UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
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
(Registrants 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At October 31, 2008, 32,790,469 shares of the registrants common stock ($0.001 par value) were outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. | INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except par value and share data) |
September 30, 2008 |
December 31, 2007 |
||||||
Assets |
||||||||
Cash and due from banks |
$ | 373,510 | $ | 325,399 | ||||
Securities purchased under agreements to resell and other short-term investment securities |
379,088 | 358,664 | ||||||
Investment securities |
1,779,978 | 1,602,574 | ||||||
Loans, net of unearned income |
5,285,101 | 4,151,730 | ||||||
Allowance for loan losses |
(60,290 | ) | (47,293 | ) | ||||
Net loans |
5,224,811 | 4,104,437 | ||||||
Premises and equipment, net of accumulated depreciation and amortization |
32,344 | 38,628 | ||||||
Goodwill |
4,092 | 4,092 | ||||||
Accrued interest receivable and other assets |
277,122 | 258,662 | ||||||
Total assets |
$ | 8,070,945 | $ | 6,692,456 | ||||
Liabilities, Minority Interest and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 3,231,281 | $ | 3,226,859 | ||||
Negotiable order of withdrawal (NOW) |
57,231 | 35,909 | ||||||
Money market |
1,334,393 | 941,242 | ||||||
Time |
387,236 | 335,110 | ||||||
Sweep |
422,468 | 72,083 | ||||||
Total deposits |
5,432,609 | 4,611,203 | ||||||
Short-term borrowings |
425,000 | 90,000 | ||||||
Other liabilities |
175,740 | 199,243 | ||||||
Long-term debt |
981,946 | 875,254 | ||||||
Total liabilities |
7,015,295 | 5,775,700 | ||||||
Commitments and contingencies (Note 14) |
||||||||
Minority interest in capital of consolidated affiliates |
324,998 | 240,102 | ||||||
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; 32,735,732 and 32,670,557 shares outstanding, respectively |
33 | 33 | ||||||
Additional paid-in capital |
23,816 | | ||||||
Retained earnings |
725,737 | 682,911 | ||||||
Accumulated other comprehensive loss |
(18,934 | ) | (6,290 | ) | ||||
Total stockholders equity |
730,652 | 676,654 | ||||||
Total liabilities, minority interest and stockholders equity |
$ | 8,070,945 | $ | 6,692,456 | ||||
See accompanying notes to interim consolidated financial statements (unaudited).
3
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollars in thousands, except per share amounts) |
2008 | 2007 | 2008 | 2007 | ||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 94,256 | $ | 93,243 | $ | 268,530 | $ | 267,526 | ||||||||
Investment securities: |
||||||||||||||||
Taxable |
15,321 | 14,915 | 43,677 | 46,990 | ||||||||||||
Non-taxable |
1,106 | 528 | 3,121 | 1,692 | ||||||||||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
2,712 | 4,485 | 10,513 | 12,660 | ||||||||||||
Total interest income |
113,395 | 113,171 | 325,841 | 328,868 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
6,267 | 3,572 | 16,908 | 8,328 | ||||||||||||
Borrowings |
11,999 | 13,891 | 33,859 | 36,892 | ||||||||||||
Total interest expense |
18,266 | 17,463 | 50,767 | 45,220 | ||||||||||||
Net interest income |
95,129 | 95,708 | 275,074 | 283,648 | ||||||||||||
Provision for loan losses |
13,682 | 3,155 | 29,756 | 10,865 | ||||||||||||
Net interest income after provision for loan losses |
81,447 | 92,553 | 245,318 | 272,783 | ||||||||||||
Noninterest income: |
||||||||||||||||
Client investment fees |
13,636 | 13,127 | 41,006 | 37,813 | ||||||||||||
Foreign exchange fees |
8,641 | 6,714 | 24,446 | 17,778 | ||||||||||||
Deposit service charges |
6,129 | 3,933 | 18,076 | 10,711 | ||||||||||||
Gains on derivative instruments, net |
6,472 | 8,790 | 13,479 | 15,514 | ||||||||||||
Letter of credit and standby letter of credit income |
3,050 | 2,671 | 9,138 | 8,363 | ||||||||||||
Corporate finance fees |
| 5,166 | 3,640 | 11,568 | ||||||||||||
(Losses) gains on investment securities, net |
(876 | ) | 14,719 | (4,949 | ) | 40,611 | ||||||||||
Other |
4,695 | 9,914 | 22,413 | 25,837 | ||||||||||||
Total noninterest income |
41,747 | 65,034 | 127,249 | 168,195 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Compensation and benefits |
49,598 | 56,460 | 153,438 | 161,777 | ||||||||||||
Professional services |
9,623 | 7,847 | 27,556 | 23,673 | ||||||||||||
Premises and equipment |
5,781 | 4,567 | 16,424 | 14,820 | ||||||||||||
Net occupancy |
4,135 | 5,149 | 12,825 | 16,238 | ||||||||||||
Business development and travel |
3,389 | 2,429 | 10,575 | 8,747 | ||||||||||||
Correspondent bank fees |
1,689 | 1,511 | 5,011 | 4,371 | ||||||||||||
Telephone |
1,373 | 1,178 | 3,870 | 4,034 | ||||||||||||
Loss from cash settlement of conversion premium of zero-coupon convertible subordinated notes |
| | 3,858 | | ||||||||||||
Data processing services |
1,082 | 1,054 | 3,275 | 2,940 | ||||||||||||
Reduction of the provision for unfunded credit commitments |
(990 | ) | (973 | ) | (355 | ) | (2,778 | ) | ||||||||
Impairment of goodwill |
| | | 17,204 | ||||||||||||
Other |
4,751 | 3,737 | 14,580 | 11,966 | ||||||||||||
Total noninterest expense |
80,431 | 82,959 | 251,057 | 262,992 | ||||||||||||
Income before minority interest in net loss (income) of consolidated affiliates and income tax expense |
42,763 | 74,628 | 121,510 | 177,986 | ||||||||||||
Minority interest in net loss (income) of consolidated affiliates |
1,693 | (10,458 | ) | 7,445 | (26,639 | ) | ||||||||||
Income before income tax expense |
44,456 | 64,170 | 128,955 | 151,347 | ||||||||||||
Income tax expense |
17,448 | 26,054 | 52,749 | 61,975 | ||||||||||||
Net income |
$ | 27,008 | $ | 38,116 | $ | 76,206 | $ | 89,372 | ||||||||
Earnings per common sharebasic |
$ | 0.83 | $ | 1.12 | $ | 2.36 | $ | 2.61 | ||||||||
Earnings per common sharediluted |
$ | 0.80 | $ | 1.03 | $ | 2.22 | $ | 2.41 |
See accompanying notes to interim consolidated financial statements (unaudited).
4
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
(Dollars in thousands) |
2008 | 2007 | 2008 | 2007 | |||||||||||
Net income |
$ | 27,008 | $ | 38,116 | $ | 76,206 | $ | 89,372 | |||||||
Other comprehensive (loss) income, net of tax: |
|||||||||||||||
Foreign currency translation (losses) gains, net of tax |
(333 | ) | 128 | (749 | ) | 217 | |||||||||
Change in unrealized (losses) gains on available-for-sale investment securities: |
|||||||||||||||
Unrealized holding (losses) gains, net of tax |
(5,693 | ) | 10,417 | (13,409 | ) | 3,065 | |||||||||
Reclassification adjustment for realized losses (gains) included in net income, net of tax |
726 | 31 | 1,514 | (110 | ) | ||||||||||
Other comprehensive (loss) income, net of tax |
(5,300 | ) | 10,576 | (12,644 | ) | 3,172 | |||||||||
Comprehensive income |
$ | 21,708 | $ | 48,692 | $ | 63,562 | $ | 92,544 | |||||||
See accompanying notes to interim consolidated financial statements (unaudited).
