4.0 million for the first quarter of 2011. The net gains on equity warrant assets of $13.9 million for the second quarter of 2011 were driven by realized gains of $7.6 million from the exercise of certain equity warrant positions and $7.0 million from unrealized valuation increases in our equity warrant portfolio, partially offset by $0.7 million from equity warrant cancellations and expirations.

 

   

Net losses of $0.5 million on foreign exchange forward contracts for our foreign currency denominated loans in the second quarter of 2011, compared to net losses of $2.6 million in the first quarter of 2011. The net losses of $0.5 million in the second quarter of 2011 were primarily due to the weakening of the U.S. dollar against the Euro and Pound Sterling and were offset by net gains of $0.5 million from the revaluation of foreign currency denominated loans that are included in the line item “Other” as part of noninterest income.

 

   

Deposit service charges were $7.8 million for the second quarter of 2011, compared to $7.1 million for the first quarter of 2011. The increase in deposit service charges of $0.7 million was primarily due to increased deposit activity of our clients.

Noninterest Expense

Noninterest expense was $121.0 million for the second quarter of 2011, compared to $117.4 million for the first quarter of 2011 and $104.2 million for the second quarter of 2010.

 

8


The following table provides a summary of certain noninterest expense items:

 

     Three months ended      Six months ended  

(Dollars in thousands)

   June 30,
2011
    March 31,
2011
    June 30,
2010
     June 30,
2011
    June 30,
2010
 

Compensation and benefits:

           

Salaries and wages

   $ 32,634      $ 33,807      $ 28,546       $ 66,441      $ 57,728   

Incentive compensation plan

     23,763        15,655        14,421         39,418        25,373   

Employee stock ownership plan (ESOP)

     3,215        5,354        1,604         8,569        3,886   

Other employee benefits (1)

     20,276        20,816        15,422         41,092        32,836   
                                         

Total compensation and benefits

     79,888        75,632        59,993         155,520        119,823   

Professional services

     13,891        12,987        12,642         26,878        24,740   

FDIC assessments

     2,163        3,475        5,587         5,638        10,636   

Provision for (reduction of) unfunded credit commitments

     976        (900     2,376         76        869   

Net gain from note repurchases and termination of corresponding interest rate swaps

     (3,123     —          —           (3,123     —     

Other (2)

     27,237        26,241        23,582         53,478        46,688   
                                         

Total noninterest expense

   $ 121,032      $ 117,435      $ 104,180       $ 238,467      $ 202,756   
                                         

Period-end full-time equivalent employees

     1,428        1,396        1,289         1,428        1,289   

Average full-time equivalent employees

     1,416        1,389        1,277         1,403        1,274   

 

(1) Other employee benefits expense includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), warrant and retention plans, agency fees and other employee related expenses.
(2) Other noninterest expense includes premises and equipment, net occupancy, business development and travel, correspondent bank fees and other noninterest expenses. For further details of noninterest expense items, please refer to the section “Interim Consolidated Statements of Income” provided below.

The key factors affecting the changes in noninterest expense from the first quarter to the second quarter of 2011 were as follows:

 

   

An increase in compensation and benefits expense of $4.3 million, primarily as a result of the following:

 

   

An increase of $8.1 million in incentive compensation due to our strong financial performance in the second quarter of 2011 and our current expectation that we will exceed our internal performance targets for 2011.

The above increase was partially offset by the following:

 

   

A decrease of $2.1 million in ESOP expenses due to seasonal employer contributions made in the first quarter of 2011, partially offset by an increase in accruals due to our strong financial performance in the second quarter of 2011 and our current expectation that we will exceed our internal performance targets for 2011.

 

   

A decrease of $1.2 million in salaries and wages primarily due to seasonal accruals of vacation benefits in the first quarter of 2011, partially offset by an increase in the number of average full-time equivalent employees (“FTE”), which increased by 27 to 1,416 FTEs for the second quarter of 2011 compared to 1,389 FTEs for the first quarter of 2011.

 

   

A provision for unfunded credit commitments of $1.0 million in the second quarter of 2011, compared to a reduction of provision of $0.9 million in the first quarter of 2011. The provision of $1.0 million in the second quarter of 2011 was primarily due to an increase in unfunded credit commitment balances of $380.1 million.

 

   

An increase of $0.9 million in professional services expense, primarily due to an increase in IT activities in the second quarter of 2011 to maintain and enhance IT infrastructure and to support new initiatives.

The above increases in noninterest expense were partially offset by the following:

 

   

Net gains of $3.1 million from the repurchase of debt and the termination of the associated portions of interest rate swaps in the second quarter of 2011, which is included in the line item “Other” as part of noninterest expense.

 

   

A decrease of $1.3 million in FDIC assessments, primarily due to changes in our assessment calculation by the FDIC beginning in April 2011 pursuant to the Dodd-Frank Act.

 

9


Non-GAAP noninterest expense, net of noncontrolling interests and excluding net gains from debt repurchases, was $121.5 million for the second quarter of 2011, compared to $114.0 million for the first quarter of 2011 and $101.3 million for the second quarter of 2010. Reconciliations of our non-GAAP noninterest expense, net of noncontrolling interests, are provided below under the section “Use of Non-GAAP Financial Measures.”

Income Tax Expense

Our effective tax expense rate was 39.7 percent for the second quarter of 2011, compared to 40.8 percent for the first quarter of 2011 and 39.6 percent for the second quarter of 2010. The decrease in the tax rate from the first quarter to the second quarter of 2011 was primarily attributable to the effect of lower non-deductible expenses as a percentage of pre-tax income.

Our effective tax rate was 40.1 percent for the six months ended June 30, 2011, compared to 39.0 percent for the comparable 2010 period. The increase in the tax rate was primarily attributable to the lower tax impact of tax advantaged investments on our overall pre-tax income for the six months ended June 30, 2011.

Our effective tax expense rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests.

Noncontrolling Interests

 

     Three months ended     Six months ended  

(Dollars in thousands)

   June 30,
2011
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Net interest income (1)

   $ (45   $ (7   $ (25   $ (52   $ (18

Noninterest income (1)

     (28,418     (42,371     (3,463     (70,789     (17,746

Noninterest expense (1)

     2,621        3,481        2,880        6,102        6,111   

Carried interest (2)

     1,860        (1,191     542        669        934   
                                        

Net income attributable to noncontrolling interests

   $ (23,982   $ (40,088   $ (66   $ (64,070   $ (10,719
                                        

 

(1) Represents noncontrolling interests share in net interest income, noninterest income and noninterest expense.
(2) Represents the change in the preferred allocation of income we earn as general partners managing our managed funds, the preferred allocation earned by the general partner entity managing one of our consolidated sponsored debt funds, and the preferred allocation earned by the limited partners of two of our managed funds of funds.

Net income attributable to noncontrolling interests was $24.0 million for the second quarter of 2011, compared to net income of $40.1 million for the first quarter of 2011 and $0.1 million for the second quarter of 2010. Net income attributable to noncontrolling interests of $24.0 million for the second quarter of 2011 was primarily a result of the following:

 

   

Net gains on investment securities (including carried interest) attributable to noncontrolling interests of $26.4 million, primarily from gains of $27.8 million from our managed funds of funds.

 

   

Noninterest expense of $2.6 million, primarily related to management fees paid by the noncontrolling interests to our subsidiaries that serve as general partner.

SVBFG Stockholders’ Equity

Total SVBFG stockholders’ equity increased by $123.3 million to $1.4 billion at June 30, 2011, primarily due to net income of $65.8 million in the second quarter of 2011, an increase in accumulated other comprehensive income of $38.1 million primarily due to increases in the fair value of our available-for-sale securities portfolio as a result of decreases in market rates, and an increase in additional-paid-in-capital of $19.4 million primarily from stock option exercises during the second quarter of 2011.

 

10


Outlook for the Year Ending December 31, 2011

Our outlook for the year ending December 31, 2011 is provided below on a GAAP basis, unless otherwise noted. We have provided our current outlook for the expected full year results of our significant forecasted activities. In general, we do not provide our outlook for items where the timing or financial impact are particularly uncertain and/or subject to market or other conditions beyond our control (such as level of IPO, M&A or general financing activity), or for potential unusual or non-recurring items; nevertheless, we have provided estimates on two such items, specifically net gains (losses) on equity warrant assets and net gains (losses) on investment securities, net of noncontrolling interests. The timing, magnitude and realization of the net gains (losses) on these two items is uncertain because of the inherent variability of the valuation of the financial instruments. As a result the fair value might increase or decrease materially, and the realized net proceeds upon disposition might be more or less than the recorded value. The outlook assumptions presented below are, by their nature, forward-looking statements and are subject to substantial risks and uncertainties which are discussed below under the caption “Forward-Looking Statements.”

For the year ending December 31, 2011, compared to our full year 2010 results, we currently expect the following outlook:

 

     
      

Current full year 2011 outlook compared to

2010 results (as of July 21, 2011)

   Change in outlook compared to outlook
reported as of April 21, 2011
     
Average loan balances   

Increase at a percentage rate in the mid twenties

 

  

No change from previous outlook

 

     
Average deposit balances    Increase at a percentage rate in the high twenties   

Outlook increased from low double digits due to higher than expected growth from new clients and the continued lack of attractive market investment opportunities for our clients

 

     
Net interest income   

Increase at a percentage rate in the mid twenties

 

  

No change from previous outlook

 

     
Net interest margin    Between 3.05% and 3.15%   

Outlook decreased from between 3.30% and 3.40% due to increased outlook for deposit growth and sales of higher-yielding securities in the second quarter of 2011 being reinvested in lower-yielding securities

 