5
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, | ||||||||
(Dollars in thousands) |
2008 | 2007 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 76,206 | $ | 89,372 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Impairment of goodwill |
| 17,204 | ||||||
Provision for loan losses |
29,756 | 10,865 | ||||||
Reduction of the provision for unfunded credit commitments |
(355 | ) | (2,778 | ) | ||||
Changes in fair values of derivatives, net |
(6,888 | ) | (10,477 | ) | ||||
Losses (gains) on investment securities, net |
4,949 | (40,611 | ) | |||||
Depreciation and amortization |
18,603 | 14,332 | ||||||
Minority interest in net (loss) income of consolidated affiliates |
(7,445 | ) | 26,639 | |||||
Tax benefit of original issue discount |
3,899 | 2,522 | ||||||
Tax benefits of share-based compensation and other |
1,419 | 1,420 | ||||||
Amortization of share-based compensation |
10,870 | 12,206 | ||||||
Amortization of deferred warrant-related loan fees |
(6,105 | ) | (5,474 | ) | ||||
Deferred income tax benefit (expense) |
16,357 | (9,337 | ) | |||||
Loss on valuation adjustments and sale of other real estate owned |
236 | 1,368 | ||||||
Changes in other assets and liabilities: |
||||||||
Accrued interest, net |
1,815 | 7,553 | ||||||
Accounts receivable |
851 | (3,469 | ) | |||||
Income tax receivable, net |
(5,919 | ) | 1,959 | |||||
Accrued compensation |
(19,821 | ) | 3,201 | |||||
Foreign exchange spot contracts, net |
4,689 | 8,232 | ||||||
Other, net |
(9,790 | ) | 5,696 | |||||
Net cash provided by operating activities |
113,327 | 130,423 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of available-for-sale securities |
(302,346 | ) | (40,269 | ) | ||||
Proceeds from sales of available-for-sale securities |
4,432 | 7,127 | ||||||
Proceeds from maturities and pay downs of available-for-sale securities |
194,158 | 242,673 | ||||||
Purchases of nonmarketable securities (cost and equity method accounting) |
(43,674 | ) | (21,015 | ) | ||||
Proceeds from sales of nonmarketable securities (cost and equity method accounting) |
7,422 | 12,614 | ||||||
Proceeds from nonmarketable securities (cost and equity method accounting) |
1,498 | 10,278 | ||||||
Purchases of nonmarketable securities (investment fair value accounting) |
(85,997 | ) | (56,656 | ) | ||||
Proceeds from sales of nonmarketable securities (investment fair value accounting) |
22,083 | 19,356 | ||||||
Net (increase) in loans |
(1,156,978 | ) | (348,756 | ) | ||||
Proceeds from recoveries of charged-off loans |
5,547 | 5,366 | ||||||
Proceeds from sale of other real estate owned |
287 | 4,309 | ||||||
Purchases of premises and equipment |
(5,959 | ) | (10,484 | ) | ||||
Net cash used for investing activities |
(1,359,527 | ) | (175,457 | ) | ||||
Cash flows from financing activities: |
||||||||
Net increase (decrease) in deposits |
821,406 | (87,917 | ) | |||||
Principal payments of other long-term debt |
(901 | ) | | |||||
Payments for early conversion of zero-coupon convertible subordinated notes |
(7,832 | ) | | |||||
Payments for settlement of zero-coupon convertible subordinated notes upon maturity |
(141,900 | ) | | |||||
Proceeds from exercise of call options pursuant to convertible note hedge agreement related to zero coupon convertible subordinated notes |
3,857 | | ||||||
Proceeds from issuance of 3.875% convertible senior notes, net of issuance costs |
243,236 | | ||||||
Proceeds from issuance of senior and subordinated notes, net of issuance costs |
| 495,030 | ||||||
Proceeds from issuance of warrants related to 3.875% convertible senior notes |
21,200 | | ||||||
Cost of hedge agreement related to 3.875% convertible senior notes |
(41,750 | ) | | |||||
Increase (decrease) in short-term borrowings |
335,000 | (313,537 | ) | |||||
Capital contributions from minority interest participants, net of distributions |
92,341 | 43,477 | ||||||
Stock compensation related tax benefits |
5,882 | 6,280 | ||||||
Proceeds from issuance of common stock and ESPP |
29,813 | 25,567 | ||||||
Repurchases of common stock |
(45,617 | ) | (97,332 | ) | ||||
Net cash provided by financing activities |
1,314,735 | 71,568 | ||||||
Net increase in cash and cash equivalents |
68,535 | 26,534 | ||||||
Cash and cash equivalents at beginning of year |
684,063 | 632,585 | ||||||
Cash and cash equivalents at end of period |
$ | 752,598 | $ | 659,119 | ||||
See accompanying notes to interim consolidated financial statements (unaudited).
6
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 throughout their life cycles. In this Quarterly Report on Form 10-Q, when we refer to SVB Financial Group, the Company, we, our, us or use 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 refer to SVB Financial or the Parent we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.
The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (GAAP). Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 2008 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, 2007 (2007 Form 10-K).
The accompanying interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary DataNote 2 (Summary of Significant Accounting Policies) under Part II, Item 8 of our 2007 Form 10-K.
The preparation of interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include the valuation of non-marketable securities, the adequacy of 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, goodwill and share-based compensation.
In July 2007, we reached a decision to cease operations at SVB Alliant, our investment banking subsidiary, which provided advisory services in the areas of mergers and acquisitions, corporate finance, strategic alliances and private placements. After completion of the remaining client transactions, operations at SVB Alliant were ceased as of March 31, 2008. Accordingly, SVB Alliant was no longer reported as an operating segment as of the second quarter of 2008. We have not presented the results of operations of SVB Alliant in discontinued operations for the three and nine months ended September 30, 2008 or for any comparative period presented based on our assessment of the materiality of SVB Alliants results to our consolidated results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentations.
2. Recent Accounting Pronouncements
We adopted Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements (SFAS No. 157) on January 1, 2008. SFAS No. 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS No. 157 does not expand or require any new fair value measures. In February 2008, the Financial Accounting Standards Board (FASB) decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until 2009. Accordingly, our adoption of this standard in 2008 was limited to financial assets and liabilities. The adoption of SFAS No. 157 did not have a material effect on our financial condition or results of operations. We are still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore have not yet determined the impact that it may have on our financial statements upon full adoption on January 1, 2009. Nonfinancial assets and liabilities for which we have not applied the provisions of SFAS No. 157 include those measured at fair value in impairment testing and those initially measured at fair value in a business combination. Additionally, in early October 2008, the FASB issued a clarification related to the application of SFAS No. 157 for determining the fair value of a financial asset when a market for that asset is not active. We have applied the
7
guidance from the FASB clarification as it is effective upon issuance and requires retrospective application. There was no material effect on our financial assets as a result of this application.
We adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159) on January 1, 2008. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS No. 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The adoption of SFAS No. 159 did not have an effect on our financial condition or results of operations as we did not elect this fair value option for any financial instruments.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of SFAS No. 160 on our consolidated financial position and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires companies with derivative instruments to provide enhanced disclosure information that should enable financial statement users to better understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) and how derivative instruments and related hedged items affect a companys financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The standard expands the disclosure requirements for derivatives and hedged items and has no impact on how we account for these instruments.
In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board (APB) Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB No. 14). The FSP requires the proceeds from the issuance of such convertible debt instruments to be allocated between a liability and an equity component in a manner that reflects the entitys non-convertible debt borrowing rate when interest expense is recognized in subsequent periods. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. FSP APB No. 14-1 is effective in fiscal years beginning after December 15, 2008 and requires retrospective application to all prior periods presented. Our 2009 adoption will require historical financial statements for fiscal year 2003 through fiscal year 2008 to be adjusted to conform to the FSPs new accounting treatment for both our Zero-Coupon Convertible Subordinated Notes due June 15, 2008 and 3.875% Convertible Senior Notes due April 15, 2011 (also refer to Note 9). We are evaluating the impact of this new accounting treatment, which will primarily result in an increase to non-cash interest expense reported in our historical financial statements.
8
3. Earnings Per Share (EPS)
The following is a reconciliation of basic EPS to diluted EPS:
Three months ended September 30, | Nine months ended September 30, | |||||||||||
(Dollars and shares in thousands, except per share amounts) |
2008 | 2007 | 2008 | 2007 | ||||||||
Numerator: |
||||||||||||
Net income |
$ | 27,008 | $ | 38,116 | $ | 76,206 | $ | 89,372 | ||||
Denominator: |
||||||||||||
Weighted average common shares outstanding-basic |
32,534 | 34,029 | 32,295 | 34,255 | ||||||||
Weighted average effect of dilutive securities: |
||||||||||||
Stock options |
994 | 1,233 | 998 | 1,310 | ||||||||
Restricted stock awards and units |
107 | 63 | 94 | 83 | ||||||||
2003 Convertible Notes |
| 1,540 | 868 | 1,484 | ||||||||
Warrants associated with 2003 Convertible Notes |
| 4 | | | ||||||||
2008 Convertible Notes |
143 | | | | ||||||||
Warrants associated with 2008 Convertible Notes |
| | | | ||||||||
Denominator for diluted calculation |
33,778 | 36,869 | 34,255 | 37,132 | ||||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.83 | $ | 1.12 | $ | 2.36 | $ | 2.61 | ||||
Diluted |
$ | 0.80 | $ | 1.03 | $ | 2.22 | $ | 2.41 | ||||
Stock options with exercise prices greater than the average market price of our common stock were excluded from the diluted EPS calculation as their inclusion would have been anti-dilutive. Any dilutive effect of our $150 million zero-coupon convertible subordinated notes (2003 Convertible Notes) and $250 million of 3.875% convertible senior notes (2008 Convertible Notes) are included in the calculation of diluted EPS using the treasury stock method, in accordance with the provisions of Emerging Issues Task Force (EITF) 04-8, The Effect of Contingently Convertible Instruments on Diluted EPS, EITF No. 90-19, Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion and SFAS No. 128, Earnings Per Share. For the three months ended September 30, 2008, there was no effect of the weighted average 2003 Convertible Notes on our diluted EPS calculation due to their maturity on June 15, 2008. However, we included the weighted average dilutive effect of the 2003 Convertible Notes in our diluted EPS calculation for the nine months ended September 30, 2008. The issuance of the 2008 Convertible Notes in April 2008 impacted our weighted average diluted common shares total for the three months ended September 30, 2008 as the applicable conversion price was lower than the average daily closing price for the three month period. For the nine months ended September 30, 2008, the 2008 Convertible Notes did not impact our weighted average diluted common shares total as the applicable conversion price was higher than the average daily closing price for the nine month period.
The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three and nine months ended September 30, 2008, and 2007:
Three months ended September 30, | Nine months ended September 30, | |||||||
(Shares in thousands) |
2008 | 2007 | 2008 | 2007 | ||||
Stock options |
827 | 641 | 822 | 715 | ||||
Restricted stock awards and units |
2 | | 1 | 1 | ||||
Warrants associated with 2003 Convertible Notes |
| | 89 | 81 | ||||
2008 Convertible Notes |
| | 205 | | ||||
Warrants associated with 2008 Convertible Notes |
838 | | 903 | | ||||
Total |
1,667 | 641 | 2,020 | 797 | ||||
4. Share-Based Compensation
For the three months ended September 30, 2008 and 2007, we recorded share-based compensation expense of $3.5 million and $3.8 million, respectively, resulting in the recognition of $1.0 million and $0.8 million, respectively, in related tax benefits. For the nine months ended September 30, 2008 and 2007, we recorded share-based compensation expense of $10.9 million and $12.0 million, respectively, resulting in the recognition of $2.7 million and $2.4 million, respectively, in related tax benefits.