     
Allowance for loan losses for total gross performing loans as a percentage of total gross performing loans    Between 1.20% and 1.30%   

Outlook improved from between 1.25% and 1.35% due to the strong overall credit quality of our portfolio

 

     
Net loan charge-offs    Lower than 0.25% of average total gross loans   

Outlook improved from lower than 0.50% due to the strong overall credit quality of our portfolio

 

     

Nonperforming loans as a percentage of total gross loans

 

   Lower than 2010 levels of 0.71%   

No change from previous outlook

 

     
Fees for deposit services, letters of credit, business credit card, client investment, and foreign exchange, in aggregate    Increase at the percentage rate in the mid single digits   

Outlook decreased from high single digits due to lower than expected margins on off-balance sheet products due to the low interest rate environment

 

     
Net gains (losses) on equity warrant assets    Between $25 million and $35 million   

Outlook improved from between $7 million and $10 million due to increased IPO and M&A activity in the market and improvement in the economy. The timing, magnitude and realization of these gains (or losses) is uncertain and is dependent on market conditions

 

     
Net gains on investment securities, net of noncontrolling interests and excluding gains on sales of available-for-sale securities*    Between $15 million and $20 million   

Outlook improved from between $13 million and $16 million due to increased IPO and M&A activity in the market and improvement in the economy. The timing, magnitude and realization of these gains (or losses) is uncertain and is dependent on market conditions

 

     
Noninterest expense* (excluding expenses related to noncontrolling interests)   

Increase at a percentage rate in the mid teens

 

  

No change from previous outlook

 

 

* Non-GAAP

 

11


Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, such as forecasts of our future financial results and condition, expectations for our operations and business, and our underlying assumptions of such forecasts and expectations. In this release, including the section “Outlook for the Year Ending December 31, 2011” above, we make forward-looking statements discussing management’s expectations about economic conditions; opportunities in the market; the outlook for our clients; our financial, credit, and business performance (including our expectation that we will exceed internal 2011 performance targets); expense levels; and financial results (and the components of such results) for the year 2011.

Although management believes that the expectations reflected in our forward-looking statements are reasonable and has based these expectations on our beliefs and assumptions, such expectations are not guarantees and may prove to be incorrect. Actual results could differ significantly. Factors that may cause the outlook for the year 2011 and other forward-looking statements herein to change include, among others, the following: (i) deterioration, weaker than expected improvement, or other changes in the state of the economy or the markets in which we conduct business or are served by us (including the levels of initial public offerings and mergers & acquisitions activities), (ii) changes in the volume and credit quality of our loans, (iii) changes in interest rates or market levels or factors affecting them, (iv) changes in the performance or equity valuations of funds or companies in which we have invested or hold derivative instruments or equity warrant assets, (v) variations from our expectations as to factors impacting our cost structure, (vi) changes in our assessment of the creditworthiness or liquidity of our clients or unanticipated effects of credit concentration risks which create or exacerbate deterioration of such creditworthiness or liquidity, (vii) accounting changes, as required by U.S. generally accepted accounting principles, and (viii) regulatory or legal changes, especially those related to the recent financial services reform legislation. For additional information about these factors, please refer to our public reports filed with the U.S. Securities and Exchange Commission, including our most recently-filed quarterly or annual report. The forward-looking statements included in this release are made only as of the date of this release. We do not intend, and undertake no obligation, to update these forward-looking statements.

Earnings Conference Call

On July 21, 2011, we will host a conference call at 3:00 p.m. (Pacific Time) to discuss the financial results for the second quarter ended June 30, 2011. The conference call can be accessed by dialing (877) 663-9523 or (404) 665-9482, and referencing the conference ID “83161653.” A live webcast of the audio portion of the call can be accessed on the Investor Relations section of our website at www.svb.com . A replay of the conference call will be available beginning at approximately 6:00 p.m. (Pacific Time) on Thursday, July 21, 2011, through midnight on Tuesday, July 26, 2011, by dialing (800) 642-1687 or (706) 645-9291 and referencing conference ID number “83161653.” A replay of the audio webcast will also be available on www.svb.com for 12 months beginning Thursday, July 21, 2011.

About SVB Financial Group

For over 25 years, SVB Financial Group and its subsidiaries, including Silicon Valley Bank, have been dedicated to helping entrepreneurs succeed. SVB Financial Group is a financial holding company that serves companies in the technology, life science, venture capital/private equity and premium wine industries. Offering diversified financial services through Silicon Valley Bank, SVB Analytics, SVB Capital, SVB Global and SVB Private Bank, SVB Financial Group provides clients with commercial, investment, international and private banking services. The Company also offers funds management, broker-dealer services and asset management, as well as the added value of its knowledge and networks worldwide. Headquartered in Santa Clara, California, SVB Financial Group operates through 26 offices in the U.S. as well as through offices internationally in China, India, Israel and the United Kingdom. More information on the Company can be found at www.svb.com. (SIVB-F)

Banking services are provided by Silicon Valley Bank, the California bank subsidiary and commercial banking operation of SVB Financial Group, and a member of the FDIC and the Federal Reserve. SVB Private Bank is a division of Silicon Valley Bank. SVB Financial Group is also a member of the Federal Reserve.