Unrecognized Compensation Expense
At September 30, 2008, unrecognized share-based compensation expense was as follows:
9
(Dollars in thousands) |
Unrecognized Expense | Average Expected Recognition Period - in Years | |||
Stock options |
$ | 7,688 | 1.53 | ||
Restricted stock awards and units |
14,701 | 1.63 | |||
Total unrecognized share-based compensation expense |
$ | 22,389 | |||
Share-Based Payment Award Activity
The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the nine months ended September 30, 2008:
Shares | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life in Years |
Aggregate Intrinsic Value of In-The- Money Options | ||||||||
Outstanding at December 31, 2007 |
3,769,229 | $ | 33.74 | ||||||||
Granted |
417,912 | 48.74 | |||||||||
Exercised |
(935,099 | ) | 29.18 | ||||||||
Forfeited |
(16,169 | ) | 47.59 | ||||||||
Expired |
(14,920 | ) | 30.07 | ||||||||
Outstanding at September 30, 2008 |
3,220,953 | 36.96 | 3.82 | $ | 67,514,674 | ||||||
Vested and expected to vest at September 30, 2008 |
3,086,011 | 36.43 | 3.71 | 66,319,184 | |||||||
Exercisable at September 30, 2008 |
2,324,225 | 32.51 | 3.08 | 59,058,857 | |||||||
The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $57.92 at September 30, 2008. The total intrinsic value of options exercised during the three and nine months ended September 30, 2008 was $13.4 million and $22.0 million, respectively, and the total intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $4.3 million and $20.8 million, respectively.
The table below provides information for restricted stock awards and restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the nine months ended September 30, 2008:
Shares | Weighted-Average Grant Date Fair Value | |||||
Nonvested at December 31, 2007 |
376,181 | $ | 44.58 | |||
Granted |
194,042 | 48.71 | ||||
Vested |
(71,628 | ) | 44.03 | |||
Forfeited |
(9,743 | ) | 48.11 | |||
Nonvested at September 30, 2008 |
488,852 | 46.23 | ||||
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5. Securities Purchased under Agreements to Resell and Other Short-Term Investment Securities
The following table details the securities purchased under agreements to resell and other short-term investment securities at September 30, 2008 and December 31, 2007, respectively:
(Dollars in thousands) |
September 30, 2008 | December 31, 2007 | ||||
Securities purchased under agreements to resell |
$ | 86,982 | $ | 62,181 | ||
Interest-earning deposits |
88,092 | 81,553 | ||||
Other short-term investment securities |
204,014 | 214,930 | ||||
Total securities purchased under agreements to resell and other short-term investment securities |
$ | 379,088 | $ | 358,664 | ||
6. Investment Securities
The composition of our investment securities at September 30, 2008 and December 31, 2007 is presented below:
(Dollars in thousands) |
September 30, 2008 | December 31, 2007 | ||||
Marketable securities: |
||||||
Available-for-sale securities, at fair value |
$ | 1,338,778 | $ | 1,259,106 | ||
Marketable securities (investment company fair value accounting) (1) |
2,279 | 3,591 | ||||
Non-marketable securities (investment company fair value accounting): |
||||||
Private equity fund investments (2) |
232,016 | 194,862 | ||||
Other private equity investments (3) |
79,687 | 44,872 | ||||
Other investments (4) |
2,237 | 12,080 | ||||
Non-marketable securities (equity method accounting): |
||||||
Other investments (5) |
25,732 | 21,299 | ||||
Low income housing tax credit funds |
26,414 | 24,491 | ||||
Non-marketable securities (cost method accounting): |
||||||
Private equity fund investments (6) |
59,074 | 35,006 | ||||
Other private equity investments |
13,761 | 7,267 | ||||
Total investment securities |
$ | 1,779,978 | $ | 1,602,574 | ||
(1) | Marketable securities (investment company fair value accounting) represent investments managed by us or our consolidated subsidiaries that were originally made within our non-marketable securities portfolio that have been converted into publicly-traded shares. The following table shows the distributions of these investments by the following funds and our ownership of each fund at September 30, 2008 and December 31, 2007: |
September 30, 2008 | December 31, 2007 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
Partners for Growth, LP |
$ | 1,387 | 50.0 | % | $ | 2,556 | 50.0 | % | ||||
SVB India Capital Partners I, LP |
844 | 13.9 | 1,035 | 13.9 | ||||||||
SVB Strategic Investors Fund, LP |
48 | 12.6 | | 12.6 | ||||||||
Total marketable securities |
$ | 2,279 | $ | 3,591 | ||||||||
(2) | The following table shows the distributions of these investments by the following consolidated fund of funds and our ownership of each fund at September 30, 2008 and December 31, 2007: |
September 30, 2008 | December 31, 2007 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
SVB Strategic Investors Fund, LP |
$ | 67,737 | 12.6 | % | $ | 68,744 | 12.6 | % | ||||
SVB Strategic Investors Fund II, LP |
92,317 | 8.6 | 81,382 | 8.6 | ||||||||
SVB Strategic Investors Fund III, LP |
71,522 | 5.9 | 44,736 | 5.9 | ||||||||
SVB Strategic Investors Fund IV, LP |
440 | 5.0 | | | ||||||||
Total private equity fund investments |
$ | 232,016 | $ | 194,862 | ||||||||
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(3) | The following table shows the distributions of these investments by the following consolidated co-investment funds and our ownership of each fund at September 30, 2008 and December 31, 2007: |
September 30, 2008 | December 31, 2007 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
Silicon Valley BancVentures, LP |
$ | 25,372 | 10.7 | % | $ | 28,068 | 10.7 | % | ||||
SVB Capital Partners II, LP (i) |
37,718 | 5.1 | 14,458 | 5.1 | ||||||||
SVB India Capital Partners I, LP |
16,597 | 13.9 | 2,346 | 13.9 | ||||||||
Total other private equity investments |
$ | 79,687 | $ | 44,872 | ||||||||
(i) | At September 30, 2008, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership interest of SVB Strategic Investors Fund II, LP. |
(4) | Other investments within non-marketable securities (investment company fair value accounting) include investments made by Partners for Growth, LP, a consolidated sponsored debt fund. At September 30, 2008, we had a majority ownership interest of approximately 50.0% in the fund. Partners for Growth, LP is managed by a third party, and we do not have an ownership interest in the general partner of this fund. |
(5) | The following table shows the distributions of these investments by the following sponsored debt funds and our ownership of each fund at September 30, 2008 and December 31, 2007: |
September 30, 2008 | December 31, 2007 | |||||||||||
(Dollars in thousands) |
Amount | Ownership % | Amount | Ownership % | ||||||||
Gold Hill Venture Lending 03, LP (i) |
$ | 16,635 | 9.3 | % | $ | 15,915 | 9.3 | % | ||||
Partners for Growth II, LP |
9,054 | 24.2 | 5,384 | 24.2 | ||||||||
Other fund investment (ii) |
43 | | | | ||||||||
Total other investments |
$ | 25,732 | $ | 21,299 | ||||||||
(i) | At September 30, 2008, we had a direct ownership interest of 4.8% in the fund. In addition, we had a 90.7% direct ownership interest in the funds general partner, Gold Hill Venture Lending Partners 03, LLC (GHLLC). GHLLC has a direct ownership interest of 5.0% in Gold Hill Venture Lending 03, LP and its parallel funds. Our indirect interest in the fund through our investment in GHLLC is 4.5%. Our direct and indirect ownership in the fund is 9.3%. |
(ii) | At September 30, 2008, our ownership interest is less than 5% of the voting stock of the fund. |
(6) | Represents investments in 356 and 325 private equity funds at September 30, 2008 and December 31, 2007, respectively, where our ownership interest is less than 5% of the voting stock of each such fund. |
The following table summarizes our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months, or 12 months or longer, at September 30, 2008:
September 30, 2008 | |||||||||||||||||||||
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. agencies and corporations: |
|||||||||||||||||||||
Collateralized mortgage obligations (1) |
$ | 227,082 | $ | (5,613 | ) | $ | 135,370 | $ | (11,979 | ) | $ | 362,452 | $ | (17,592 | ) | ||||||
Mortgage-backed securities (1) |
359,018 | (5,837 | ) | 63,858 | (2,712 | ) | 422,876 | (8,549 | ) | ||||||||||||
Discount notes and bonds |
9,997 | (5 | ) | | | 9,997 | (5 | ) | |||||||||||||
Commercial mortgage-backed securities (1) |
9,614 | (281 | ) | 43,252 | (2,712 | ) | 52,866 | (2,993 | ) | ||||||||||||
Municipal bonds and notes |
84,289 | (6,815 | ) | | | 84,289 | (6,815 | ) | |||||||||||||
Marketable equity securities |
250 | (5 | ) | | | 250 | (5 | ) | |||||||||||||
Total temporarily impaired securities |
$ | 690,250 | $ | (18,556 | ) | $ | 242,480 | $ | (17,403 | ) | $ | 932,730 | $ | (35,959 | ) | ||||||
(1) | As of September 30, 2008, we identified a total of 279 investments that were in unrealized loss positions, of which 44 investments totaling $242.5 million with unrealized losses of $17.4 million had fair values less than their adjusted cost for a period of time greater than 12 months. Securities classified as collateralized mortgage obligations totaling $135.4 million with unrealized losses of $12.0 million were originally purchased between May 2002 and July 2005. Securities classified as mortgage-backed securities totaling $63.9 million with unrealized losses of $2.7 million were originally purchased between June |
12
2003 and March 2005. Securities classified as commercial mortgage-backed securities totaling $43.3 million with unrealized losses of $2.7 million were originally purchased between April 2005 and July 2005. All investments with unrealized losses for a period of time greater than 12 months are either rated AAA by Moodys or S&P or are issued by a government sponsored enterprise. The unrealized losses are primarily due to increases in market spreads to benchmark interest rates relative to rates and spreads at the time of purchase. Based on the underlying credit quality of the investments, we expect these impairments to be temporary, and as such, we expect to recover impairments prior to maturity and we have the intent and ability to hold these investments until recovery or final maturity. Market valuations and impairment analyses on assets in the investment portfolio are reviewed and monitored on an ongoing basis. |
The following table summarizes our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months, or 12 months or longer, as of December 31, 2007:
December 31, 2007 | |||||||||||||||||||||
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. agencies and corporations: |
|||||||||||||||||||||
Collateralized mortgage obligations |
$ | | $ | | $ | 408,238 | $ | (7,828 | ) | $ | 408,238 | $ | (7,828 | ) | |||||||
Mortgage-backed securities |
9,759 | (12 | ) | 331,300 | (5,700 | ) | 341,059 | (5,712 | ) | ||||||||||||
U.S. agency debentures |
| | 74,575 | (440 | ) | 74,575 | (440 | ) | |||||||||||||
Commercial mortgage-backed securities |
| | 51,380 | (740 | ) | 51,380 | (740 | ) | |||||||||||||
Municipal bonds and notes |
24,327 | (240 | ) | | | 24,327 | (240 | ) | |||||||||||||
Marketable equity securities |
7,391 | (884 | ) | | | 7,391 | (884 | ) | |||||||||||||
Total temporarily impaired securities |
$ | 41,477 | $ | (1,136 | ) | $ | 865,493 | $ | (14,708 | ) | $ | 906,970 | $ | (15,844 | ) | ||||||
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The following table presents the components of gains and losses on investment securities for the three and nine months ended September 30, 2008 and 2007:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollars in thousands) |
2008 | 2007 | 2008 | 2007 | ||||||||||||
Gross gains on investment securities: |
||||||||||||||||
Available-for-sale securities, at fair value |
$ | 1 | $ | 100 | $ | 206 | $ | 496 | ||||||||
Marketable securities (investment company fair value accounting) |
18 | 4 | 630 | 96 | ||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||
Private equity fund investments |
1,723 | 15,766 | 18,538 | 35,859 | ||||||||||||
Other private equity investments |
4,694 | 407 | 10,134 | 1,838 | ||||||||||||
Other investments |
41 | 5,786 | 196 | 18,770 | ||||||||||||
Non-marketable securities (equity method accounting): |
||||||||||||||||
Other investments |
148 | 1,245 | 1,679 | 1,530 | ||||||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||
Private equity fund investments |
318 | 247 | 728 | 1,044 | ||||||||||||
Other private equity investments |
4 | 1 | 85 | 233 | ||||||||||||
Total gross gains on investment securities |
6,947 | 23,556 | 32,196 | 59,866 | ||||||||||||
Gross losses on investment securities: |
||||||||||||||||
Available-for-sale securities, at fair value |
(1,234 | ) | (152 | ) | (2,775 | ) | (306 | ) | ||||||||
Marketable securities (investment company fair value accounting) |
(1,348 | ) | | (3,274 | ) | | ||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||
Private equity fund investments |
(3,585 | ) | (3,013 | ) | (19,334 | ) | (10,569 | ) | ||||||||
Other private equity investments |
(393 | ) | (1,591 | ) | (2,926 | ) | (3,426 | ) | ||||||||
Other investments |
(132 | ) | (3,835 | ) | (5,646 | ) | (4,176 | ) | ||||||||
Non-marketable securities (equity method accounting): |
||||||||||||||||
Other investments |
(1 | ) | | (1,094 | ) | (214 | ) | |||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||
Private equity fund investments |
(1,130 | ) | (246 | ) | (1,838 | ) | (564 | ) | ||||||||
Other private equity investments |
| | (258 | ) | | |||||||||||
Total gross losses on investment securities |
(7,823 | ) | (8,837 | ) | (37,145 | ) | (19,255 | ) | ||||||||
(Losses) gains on investment securities, net |
$ | (876 | ) | $ | 14,719 | $ | (4,949 | ) | $ | 40,611 | ||||||
Amounts attributable to minority interests, including carried interest |
$ | 1,220 | $ | 11,885 | $ | (227 | ) | $ | 31,502 | |||||||
7. Loans and Allowance for Loan Losses
The composition of loans, net of unearned income of $38.2 million and $26.4 million at September 30, 2008 and December 31, 2007, respectively, is presented in the following table:
(Dollars in thousands) |
September 30, 2008 | December 31, 2007 | ||||
Commercial loans |
$ | 4,313,592 | $ | 3,321,911 | ||
Premium wine (1) |
402,811 | 375,169 | ||||
Community development loans (2) |
51,668 | 52,094 | ||||
Consumer and other (3) |
517,030 | 402,556 | ||||
Total loans, net of unearned income |
$ | 5,285,101 | $ | 4,151,730 | ||
(1) | Premium wine consists of loans for vineyard development as well as financial solutions to meet the needs of our clients premium wineries and vineyards. At September 30, 2008 and December 31, 2007, $267.8 million and $251.1 million, respectively, of such loans were secured by real estate. |
(2) | Community development loans consist of low income housing loans made to fulfill our responsibilities under the Community Reinvestment Act and are primarily secured by real estate. |
(3) | Consumer and other loans consist of loans to targeted high-net-worth individuals. These products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans and capital call lines of credit. This category also includes loans made to eligible employees through our Employee Home Ownership Plan. At September 30, 2008 and December 31, 2007, $219.0 million and $181.8 million, respectively, of such consumer and other loans were secured by real estate. Loans secured by real estate at September 30, 2008 were comprised of $87.0 million of home equity lines of credit, which may have been used to finance real estate investments, $58.5 million of loans used to purchase, renovate or refinance personal residences, and $73.5 million of loans made to eligible employees through our Employee Home Ownership Plan. Loans secured by real estate at December 31, 2007 were comprised of $84.8 million of home equity lines of credit, which may have been used to finance real estate investments, $48.1 million of loans used to purchase, renovate or refinance personal residences, and $48.9 million of loans made to eligible employees through our Employee Home Ownership Plan. |
14
The activity in the allowance for loan losses for the three and nine months ended September 30, 2008 and 2007 was as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollars in thousands) |
2008 | 2007 | 2008 | 2007 | ||||||||||||
Allowance for loan losses, beginning balance |
$ | 52,888 | $ | 43,352 | $ | 47,293 | $ | 42,747 | ||||||||
Provision for loan losses |
13,682 | 3,155 | 29,756 | 10,865 | ||||||||||||
Loan charge-offs |
(7,000 | ) | (4,138 | ) | (22,306 | ) | (14,754 | ) | ||||||||
Loan recoveries |
720 | 1,856 | 5,547 | 5,367 | ||||||||||||
Allowance for loan losses, ending balance |
$ | 60,290 | $ | 44,225 | $ | 60,290 | $ | 44,225 | ||||||||
The aggregate investment in loans for which impairment has been determined in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, totaled $9.1 million and $7.6 million at September 30, 2008 and December 31, 2007, respectively. The allocation of the allowance for loan losses related to impaired loans was $5.9 million and $1.4 million at September 30, 2008 and December 31, 2007, respectively. Average impaired loans for the three months ended September 30, 2008 and 2007 was $10.5 million and $12.3 million, respectively, and average impaired loans for the nine months ended September 30, 2008 and 2007 was $9.9 million and $11.1 million, respectively. If these loans had not been impaired, $0.1 million in interest income would have been recorded for both the three months ended September 30, 2008 and 2007, respectively, and $0.3 million and $0.7 million in interest income would have been recorded for the nine months ended September 30, 2008 and 2007, respectively.
8. Goodwill
Goodwill at both September 30, 2008 and December 31, 2007 was $4.1 million, which resulted from our acquisition in 2006 of a majority ownership interest in eProsper, an equity ownership data management services company. During the third quarter of 2008, we conducted our annual impairment analysis of eProsper in accordance with SFAS No. 142, based on forecasted discounted net cash flow analysis. The valuation analysis of eProsper indicated no impairment existed.
During the second quarter of 2007, we conducted our annual assessment of goodwill of SVB Alliant in accordance with SFAS No. 142. We concluded at that time that we had an impairment of goodwill based on forecasted discounted net cash flows for that reporting unit. The impairment resulted from changes in our outlook for SVB Alliants future financial performance and the entire amount of the remaining $17.2 million of goodwill was expensed as a noncash charge to continuing operations during the second quarter of 2007. All operations at SVB Alliant were ceased as of March 31, 2008.
9. Short-Term Borrowings and Long-Term Debt
The following table represents outstanding short-term borrowings and long-term debt at September 30, 2008 and December 31, 2007:
(Dollars in thousands) |
Maturity |
September 30, 2008 | December 31, 2007 | |||||
Short-term borrowings: | ||||||||
Federal funds purchased |
Less than One Month (1) | $ | 125,000 | $ | | |||
FHLB advances |
Less than One Month (1) | 300,000 | 90,000 | |||||
Total short-term borrowings |
$ | 425,000 | $ | 90,000 | ||||
Long-term debt: | ||||||||
FHLB advances |
(2) | $ | 150,000 | $ | 150,000 | |||
5.70% senior notes |
June 1, 2012 | 262,063 | 259,706 | |||||
6.05% subordinated notes |
June 1, 2017 | 265,468 | 261,099 | |||||
Zero-coupon convertible subordinated notes |
June 15, 2008 | | 149,269 | |||||
3.875% convertible senior notes |
April 15, 2011 | 250,000 | | |||||
7.0% junior subordinated debentures |
October 15, 2033 | 52,647 | 52,511 | |||||
8.0% long-term notes payable |
(3) | 1,768 | 2,669 | |||||
Total long-term debt |
$ | 981,946 | $ | 875,254 | ||||
(1) | Represents remaining maturity as of the date reported. |
(2) | Represents Federal Home Loan Bank (FHLB) advances of $50 million maturing in November 2008, $50 million maturing in May 2009 and $50 million maturing in November 2009. |
15
(3) | Long-term notes payable was assumed in relation to the acquisition of a 65% interest in eProsper in 2006 and was repayable beginning January 1, 2008 with the last repayment due in November 2009. |
Interest expense related to short-term borrowings and long-term debt was $12.0 million and $13.9 million for the three months ended September 30, 2008 and 2007, respectively, and $33.9 million and $36.9 million for the nine months ended September 30, 2008 and 2007, respectively. Interest expense shown is net of the cash flow impact from our interest rate swap agreements related to our senior and subordinated notes and junior subordinated debentures. The weighted average interest rates associated with our short-term borrowings and long-term debt outstanding were 3.14 percent and 5.23 percent for the three months ended September 30, 2008 and 2007, respectively, and 3.43 percent and 4.99 percent for the nine months ended September 30, 2008 and 2007, respectively.