 

12


SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended     Six months ended  

(Dollars in thousands, except share data)

   June 30,
2011
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Interest income:

          

Loans

   $ 93,466      $ 89,776      $ 75,558      $ 183,242      $ 149,500   

Available-for-sale securities:

          

Taxable

     44,217        41,382        36,851        85,599        69,118   

Non-taxable

     883        941        951        1,824        1,921   

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

     1,595        2,002        2,885        3,597        5,725   
                                        

Total interest income

     140,161        134,101        116,245        274,262        226,264   
                                        

Interest expense:

          

Deposits

     2,559        3,105        3,867        5,664        7,532   

Borrowings

     7,149        10,697        5,942        17,846        11,456   
                                        

Total interest expense

     9,708        13,802        9,809        23,510        18,988   
                                        

Net interest income

     130,453        120,299        106,436        250,752        207,276   

Provision for (reduction of) loan losses

     134        (3,047     7,408        (2,913     18,153   
                                        

Net interest income after provision for loan losses

     130,319        123,346        99,028        253,665        189,123   
                                        

Noninterest income:

          

Gains on investment securities, net

     71,680        51,337        4,805        123,017        20,809   

Foreign exchange fees

     10,354        10,497        8,255        20,851        17,116   

Deposit service charges

     7,838        7,117        7,734        14,955        14,959   

Gains on derivative instruments, net

     13,651        551        1,326        14,202        3,308   

Credit card fees

     4,364        3,817        3,027        8,181        5,714   

Client investment fees

     3,107        3,661        4,941        6,768        8,881   

Letters of credit and standby letters of credit income

     2,702        2,710        2,606        5,412        5,117   

Other

     10,012        10,264        7,463        20,276        13,526   
                                        

Total noninterest income

     123,708        89,954        40,157        213,662        89,430   
                                        

Noninterest expense:

          

Compensation and benefits

     79,888        75,632        59,993        155,520        119,823   

Professional services

     13,891        12,987        12,642        26,878        24,740   

Premises and equipment

     6,440        5,912        5,319        12,352        11,103   

Business development and travel

     5,890        5,653        5,103        11,543        9,389   

Net occupancy

     4,546        4,650        4,649        9,196        9,337   

FDIC assessments

     2,163        3,475        5,587        5,638        10,636   

Correspondent bank fees

     2,202        2,163        1,956        4,365        3,904   

Provision for (reduction of) unfunded credit commitments

     976        (900     2,376        76        869   

Other

     5,036        7,863        6,555        12,899        12,955   
                                        

Total noninterest expense

     121,032        117,435        104,180        238,467        202,756   
                                        

Income before income tax expense

     132,995        95,865        35,005        228,860        75,797   

Income tax expense

     43,263        22,770        13,819        66,033        25,401   
                                        

Net income before noncontrolling interests

     89,732        73,095        21,186        162,827        50,396   

Net income attributable to noncontrolling interests

     (23,982     (40,088     (66     (64,070     (10,719
                                        

Net income available to common stockholders

   $ 65,750      $ 33,007      $ 21,120      $ 98,757      $ 39,677   
                                        

Earnings per common share—basic

   $ 1.53      $ 0.78      $ 0.51      $ 2.31      $ 0.95   

Earnings per common share—diluted

     1.50        0.76        0.50        2.27      $ 0.94   

Weighted average common shares outstanding—basic

     42,923,955        42,482,037        41,720,015        42,704,216        41,558,102   

Weighted average common shares outstanding—diluted

     43,739,743        43,426,306        42,475,959        43,559,345        42,339,867   

 

13


SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

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

   June 30,
2011
    March 31,
2011
    June 30,
2010
 

Assets:

      

Cash and due from banks

   $ 2,100,462      $ 2,073,848      $ 4,146,737   

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

     464,757        276,212        43,606   
                        

Cash and cash equivalents

     2,565,219        2,350,060        4,190,343   
                        

Available-for-sale securities

     9,580,905        9,500,828        5,338,233   

Non-marketable securities

     875,194        798,064        616,339   
                        

Investment securities

     10,456,099        10,298,892        5,954,572   
                        

Loans, net of unearned income

     5,978,646        5,651,170        4,450,189   

Allowance for loan losses

     (82,155     (82,051     (71,789
                        

Net loans

     5,896,491        5,569,119        4,378,400   
                        

Premises and equipment, net of accumulated depreciation and amortization

     49,452        46,161        38,123   

Accrued interest receivable and other assets

     399,474        354,034        342,548   
                        

Total assets

   $ 19,366,735      $ 18,618,266      $ 14,903,986   
                        

Liabilities and total equity:

      

Liabilities:

      

Deposits:

      

Noninterest-bearing demand

   $ 10,683,945      $ 9,524,698      $ 7,206,104   

Interest-bearing deposits

     5,594,529        5,805,621        4,934,309   
                        

Total deposits

     16,278,474        15,330,319        12,140,413   
                        

Short-term borrowings

     —          35,415        44,735   

Other liabilities

     462,614        200,768        222,073   

Long-term debt

     609,596        1,204,733        869,810   
                        

Total liabilities

     17,350,684        16,771,235        13,277,031   
                        

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; 43,136,209 shares, 42,697,828 shares and 41,886,197 shares outstanding, respectively

     43        43        42   

Additional paid-in capital

     462,885        443,453        404,521   

Retained earnings

     926,588        860,838        772,592   

Accumulated other comprehensive income

     47,377        9,240        59,948   
                        

Total SVBFG stockholders’ equity

     1,436,893        1,313,574        1,237,103   

Noncontrolling interests

     579,158        533,457        389,852   
                        

Total equity

     2,016,051        1,847,031        1,626,955   
                        

Total liabilities and total equity

   $ 19,366,735      $ 18,618,266      $ 14,903,986   
                        

Capital ratios:

      

Total risk-based capital ratio

     14.97     16.85     19.98

Tier 1 risk-based capital ratio

     13.58        13.37        15.65   

Tier 1 leverage ratio

     8.04        7.65        8.56   

Tangible common equity to tangible assets ratio (1)

     7.42        7.05        8.29   

Tangible common equity to risk-weighted assets ratio

     13.72        13.13        15.95   

Other period-end statistics:

      

Loans, net of unearned income-to-deposits ratio

     36.73     36.86     36.66

Book value per common share (2)

   $ 33.31      $ 30.76      $ 29.53   

Full-time equivalent employees

     1,428        1,396        1,289   

 

(1) Tangible common equity consists of SVBFG stockholders’ equity less acquired intangibles. Tangible assets represent total assets less acquired intangibles.
(2) Book value per common share is calculated by dividing total SVBFG stockholders’ equity by total outstanding common shares.

 

14


SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM AVERAGE BALANCES, RATES AND YIELDS

(Unaudited)

 

     Three months ended  
     June 30, 2011     March 31, 2011     June 30, 2010  

(Dollars in thousands)

   Average
balance
    Interest
income/
expense
    Yield/
rate
    Average
balance
    Interest
income/
expense
    Yield/
rate
    Average
balance
    Interest
income/
expense
    Yield/
rate
 

Interest-earning assets :

                  

Federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1)

   $ 1,731,129      $ 1,595        0.37   $ 2,538,941      $ 2,002        0.32   $ 4,093,873      $ 2,885        0.28

Available-for-sale securities: (2)

                  

Taxable

     9,419,378        44,217        1.88        8,628,837        41,382        1.94        5,093,883        36,851        2.90   

Non-taxable (3)

     93,939        1,359        5.80        96,375        1,448        6.09        97,462        1,463        6.02   

Total loans, net of unearned income (4)

     5,532,831        93,466        6.78        5,312,050        89,776        6.85        4,112,040        75,558        7.37   
                                                                        

Total interest-earning assets

     16,777,277        140,637        3.36        16,576,203        134,608        3.30        13,397,258        116,757        3.50   
                                                                        

Cash and due from banks

     274,044            266,097            227,595       

Allowance for loan losses

     (86,551         (87,980         (75,637    

Other assets (5)

     1,289,761            1,195,884            1,005,046       
                                                                        

Total assets

   $ 18,254,531          $ 17,950,204          $ 14,554,262       
                                                                        

Funding sources :

                  

Interest-bearing liabilities:

                  

NOW deposits

   $ 71,360      $ 68        0.38   $ 76,282      $ 77        0.41   $ 41,070      $ 39        0.38

Money market deposits

     2,516,675        1,485        0.24        2,361,971        1,576        0.27        1,649,561        1,247        0.30   

Money market deposits in foreign offices

     162,419        126        0.31        135,967        112        0.33        82,451        66        0.32   

Time deposits

     307,600        300        0.39        342,341        377        0.45        354,078        474        0.54   

Sweep deposits

     2,659,999        580        0.09        2,602,487        963        0.15        2,573,537        2,041        0.32   
                                                                        

Total interest-bearing deposits

     5,718,053        2,559        0.18        5,519,048        3,105        0.23        4,700,697        3,867        0.33   

Short-term borrowings

     26,110        9        0.14        39,927        16        0.16        45,712        24        0.21   

5.375% senior notes

     347,665        4,810        5.55        347,617        4,809        5.61        —          —          —     

3.875% convertible notes

     38,446        656        6.84        249,509        3,554        5.78        247,756        3,534        5.72   

Junior subordinated debentures

     55,489        831        6.01        55,533        834        6.09        55,665        831        5.99   