Zero-Coupon Convertible Subordinated Notes (2003 Convertible Notes)
Our 2003 Convertible Notes, previously issued with an original aggregate total principal amount of $150 million, matured on June 15, 2008. As of the maturity date, convertible notes for the aggregate total principal amount of $141.9 million were outstanding and had not yet been converted. Based on the conversion terms of these notes, on June 23, 2008, we made an aggregate conversion settlement payment in cash and in shares of our common stock. The total value of both cash and shares as calculated based on the terms of the notes and as of the payment date was $212.8 million. Of the $212.8 million, we paid $141.9 million in cash, representing the portion of the conversion payment as the total principal amount of the notes converted. We also issued 1,406,034 shares of our common stock, valued at $70.9 million as calculated based on the terms of the notes, representing the portion of the conversion premium value that exceeded the total principal amount of the notes. In connection with this conversion settlement payment, we exercised call options pursuant to a call-spread arrangement with a certain counterparty, under which the counterparty delivered to us 1,406,043 shares of our common stock, valued at $70.9 million. Accordingly, there was no net impact on our total stockholders equity with respect to settling the conversion premium value.
In May 2008, prior to the maturity date of our 2003 Convertible Notes, we received a conversion notice to convert notes in the total principal amount of $7.8 million. Consistent with prior early conversions, we elected to settle the conversion fully in cash and paid a total of $11.6 million in cash, which included $3.9 million representing the conversion premium value of the converted notes. Accordingly, we recorded a non-tax deductible loss of $3.9 million as noninterest expense. In connection with this early conversion settlement payment, we exercised call options pursuant to our call-spread arrangement and received a corresponding cash payment of $3.9 million from the counterparty to the call-spread arrangement. As such, we recorded an increase in stockholders equity of $3.9 million, representing such payment received, which was reflected as additional paid-in capital. Consequently, the $3.9 million in noninterest expense we recorded due to this early conversion settlement had no net impact on our total stockholders equity.
3.875% Convertible Senior Notes (2008 Convertible Notes)
In April 2008, we issued our 2008 Convertible Notes, due April 15, 2011 in the aggregate principal amount of $250 million to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The issuance costs related to the 2008 Convertible Notes were $6.8 million, and the net proceeds from the offering were $243.2 million. We used $141.9 million of the net proceeds to settle the conversion of our zero-coupon convertible subordinated notes, which matured in June 2008. All remaining proceeds were used for general corporate purposes. The 2008 Convertible Notes are initially convertible, subject to certain conditions, into cash up to the principal amount of notes and, with respect to any excess conversion value, into shares of our common stock or cash or any combination thereof, at our option. Holders may convert their 2008 Convertible Notes beginning any fiscal quarter commencing after June 30, 2008, if: (i) the price of our common stock issuable upon conversion of the note reaches a specific threshold, (ii) specified corporate transactions occur, or (iii) the trading price for the note falls below certain thresholds. The notes have an initial conversion rate of 18.8525 shares of common stock per $1,000 principal amount of notes, which represents an initial effective conversion price of $53.04 per share. Upon maturity, we intend to settle the outstanding principal amount in cash, and we have the option to settle any amount exceeding the principal value of the 2008 Convertible Notes in either cash or shares of our common stock.
Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge and warrant agreement (See Note 10-Derivative Financial Instruments), which effectively increased the economic conversion price of our 2008 Convertible Notes to $64.43 per share of common stock. The terms of the hedge and warrant agreement are not part of the terms of the notes and will not affect the rights of the holders of the notes.
Available Lines of Credit
At September 30, 2008, we had available $1.40 billion in uncommitted federal funds lines of credit, of which $1.28 billion were unused. We have repurchase agreements with multiple securities dealers, which allow us to access short-term borrowings by using fixed income securities as collateral. At September 30, 2008, we had not borrowed against our repurchase 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 at September 30, 2008 totaled $664.7 million, of which $214.7 million was unused. The market value of collateral pledged at the discount window of the Federal Reserve Bank in accordance
16
with our risk management practices totaled $80.0 million at September 30, 2008. We have not borrowed against this pledged collateral.
10. Derivative Financial Instruments
Our derivative contracts are carried at fair value with changes in fair value recorded as gains on derivatives, net, as part of our noninterest income, a component of consolidated net income. The total notional or contractual amount, credit risk amount and estimated net fair value for derivatives at September 30, 2008 and December 31, 2007, respectively, were as follows:
September 30, 2008 | December 31, 2007 | |||||||||||||||||||
(Dollars in thousands) |
Notional or contractual amount |
Credit risk amount (1) |
Estimated net fair value |
Notional or contractual amount |
Credit risk amount (1) |
Estimated net fair value |
||||||||||||||
Fair Value Hedges |
||||||||||||||||||||
Interest rate swap - senior notes |
$ | 250,000 | $ | 12,240 | $ | 12,240 | $ | 250,000 | $ | 9,878 | $ | 9,878 | ||||||||
Interest rate swap - subordinated notes |
250,000 | 15,959 | 15,959 | 250,000 | 11,621 | 11,621 | ||||||||||||||
Interest rate swap - junior subordinated debt |
50,000 | | (847 | ) | 50,000 | | (1,304 | ) | ||||||||||||
Derivatives - Other |
||||||||||||||||||||
Foreign exchange forwards |
$ | 576,345 | $ | 14,816 | $ | 4,294 | $ | 580,861 | $ | 12,290 | $ | 1,586 | ||||||||
Foreign currency options |
9,404 | 276 | | 63,906 | 492 | | ||||||||||||||
Equity warrant assets |
119,980 | 39,054 | 39,054 | 101,035 | 31,317 | 31,317 | ||||||||||||||
Covered call options (2) |
476 | | (1 | ) | | | |
(1) | Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of September 30, 2008 remain at A or higher and there have been no material change in their credit ratings during the third quarter of 2008. |
(2) | Represents covered call options held by one of our sponsored debt funds. |
Fair Value Hedges
The interest rate swap agreement for our 5.70% senior notes provided a cash benefit of $1.5 million and $3.1 million for the three and nine months ended September 30, 2008, respectively, compared to a cash outlay of $0.3 million and $0.4 million, respectively, for the comparable 2007 periods. The interest rate swap agreement for our 6.05% subordinated notes provided a cash benefit of $1.6 million and $3.3 million for the three and nine months ended September 30, 2008, respectively, compared to a cash outlay of $0.2 million and $0.3 million, respectively, for the comparable 2007 periods. The cash benefit was recognized in the consolidated statements of income as a reduction in interest expense, while the cash outlay was recognized as an increase in interest expense. The 5.70% senior notes and the 6.05% subordinated notes were issued by the Bank in May 2007.
The interest rate swap agreement for our 7.0% junior subordinated debentures provided a cash benefit of $0.4 million and $0.9 million for the three and nine months ended September 30, 2008, respectively, compared to $39 thousand and $0.1 million for the comparable 2007 periods. The cash benefit was recognized in the consolidated statements of income as a reduction in interest expense. For the three and nine months ended September 30, 2008, we recorded a net loss resulting from a non-cash decrease in fair value of the hedge agreement of $10 thousand and a net gain resulting from a non-cash increase in the fair value of the hedge agreement of $0.4 million, respectively, which was reflected in gains on derivative instruments, net. For the three and nine months ended September 30, 2007, we recorded net losses resulting from non-cash decreases in the fair value of the hedge agreement of $0.3 million and $0.1 million, respectively, which was reflected in gains on derivative instruments, net. The 7.0% junior subordinated debentures were issued in October 2003.
Derivatives - Other
We obtain equity warrant assets to purchase an equity position in a client companys stock primarily in consideration for providing credit facilities and, to a lesser extent, for providing other services. The change in fair value of equity warrant assets is recorded as gains on derivative instruments, net, in noninterest income, a component of consolidated net income. Total net gains on equity warrant assets from gains on exercise and changes in fair value were $1.4 million and $9.2 million for the three months ended September 30, 2008 and 2007, respectively, and $8.9 million and $15.2 million for the nine months ended September 30, 2008 and 2007, respectively.
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Derivative Fair Value Instruments Indexed to and Potentially Settled in a Companys Own Stock
2003 Convertible Notes
Concurrent with the issuance of our 2003 Convertible Notes, we entered into a convertible note hedge agreement (purchased call option) at a cost of $39.3 million, and a warrant agreement providing proceeds of $17.4 million with respect to our common stock, with the objective of decreasing our exposure to potential dilution from conversion of the 2003 Convertible Notes.
At issuance, under the terms of the convertible note hedge, upon the occurrence of conversion events, we had the right to purchase up to 4,460,610 shares of our common stock from the counterparty at a price of $33.6277 per common share. The cost of the convertible note hedge was included in stockholders equity in accordance with the guidance in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys own Stock (EITF 00-19). Upon maturity of the 2003 Convertible Notes on June 15, 2008, we exercised the right to purchase 1,406,043 shares under the terms of the convertible note hedge agreement. The convertible note hedge agreement expired on June 15, 2008.
At issuance, under the warrant agreement, the counterparty could purchase up to 4,460,608 shares of our common stock at $51.34 per share, upon the occurrence of conversion events. The remaining warrants under the warrant agreement expired unexercised on June 15, 2008.
2008 Convertible Notes
Concurrent with the issuance of our 2008 Convertible Notes, we entered into a convertible note hedge agreement (purchased call option) at a cost of $41.8 million, and a warrant agreement providing proceeds of $21.2 million with respect to our common stock, with the objective of decreasing our exposure to potential dilution from conversion of the 2008 Convertible Notes.