Senior and subordinated notes

     323,042        770        0.96        552,363        1,411        1.04        553,169        1,490        1.08   

Other long-term debt

     5,634        73        5.20        5,261        73        5.63        6,974        63        3.62   
                                                                        

Total interest-bearing liabilities

     6,514,439        9,708        0.60        6,769,258        13,802        0.83        5,609,973        9,809        0.70   

Portion of noninterest-bearing funding sources

     10,262,838            9,806,945            7,787,285       
                                                                        

Total funding sources

     16,777,277        9,708        0.23        16,576,203        13,802        0.34        13,397,258        9,809        0.30   
                                                                        

Noninterest-bearing funding sources :

                  

Demand deposits

     9,551,686            9,147,491            7,204,744       

Other liabilities

     238,583            235,924            156,182       

SVBFG stockholders’ equity

     1,404,391            1,314,811            1,200,213       

Noncontrolling interests

     545,432            482,720            383,150       

Portion used to fund interest-earning assets

     (10,262,838         (9,806,945         (7,787,285    
                                                                        

Total liabilities and total equity

   $ 18,254,531          $ 17,950,204          $ 14,554,262       
                                                                        

Net interest income and margin

     $ 130,929        3.13     $ 120,806        2.96     $ 106,948        3.20
                                                      

Total deposits

   $ 15,269,739          $ 14,666,539          $ 11,905,441       
                                    

Average SVBFG stockholders’ equity as a percentage of average assets

         7.69         7.32         8.25
                                    

Reconciliation to reported net interest income:

                  

Adjustments for taxable equivalent basis

       (476         (507         (512  
                                    

Net interest income, as reported

     $ 130,453          $ 120,299          $ 106,436     
                                    

 

(1) Includes average interest-bearing deposits in other financial institutions of $286.6 million, $253.2 million and $215.4 million for the quarters ended June 30, 2011, March 31, 2011, and June 30, 2010, respectively. For the quarters ended June 30, 2011, March 31, 2011 and June 30, 2010, balance also includes $1.3 billion, $1.9 billion and $3.8 billion, respectively, deposited at the Federal Reserve Bank, earning interest at the Federal Funds target rate.
(2) Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income.
(3) Interest income on non-taxable investment securities is presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.0 percent for all periods presented.
(4) Nonaccrual loans are reflected in the average balances of loans.
(5) Average investment securities of $907.0 million, $774.0 million and $657.2 million for the quarters ended June 30, 2011, March 31, 2011 and June 30, 2010, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable securities.

 

15


SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM AVERAGE BALANCES, RATES AND YIELDS

(Unaudited)

 

     Six months ended  
     June 30, 2011     June 30, 2010  

(Dollars in thousands)

   Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
    Average
Balance
    Interest
Income/
Expense
    Yield/
Rate
 

Interest-earning assets :

            

Federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1)

   $ 2,132,803      $ 3,597        0.34   $ 4,204,475      $ 5,725        0.27

Investment securities: (2)

            

Taxable

     9,026,291        85,599        1.91        4,505,800        69,118        3.09   

Non-taxable (3)

     95,150        2,807        5.95        98,206        2,955        6.07   

Total loans, net of unearned income (4)

     5,423,051        183,242        6.81        4,113,789        149,500        7.33   
                                                

Total interest-earning assets

     16,677,295        275,245        3.32        12,922,270        227,298        3.55   
                                                

Cash and due from banks

     270,092            232,615       

Allowance for loan losses

     (87,261         (76,837    

Other assets (5)

     1,243,082            984,533       
                                                

Total assets

   $ 18,103,208          $ 14,062,581       
                                                

Funding sources :

            

Interest-bearing liabilities:

            

NOW deposits

   $ 73,807      $ 145        0.40   $ 51,382      $ 103        0.40

Money market deposits

     2,439,751        3,061        0.25        1,517,373        2,281        0.30   

Money market deposits in foreign offices

     149,266        238        0.32        72,300        119        0.33   

Time deposits

     324,875        677        0.42        338,862        967        0.58   

Sweep deposits

     2,631,402        1,543        0.12        2,499,807        4,062        0.33   
                                                

Total interest-bearing deposits

     5,619,101        5,664        0.20        4,479,724        7,532        0.34   

Short-term borrowings

     32,980        25        0.15        45,193        39        0.17   

5.375% senior notes

     347,641        9,619        5.58        —          —          0.00   

3.875% convertible senior notes

     143,394        4,210        5.92        247,477        7,060        5.75   

Junior subordinated debentures

     55,511        1,665        6.05        55,815        1,400        5.06   

Senior and subordinated notes

     437,069        2,181        1.01        552,554        2,826        1.03   

Other long-term debt

     5,449        146        5.40        7,154        131        3.69   
                                                

Total interest-bearing liabilities

     6,641,145        23,510        0.71        5,387,917        18,988        0.71   

Portion of noninterest-bearing funding sources

     10,036,150            7,534,353       
                                                

Total funding sources

     16,677,295        23,510        0.28        12,922,270        18,988        0.30   
                                                

Noninterest-bearing funding sources :