At issuance, under the terms of the convertible note hedge, upon the occurrence of conversion events, we have the right to purchase up to 4,713,125 shares of our common stock from the counterparty at a price of $53.04 per common share. The convertible note hedge agreement will expire on April 15, 2011. We have the option to settle any amounts due under the convertible hedge either in cash or net shares of our common stock. The cost of the convertible note hedge is included in stockholders equity in accordance with the guidance in EITF 00-19. The call option under the convertible note hedge is exercisable in the event of a note conversion. For the three months ended September 30, 2008, there were no note conversions and, consequently, no exercises under the call option.
At issuance, under the warrant agreement, the counterparty can purchase up to 4,713,125 shares of our common stock at $64.43 per share, upon the occurrence of certain conversion events. The warrant agreement will expire ratably on a series of expiration dates commencing on July 15, 2011. The warrant is exercisable in the event of a note conversion. For the three months ended September 30, 2008, there were no note conversions and, consequently, no exercises under the warrant.
11. Other Noninterest Income
The following table presents the components of other noninterest income for the three and nine months ended September 30, 2008 and 2007, respectively:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||
(Dollars in thousands) |
2008 | 2007 | 2008 | 2007 | ||||||||||
Service-based fee income (1) |
$ | 2,072 | $ | 1,708 | $ | 6,329 | $ | 3,646 | ||||||
Fund management fees |
2,228 | 1,901 | 6,105 | 6,643 | ||||||||||
Credit card fees |
1,473 | 1,558 | 4,675 | 4,322 | ||||||||||
(Losses) gains on foreign currency loans revaluation, net |
(4,741 | ) | 2,133 | (2,825 | ) | 3,016 | ||||||||
Other |
3,663 | 2,614 | 8,129 | 8,210 | ||||||||||
Total other noninterest income |
$ | 4,695 | $ | 9,914 | $ | 22,413 | $ | 25,837 | ||||||
(1) | Includes income from SVB Analytics and eProsper. |
12. Common Stock Repurchases
We did not repurchase any shares of our common stock for the three months ended September 30, 2008. We repurchased 1.0 million shares of our common stock for the nine months ended September 30, 2008 totaling $45.6 million, compared to 1.9 million shares for the comparable 2007 period totaling $97.3 million. On July 24, 2008, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $150.0 million of our common stock, which expires on December 31, 2009. At September 30, 2008, $150.0 million of repurchases remain authorized under our stock repurchase program.
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13. Segment Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), requires that we report certain financial and descriptive information about our reportable operating segments, as well as related disclosures about products and services, geographic areas and major customers. Our reportable operating segments results are regularly reviewed internally by our chief operating decision maker (CODM) when evaluating segment performance and deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer (CEO).
For management reporting purposes, we offer clients financial products and services through three strategic operating segments: Commercial Banking, SVB Capital and Other Business Services. Our Other Business Services group includes SVB Global, SVB Private Client Services, SVB Analytics and SVB Wine Division. All operations at SVB Alliant were ceased as of March 31, 2008. Accordingly, SVB Alliant was no longer reported as an operating segment as of the second quarter of 2008. The results of operations for SVB Alliant have been included as part of the Reconciling Items column for all prior periods presented.
Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, the internal profitability reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. Our management reporting process measures the performance of our operating segments based on our internal operating structure and is not necessarily comparable with similar information for other financial services companies. In addition, changes in an individual clients primary relationship designation have resulted, and may in the future result, in the inclusion of certain clients in different segments in different periods. We have reclassified certain prior period amounts to conform to the current periods presentation.
An operating segment is separately reportable if it exceeds any one of several quantitative thresholds specified in SFAS No. 131. Of our operating segments, only Commercial Banking and SVB Capital were determined to be reportable segments as of September 30, 2008. SVB Global, SVB Private Client Services, SVB Analytics and SVB Wine Division did not separately meet the reporting thresholds and as a result, in the table below, have been aggregated in a column labeled Other Business Services for segment reporting purposes.
The Reconciling Items column reflects adjustments necessary to reconcile the results of the operating segments based on our internal profitability reporting process to the consolidated financial statements prepared in conformity with GAAP. Net interest income in the Reconciling Items column primarily consisted of interest income recognized from our fixed income investment portfolio. Noninterest income in the Reconciling Items column primarily consisted of noninterest income attributable to minority interests and gains (losses) on equity warrant assets. Noninterest expense in the Reconciling Items column primarily consisted of expenses associated with corporate support functions such as information technology, finance and legal, as well as certain corporate wide adjustments related to compensation expenses. Additionally, average assets in the Reconciling Items column primarily consisted of our fixed income investment portfolio balances.
Our CODM allocates resources to and assesses the performance of each operating segment based on net interest income, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss before income taxes. Net interest income, our primary source of revenue, is reported net of funds transfer pricing (FTP). FTP is an internal measurement framework designed to assess the financial impact of a financial institutions sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised and an earnings charge is made for funded loans. In addition, we evaluate assets based on average balances; therefore, period-end asset balances are not presented for segment reporting purposes. We have not reached reportable levels of revenue, net income or assets outside the United States and as such we do not present geographic segment information.
FTP is calculated by applying a transfer rate to pooled, or aggregated, loan and deposit volumes, effective January 1, 2008. Prior to January 1, 2008, FTP was calculated at an instrument level based on account characteristics. Effective January 1, 2008, expenses reported under each operating segment relate only to the direct and allocated direct costs associated with each segment. Prior to January 1, 2008, costs associated with corporate support functions were allocated to the operating segments. Total average assets equals total average assets from the general ledger effective January 1, 2008. Prior to January 1, 2008, total average assets were calculated as the greater of total average assets or total average deposits and total average stockholders equity combined. We have reclassified all prior period amounts to conform to the current periods presentation.
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Our segment information at and for the three and nine months ended September 30, 2008 and 2007 is as follows:
(Dollars in thousands) |
Commerical Banking |
SVB Capital |
Other Business Services |
Reconciling Items |
Total | |||||||||||||||
Three months ended September 30, 2008 |
||||||||||||||||||||
Net interest income |
$ | 79,475 | $ | 4 | $ | 10,438 | $ | 5,212 | $ | 95,129 | ||||||||||
Provision for loan losses |
| | | (13,682 | ) | (13,682 | ) | |||||||||||||
Noninterest income |
35,154 | 1,417 | 2,783 | 2,393 | 41,747 | |||||||||||||||
Noninterest expense (1) |
(25,711 | ) | (6,055 | ) | (10,897 | ) | (37,768 | ) | (80,431 | ) | ||||||||||
Minority interest in net loss of consolidated affiliates |
| | | 1,693 | 1,693 | |||||||||||||||
Income (loss) before income tax expense (2) |
$ | 88,918 | $ | (4,634 | ) | $ | 2,324 | $ | (42,152 | ) | $ | 44,456 | ||||||||
Total average loans, net of unearned income |
$ | 3,814,736 | $ | | $ | 1,003,243 | $ | 45,727 | $ | 4,863,706 | ||||||||||
Total average assets |
3,848,441 | 417,630 | 1,035,262 | 2,246,738 | 7,548,071 | |||||||||||||||
Total average deposits |
4,415,124 | | 400,058 | 5,074 | 4,820,256 | |||||||||||||||
Goodwill at September 30, 2008 |
| | 4,092 | | 4,092 | |||||||||||||||
Three months ended September 30, 2007 |
||||||||||||||||||||
Net interest income |
$ | 86,333 | $ | 166 | $ | 8,201 | $ | 1,008 | $ | 95,708 | ||||||||||
Provision for loan losses |
| | | (3,155 | ) | (3,155 | ) | |||||||||||||
Noninterest income |
29,676 | 5,542 | 2,525 | 27,291 | 65,034 | |||||||||||||||
Noninterest expense (1) |
(22,853 | ) | (1,756 | ) | (7,856 | ) | (50,494 | ) | (82,959 | ) | ||||||||||
Minority interest in net income of consolidated affiliates |
| | | (10,458 | ) | (10,458 | ) | |||||||||||||
Income (loss) before income tax expense (2) |
$ | 93,156 | $ | 3,952 | $ | 2,870 | $ | (35,808 | ) | $ | 64,170 | |||||||||
Total average loans, net of unearned income |
$ | 2,798,173 | $ | | $ | 800,818 | $ | 31,288 | $ | 3,630,279 | ||||||||||
Total average assets |
2,822,026 | 314,043 | 822,954 | 2,128,293 | 6,087,316 | |||||||||||||||
Total average deposits |
3,694,164 | | 236,710 | 5,753 | 3,936,627 | |||||||||||||||
Goodwill at September 30, 2007 |
| | 4,092 | | 4,092 | |||||||||||||||
Nine months ended September 30, 2008 |
||||||||||||||||||||
Net interest income |
$ | 236,932 | $ | 155 | $ | 31,052 | $ | 6,935 | $ | 275,074 | ||||||||||
Provision for loan losses |
| | | (29,756 | ) | (29,756 | ) | |||||||||||||
Noninterest income |
101,930 | 4,157 | 8,231 | 12,931 | 127,249 | |||||||||||||||
Noninterest expense (1) |
(76,039 | ) | (15,610 | ) | (31,744 | ) | (127,664 | ) | (251,057 | ) | ||||||||||
Minority interest in net loss of consolidated affiliates |
| | | 7,445 | 7,445 | |||||||||||||||
Income (loss) before income tax expense (2) |
$ | 262,823 | $ | (11,298 | ) | $ | 7,539 | $ | (130,109 | ) | $ | 128,955 | ||||||||
Total average loans, net of unearned income |
$ | 3,421,455 | $ | | $ | 937,289 | $ | 74,987 | $ | 4,433,731 | ||||||||||
Total average assets |
3,457,107 | 387,241 | 966,824 | 2,342,998 | 7,154,170 | |||||||||||||||
Total average deposits |
4,213,261 | | 423,794 | (1,681 | ) | 4,635,374 | ||||||||||||||
Goodwill at September 30, 2008 |
| | 4,092 | | 4,092 | |||||||||||||||
Nine months ended September 30, 2007 |
||||||||||||||||||||
Net interest income |
$ | 251,173 | $ | 531 | $ | 24,945 | $ | 6,999 | $ | 283,648 | ||||||||||
Provision for loan losses |
| | | (10,865 | ) | (10,865 | ) | |||||||||||||
Noninterest income |
82,861 | 16,647 | 5,442 | 63,245 | 168,195 | |||||||||||||||
Noninterest expense, excluding impairment of goodwill (1) |
(71,088 | ) | (8,357 | ) | (23,967 | ) | (142,376 | ) | (245,788 | ) | ||||||||||
Impairment of goodwill |
| | | (17,204 | ) | (17,204 | ) | |||||||||||||
Minority interest in net income of consolidated affiliates |
| | | (26,639 | ) | (26,639 | ) | |||||||||||||
Income (loss) before income tax expense (2) |
$ | 262,946 | $ | 8,821 | $ | 6,420 | $ | (126,840 | ) | $ | 151,347 | |||||||||
Total average loans, net of unearned income |
$ | 2,577,989 | $ | | $ | 798,907 | $ | 62,628 | $ | 3,439,524 | ||||||||||
Total average assets |
2,593,091 | 278,598 | 820,455 | 2,223,784 | 5,915,928 | |||||||||||||||
Total average deposits |
3,626,022 | | 248,264 | 5,579 | 3,879,865 | |||||||||||||||
Goodwill at September 30, 2007 |
| | 4,092 | | 4,092 |
(1) | The Commercial Banking segment includes direct depreciation and amortization of $0.6 million and $1.0 million for the three months ended September 30, 2008 and 2007, respectively, and $1.7 million and $2.0 million for the nine months ended September 30, 2008 and 2007, respectively. |
(2) | The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. Our effective tax rate is used as a reasonable approximation of the segment rates. |
14. Obligations Under Guarantees
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit, credit card guarantees and commitments to invest in private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract.