            

Demand deposits

     9,350,705            6,959,200       

Other liabilities

     237,261            166,177       

SVBFG stockholders’ equity

     1,359,848            1,181,674       

Noncontrolling interests

     514,249            367,613       

Portion used to fund interest-earning assets

     (10,036,150         (7,534,353    
                                                

Total liabilities and total equity

   $ 18,103,208          $ 14,062,581       
                                                

Net interest income and margin

     $ 251,735        3.04     $ 208,310        3.25
                                    

Total deposits

   $ 14,969,806          $ 11,438,924       
                        

Average SVBFG stockholders’ equity as a percentage of average assets

         7.51         8.40
                        

Reconciliation to reported net interest income :

            

Adjustments for taxable equivalent basis

       (983         (1,034  
                        

Net interest income, as reported

     $ 250,752          $ 207,276     
                        

 

(1) Includes average interest-bearing deposits in other financial institutions of $270.0 million and $192.8 million for the six months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, balance also includes $1.6 billion and $4.0 billion, respectively, deposited at the Federal Reserve Bank, earning interest at the Federal Funds target rate.
(2) Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income.
(3) Interest income on non-taxable investment securities is presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.0 percent for all periods presented.
(4) Nonaccrual loans are reflected in the average balances of loans.
(5) Average investment securities of $840.9 million and $628.5 million for the six months ended June 30, 2011 and 2010, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable securities.

 

16


Gains (Losses) on Equity Warrant Assets

 

     Three months ended     Six months ended  

(Dollars in thousands)

   June 30,
2011
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Equity warrant assets:

          

Gains on exercise, net

   $ 7,581      $ 2,024      $ 788      $ 9,605      $ 1,637   

Change in fair value (1):

          

Cancellations and expirations

     (723     (581     (744     (1,304     (2,526

Other changes in fair value

     7,003        2,553        (377     9,556        200   
                                        

Total net gains (losses) on equity warrant assets (2)

   $ 13,861      $ 3,996      $ (333   $ 17,857      $ (689
                                        

 

(1) At June 30, 2011, we held warrants in 1,153 companies, compared to 1,164 companies at March 31, 2011 and 1,146 companies at June 30, 2010.
(2) Includes net gains (losses) on equity warrant assets held by consolidated investment affiliates. Relevant amounts attributable to noncontrolling interests are reflected in the interim consolidated statements of income under the caption “Net Income Attributable to Noncontrolling Interests.”

Reconciliation of Basic and Diluted Weighted Average Common Shares Outstanding

 

     Three months ended      Six months ended  

(Shares in thousands)

   June 30,
2011
     March 31,
2011
     June 30,
2010
     June 30,
2011
     June 30,
2010
 
              

Weighted average common shares outstanding — basic

     42,924         42,482         41,720         42,704         41,558   

Effect of dilutive securities:

              

Stock options and employee stock purchase plan

     654         707         694         678         712   

Restricted stock units

     101         149         62         100         70   

3.875% Convertible Notes

     61         88         —           77         —     
                                            

Total effect of dilutive securities

     816         944         756         855         782   
                                            

Weighted average common shares outstanding — diluted

     43,740         43,426         42,476         43,559         42,340   
                                            

Credit Quality

 

     Period end balances at  

(Dollars in thousands)

   June 30,
2011
    March 31,
2011
    June 30,
2010
 

Nonperforming loans and assets :

      

Gross nonperforming loans:

      

Loans past due 90 days or more still accruing interest

   $ 2      $ 13      $ 324   

Impaired loans

     36,335        34,506        50,909   
                        

Total gross nonperforming loans

   $ 36,337      $ 34,519      $ 51,233   
                        

Nonperforming loans as a percentage of total gross loans

     0.60     0.61     1.14

Nonperforming assets as a percentage of total assets

     0.19        0.19        0.34   

Allowance for loan losses

   $ 82,155      $ 82,051      $ 71,789   

As a percentage of total gross loans

     1.36     1.44     1.60

As a percentage of total gross nonperforming loans

     226.09        237.70        140.12   

Allowance for loan losses for impaired loans

   $ 6,248      $ 6,882      $ 8,329   

As a percentage of total gross loans

     0.10     0.12     0.19

As a percentage of total gross nonperforming loans

     17.19        19.94        16.26   

Allowance for loan losses for total gross performing loans

   $ 75,907      $ 75,169      $ 63,460   

As a percentage of total gross loans

     1.26     1.32     1.41

As a percentage of total gross performing loans

     1.27        1.33        1.43   

Reserve for unfunded credit commitments (1)

   $ 17,490      $ 16,515      $ 14,200   

Total gross loans

     6,030,966        5,698,898        4,485,562   

Total gross performing loans

     5,994,629        5,664,379        4,434,329   

Total unfunded credit commitments

     6,697,256        6,317,152        5,279,364   

 

(1) The “reserve for unfunded credit commitments” is included as a component of “other liabilities.”