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Commitments to Extend Credit
The following table summarizes information related to our commitments to extend credit at September 30, 2008 and December 31, 2007, respectively:
(Dollars in thousands) |
September 30, 2008 | December 31, 2007 | ||||
Commitments available for funding: (1) |
||||||
Fixed interest rate commitments |
$ | 674,257 | $ | 498,103 | ||
Variable interest rate commitments |
4,944,764 | 4,440,522 | ||||
Total |
5,619,021 | 4,938,625 | ||||
Commitments unavailable for funding (2) |
818,461 | 726,359 | ||||
Maximum lending limits for accounts receivable factoring arrangements (3) |
495,215 | 443,835 | ||||
Reserve for unfunded credit commitments |
$ | 13,091 | $ | 13,446 |
(1) | Represents commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants required under loan commitment agreements. |
(2) | Represents commitments which are unavailable for funding, due to clients failure to meet all collateral, compliance, and financial covenants required under loan commitment agreements. |
(3) | We extend credit under accounts receivable factoring arrangements when our clients sales invoices are deemed creditworthy under existing underwriting practices. |
Commercial and Standby Letters of Credit
The table below summarizes our commercial and standby letters of credit at September 30, 2008. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.
(Dollars in thousands) |
Expires In One Year or Less |
Expires After One Year |
Total Amount Outstanding |
Maximum Amount Of Future Payments | ||||||||
Financial standby letters of credit |
$ | 618,641 | $ | 59,346 | $ | 677,987 | $ | 677,987 | ||||
Performance standby letters of credit |
23,679 | 22,493 | 46,172 | 46,172 | ||||||||
Commercial letters of credit |
7,395 | 690 | 8,085 | 8,085 | ||||||||
Total |
$ | 649,715 | $ | 82,529 | $ | 732,244 | $ | 732,244 | ||||
At September 30, 2008 and December 31, 2007, deferred fees related to financial and performance standby letters of credit were $4.7 million and $3.8 million, respectively. At September 30, 2008, collateral in the form of cash and investment securities available to us to reimburse losses, if any, under financial and performance standby letters of credit was $293.1 million.
Credit Card Guarantees
The total amount of credit card guarantees were $88.9 million at September 30, 2008 and $81.8 million at December 31, 2007. We do not believe that any losses that may be incurred by the Bank as a result of these guarantees will be material in nature. Credit card fees totaled $1.5 million and $1.6 million for the three months ended September 30, 2008 and 2007, respectively, and $4.7 million and $4.3 million for the nine months ended September 30, 2008 and 2007, respectively.
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Commitments to Invest in Private Equity Funds
The following table details our total unfunded capital commitments as well as our ownership in each fund based on our total capital commitment at September 30, 2008:
Our Ownership in Limited Partnership (Dollars in thousands) |
Capital Commitments |
Unfunded Commitments |
Ownership | ||||||
Silicon Valley BancVentures, LP |
$ | 6,000 | $ | 660 | 10.7 | % | |||
SVB Capital Partners II, LP (1) |
1,200 | 630 | 5.1 | ||||||
SVB Strategic Investors Fund, LP |
15,300 | 1,840 | 12.6 | ||||||
SVB Strategic Investors Fund II, LP |
15,000 | 5,775 | 8.6 | ||||||
SVB Strategic Investors Fund III, LP |
15,000 | 9,000 | 5.9 | ||||||
SVB Strategic Investors Fund IV, LP |
7,196 | 7,052 | 5.0 | ||||||
Partners for Growth, LP |
25,000 | 9,750 | 50.0 | ||||||
Partners for Growth II, LP |
15,000 | 6,450 | 24.2 | ||||||
Gold Hill Venture Lending 03, LP (2) |
20,000 | 1,821 | 9.3 | ||||||
SVB India Capital Partners I, LP |
7,500 | 4,575 | 13.9 | ||||||
Other Fund Investments (3) |
446,386 | 113,246 | | ||||||
Total |
$ | 573,582 | $ | 160,799 | |||||
(1) | Our ownership includes 1.3% direct ownership through SVB Capital Partners II, LLC and SVB Financial Group, and 3.8% indirect ownership through our investment in SVB Strategic Investors Fund II, LP. |
(2) | Our ownership includes 4.8% direct ownership and 4.5% indirect ownership interest through GHLLC. |
(3) | Represents commitments to 357 private equity funds where our ownership interest is less than 5% of the voting stock of each such fund. |
15. Income Taxes
The following table provides a summary of changes in our unrecognized tax benefits (including interest and penalties) for the nine months ended September 30, 2008:
(Dollars in thousands) |
Reconciliation of Unrecognized Tax Benefits |
Interest & Penalties | Total | |||||||||
Balance at January 1, 2008 |
$ | 1,114 | $ | 89 | $ | 1,203 | ||||||
Additions based on tax positions related to current year |
42 | | 42 | |||||||||
Additions for tax positions for prior year |
| 155 | 155 | |||||||||
Reductions as a result of a lapse of the applicable statute of limitations |
(862 | ) | (12 | ) | (874 | ) | ||||||
Balance at September 30, 2008 |
$ | 294 | $ | 232 | $ | 526 | ||||||
At September 30, 2008, the total amount of unrecognized tax benefits was $0.3 million, the recognition of which would reduce our income tax expense by $0.3 million. At January 1, 2008, the total amount of unrecognized tax benefits was $1.1 million, the recognition of which would have reduced our income tax expense by $0.3 million. The decrease in the amount of unrecognized tax benefits was due to the expiration of the applicable statue of limitations for income tax exposures in California and Maryland. Total accrued interest and penalties at September 30, 2008 were $0.2 million. We expect that our unrecognized tax benefit will change in the next 12 months; however, we do not expect the change to have a material impact on our financial position or our results of operations.
We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and tax returns in California and Massachusetts as major tax filings. U.S. federal tax examinations through 1998 have been concluded. The U.S. federal tax return for 2005 and subsequent years remain open to examination by the Internal Revenue Service. Our California and Massachusetts tax returns for the years 2003 and 2005, respectively, and subsequent years remain open to examination.
16. Fair Value Measurements
Our marketable investment securities, non-marketable investment securities and derivatives are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements.
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Fair Value Measurement Definition and Hierarchy
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.
SFAS No. 157 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels for measuring fair value are based on the reliability of inputs and are as follows:
Level 1 | Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to instruments utilizing Level 1 inputs. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. |
Assets and liabilities utilizing Level 1 inputs include exchange-traded equity securities.
Level 2 | Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. |
Assets and liabilities utilizing Level 2 inputs include: U.S. treasury and agency securities; mortgage-backed securities (MBS); collateralized mortgage obligations (CMO); commercial mortgage backed securities (CMBS); municipal securities; Over-the-Counter (OTC) derivative instruments (foreign exchange forwards and option contracts, interest rate swaps related to our senior notes, subordinated notes and junior subordinated debentures); and equity warrant assets for shares of public company capital stock.
Level 3 | Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
Assets and liabilities utilizing Level 3 inputs include: limited partnership interests in private equity funds, direct equity investments in private companies, and equity warrant assets for shares of private company capital stock.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment that we use to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Determination of Fair Value
Fair value measurements for assets and liabilities where there exists limited or no observable market data and, therefore, are based primarily upon our own estimates, are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the asset or liability and other such factors. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset or liability. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values. The following is a description of valuation methodologies used by us for assets and liabilities recorded at fair value.
Marketable Securities
Marketable securities, consisting of our available-for-sale fixed income investment securities portfolio and marketable securities accounted for under investment company fair value accounting, are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using broker or dealer quotations, independent pricing models or other model-based valuation techniques such as the present value of future cash flows, taking into consideration a securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the NASDAQ Stock Market. Level 2 securities include U.S. treasuries, U.S. agency debentures, investment grade mortgage securities and state and municipal obligations.