 

17


Average Client Investment Funds (1)

 

     Three months ended      Six months ended  

(Dollars in millions)

   June 30,
2011
     March 31,
2011
     June 30,
2010
     June 30,
2011
     June 30,
2010
 

Client directed investment assets

   $ 9,134       $ 9,337       $ 9,340       $ 9,236       $ 9,364   

Client investment assets under management

     8,540         7,475         6,164         8,008         5,922   

Sweep money market funds

     85         —           —           42         —     
                                            

Total average client investment funds

   $ 17,759       $ 16,812       $ 15,504       $ 17,286       $ 15,286   
                                            

 

(1) Client investment funds are maintained at third party financial institutions.

Period-end total client investment funds were $18.2 billion at June 30, 2011, compared to $17.0 billion at March 31, 2011 and $16.0 billion at June 30, 2010. The increase in average and period-end total client investment funds from the first quarter to the second quarter of 2011 was primarily due to an increase in client investment assets under management, mainly attributable to a steadily improving funding environment for both private and public clients, as well as our increased efforts to move funds off the balance sheet.

Use of Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures (non-GAAP noninterest income, non-GAAP net gains on investment securities, non-GAAP operating efficiency ratio, non-GAAP non-marketable securities, non-GAAP noninterest expense, and non-GAAP financial ratios) of financial performance. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.

In particular, in this press release, we use certain non-GAAP measures that exclude from net income and certain other financial line items in certain periods:

 

   

Income and expense attributable to noncontrolling interests — As part of our funds management business, we recognize the entire income or loss from certain funds where we own less than 100 percent. We are required under GAAP to consolidate 100 percent of the results of the funds that we are deemed to control or in which we have a majority ownership. The relevant amounts attributable to investors other than us are reflected under “Net Income Attributable to Noncontrolling Interests.” Our net income available to common stockholders includes only the portion of income or loss related to our ownership interest.

 

   

Gains of $37.3 million and $1.1 million from the sales of certain available-for-sale securities in the second quarters of 2011 and 2010, respectively.

 

   

Net gains of $3.1 million from the repurchase of $108.6 million aggregate principal amount of our 5.70% Senior Notes and $204.0 million aggregate principal amount of our 6.05% Subordinated Notes and the termination of the associated portions of interest rate swaps in the second quarter of 2011.

In addition, in this press release, we use certain non-GAAP financial ratios that are not required by GAAP or exclude certain financial items from their calculations that are otherwise required under GAAP, including:

 

   

Tangible common equity to tangible assets ratio; tangible common equity to risk-weighted assets ratio — these ratios are not required by GAAP or applicable bank regulatory requirements, and are used by management to evaluate the adequacy of the Company’s capital levels. Our ratios are calculated by dividing total SVBFG stockholders’ equity, by total assets or total risk-weighted assets, as applicable, after reducing amounts by acquired intangibles. The manner in which this ratio is calculated varies among companies. Accordingly, our ratios are not necessarily comparable to similar measures of other companies.

 

18


   

Non-GAAP return on average assets ratio; Non-GAAP return on average SVBFG stockholders’ equity ratio — these ratios exclude certain financial items that are otherwise required under GAAP. Our ratios are calculated by dividing non-GAAP net income available to common stockholders (annualized) by average assets or average SVBFG stockholders’ equity, as applicable.

 

   

Non-GAAP operating efficiency ratio — this ratio excludes certain financial items that are otherwise required under GAAP. It is calculated by dividing noninterest expense by total taxable equivalent income, after reducing both amounts by taxable equivalent income attributable to noncontrolling interests for applicable periods.

We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures (as applicable), provide meaningful supplemental information regarding our performance by: (i) excluding amounts attributable to noncontrolling interests which we effectively do not receive the economic benefit or cost of, where indicated, or (ii) providing additional information used by management that is not otherwise required by GAAP or other applicable requirement. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, net income or other financial measures prepared in accordance with GAAP. In the financial tables below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP financial measures used in this press release, or a reconciliation of the non-GAAP calculation of the financial measure.

 

    Three months ended     Six months ended  

Non-GAAP net income and earnings per share

(Dollars in thousands, except share amounts)

  June 30,
2011
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Net income available to common stockholders

  $ 65,750      $ 33,007      $ 21,120      $ 98,757      $ 39,677   

Less: gains on sales of certain available-for-sale securities (1)

    (37,314     —          (1,094     (37,314     (1,094

Tax impact of gains on sales of available-for-sale securities

    14,810        —          433        14,810        433   

Less: net gain from note repurchases and termination of corresponding interest rate swaps (2)

    (3,123     —          —          (3,123     —     

Tax impact of net gain from note repurchases and termination of corresponding interest rate swaps

    1,240        —          —          1,240        —