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Non-Marketable Securities
Our non-marketable securities consist of our investments made by the following funds:
| Funds of funds, such as SVB Strategic Investors Fund, LP, SVB Strategic Investors Fund II, LP, SVB Strategic Investors Fund III, LP, and SVB Strategic Investors Fund IV, LP, which make investments in private equity funds; |
| Co-investment funds, such as Silicon Valley BancVentures, LP, SVB Capital Partners II, LP, and SVB India Capital Partners I, LP, which make equity investments in privately held companies; and |
| A sponsored debt fund, Partners for Growth, LP, which provides financing to companies in the form of structured loans and equity investments. |
For GAAP purposes, these funds are investment companies under the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment Companies. Accordingly, these funds report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as investment gains or losses in our consolidated net income. We have retained the specialized accounting of our consolidated funds pursuant to EITF Issue No. 85-12, Retention of Specialized Accounting for Investments in Consolidation. We have valued our investments, in the absence of observable market prices, using the valuation methodologies described below applied on a consistent basis.
Investments in private equity funds are stated at fair value, based on the information provided by the investee funds management, which reflects our share of the fair value of the net assets of the investment fund on the valuation date.
For direct private company investments, valuations are based upon consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company issue, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. These valuation methodologies involve a significant degree of management judgment. Estimating the fair value of these investments requires management to make assumptions regarding future performance, financial condition, and relevant market conditions, along with other pertinent information.
Structured loans made by the sponsored debt fund are measured using pricing models that use observable inputs, such as yield curves and publicly-traded equity prices, and unobservable inputs, such as private company equity prices.
Investments in private equity funds and direct private company investments are categorized within Level 3 of the fair value hierarchy since pricing inputs are unobservable and include situations where there is little, if any, market activity for such investments. Investments in structured loans are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability and significance of the pricing inputs.
Derivative Instruments
Interest Rate Swaps, Foreign Currency Forward and Option Contracts
Our interest rate swaps, foreign currency forward and option contracts are traded in OTC markets where quoted market prices are not readily available. For these derivatives, we measure fair value using pricing models that use primarily market observable inputs, such as yield curves and option volatilities, and, accordingly, classify these as Level 2. When appropriate, valuations are adjusted for various factors such as liquidity and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, managements best estimate is used. Consistent with market practice, we have individually negotiated agreements with certain counterparties to exchange collateral (margining) based on the level of fair values of the derivative contracts they have executed. Through this margining process, one party or both parties to a derivative contract provides the other party with information about the fair value of the derivative contract to calculate the amount of collateral required. This sharing of fair value information provides additional support for the recorded fair value.
Equity Warrant Assets
As part of negotiated credit facilities and certain other services, we frequently obtain rights to acquire stock in the form of equity warrant assets in certain client companies. Our warrant agreements contain net share settlement provisions, which permit us to receive upon exercise a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a cashless exercise). Because we can net settle our warrant agreements, our equity warrant assets qualify as derivative instruments.
Equity warrant assets for shares of private and public company capital stock are recorded at fair value on the grant date and adjusted to fair value on a quarterly basis through consolidated net income. We value our equity warrant assets using a modified Black-Scholes option pricing model, which incorporates assumptions about underlying asset value, volatility, expected remaining life and risk-free interest rate. Valuation adjustments, such as a marketability discount, are made to equity warrant assets for shares of private company capital stock. These valuation adjustments are estimated based on managements judgment about the general industry environment, combined with specific information about the issuing company.
24
The valuation of equity warrant assets for shares of public company capital stock is based on market observable inputs and these are classified as Level 2. Since the valuation of equity warrant assets for shares of private company capital stock involves significant unobservable inputs they are categorized as Level 3.
The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2008:
(Dollars in thousands) |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Balance as of September 30, 2008 | ||||||||
Assets |
||||||||||||
Marketable securities: |
||||||||||||
Available-for-sale securities: |
||||||||||||
U.S. Treasury securities |
$ | | $ | 10,044 | $ | | $ | 10,044 | ||||
U.S. agencies and corporations: |
||||||||||||
Collateralized mortgage obligations |
| 582,814 | | 582,814 | ||||||||
Mortgage-backed securities |
| 465,795 | | 465,795 | ||||||||
U.S. agency debentures |
| 121,380 | | 121,380 | ||||||||
Commercial mortgage-backed securities |
| 52,866 | | 52,866 | ||||||||
Municipal bonds and notes |
| 105,633 | | 105,633 | ||||||||
Marketable equity securities |
245 | | | 245 | ||||||||
Venture capital fund investments |
1 | | | 1 | ||||||||
Total available-for-sale securities |
246 | 1,338,532 | | 1,338,778 | ||||||||
Marketable securities (investment company fair value accounting) |
2,279 | | | 2,279 | ||||||||
Total marketable securities |
2,525 | 1,338,532 | | 1,341,057 | ||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||
Private equity fund investments |
| | 232,016 | 232,016 | ||||||||
Other private equity investments |
| | 79,687 | 79,687 | ||||||||
Other investments |
| | 2,237 | 2,237 | ||||||||
Total non-marketable securities (investment company fair value accounting) |
| | 313,940 | 313,940 | ||||||||
Other assets: |
||||||||||||
Interest rate swaps |
| 28,199 | | 28,199 | ||||||||
Foreign exchange forward contracts |
| 15,092 | | 15,092 | ||||||||
Equity warrant assets |
2,079 | 36,975 | 39,054 | |||||||||
Total assets (1) |
$ | 2,525 | $ | 1,383,902 | $ | 350,915 | $ | 1,737,342 | ||||
Liabilities |
||||||||||||
Interest rate swaps |
$ | | $ | 847 | $ | | $ | 847 | ||||
Foreign exchange forward contracts |
| 10,798 | | 10,798 | ||||||||
Covered call options (2) |
| 1 | | 1 | ||||||||
Total liabilities |
$ | | $ | 11,646 | $ | | $ | 11,646 | ||||
(1) | Included in Level 1 and Level 3 assets are $1.5 million and $285.2 million, respectively, attributable to minority interests calculated based on the ownership percentages of the minority interests. |
(2) | Represents covered call options held by one of our sponsored debt funds. |
25
The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2008:
Total Realized and Unrealized Gains (Losses) Included in Income |
|||||||||||||||||||||||||
(Dollars in thousands) |
Beginning Balance |
Realized Gains (Losses) Included in Income |
Unrealized Gains (Losses) Included in Income |
Total Realized and Unrealized Gains (Losses) Included in Income |
Purchases, Sales, Other Settlements and Issuances, net |
Transfers In and/or (Out) of Level 3 |
Ending Balance at September 30, 2008 | ||||||||||||||||||
Three months ended September 30, 2008: |
|||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
|||||||||||||||||||||||||
Private equity fund investments |
$ | 220,963 | $ | 1,525 | $ | (3,388 | ) | $ | (1,863 | ) | $ | 12,916 | $ | | $ | 232,016 | |||||||||
Other private equity investments |
60,272 | | 4,300 | 4,300 | 15,115 | | 79,687 | ||||||||||||||||||
Other investments |
2,643 | | (123 | ) | (123 | ) | (283 | ) | | 2,237 | |||||||||||||||
Total non-marketable securities (investment company fair value accounting) (1) |
283,878 | 1,525 | 789 | 2,314 | 27,748 | | 313,940 | ||||||||||||||||||
Other assets: |
|||||||||||||||||||||||||
Equity warrant assets (2) |
34,494 | 1,130 | 362 | 1,492 | 1,003 | (14 | ) | 36,975 | |||||||||||||||||
Total assets |
$ | 318,372 | $ | 2,655 | $ | 1,151 | $ | 3,806 | $ | 28,751 | $ | (14 | ) | $ | 350,915 | ||||||||||
Nine months ended September 30, 2008: |
|||||||||||||||||||||||||
Non-marketable securities (investment company fair value accounting): |
|||||||||||||||||||||||||
Private equity fund investments |
$ | 194,862 | $ | 6,708 | $ | (7,505 | ) | $ | (797 | ) | $ | 37,951 | $ | | $ | 232,016 | |||||||||
Other private equity investments |
44,872 | 4,672 | 2,534 | 7,206 | 27,609 | | 79,687 | ||||||||||||||||||
Other investments |
3,098 | | (286 | ) | (286 | ) | (575 | ) | 2,237 | ||||||||||||||||
Total non-marketable securities (investment company fair value accounting) (1) |
242,832 | 11,380 | (5,257 | ) | 6,123 | 64,985 | | 313,940 | |||||||||||||||||
Other assets: |
|||||||||||||||||||||||||
Equity warrant assets (2) |
26,911 | 6,493 | 3,779 | 10,272 | (235 | ) | 27 | 36,975 | |||||||||||||||||
Total assets |
$ | 269,743 | $ | 17,873 | $ | (1,478 | ) | $ | 16,395 | $ | 64,750 | $ | 27 | $ | 350,915 | ||||||||||
(1) | Realized and unrealized gains (losses) of our total non-marketable securities are recorded on the line item gains on investment securities, net a component of noninterest income. |
(2) | Realized and unrealized gains (losses) of our equity warrant assets are recorded on the line item gains on derivative instruments, net a component of noninterest income. |
The following table presents the cumulative unrealized gains (losses) for Level 3 assets at September 30, 2008:
(Dollars in thousands) |
September 30, 2008 | |||
Non-marketable securities (investment company fair value accounting): |
||||
Private equity fund investments |
$ | (11,001 | ) | |
Other private equity investments |
2,497 | |||
Other investments |
(458 | ) | ||
Total non-marketable securities (investment company fair value accounting) |
(8,962 | ) | ||
Other assets: |
||||
Equity warrant assets |
5,869 | |||
Total unrealized losses at period end |
$ | (3,093 | ) | |
17. Related Party Transactions
SVB Financial has a commitment under a revolving line of credit facility to Gold Hill Venture Lending 03, LP, a venture debt fund (Gold Hill), and its affiliated funds. SVB Financial has a 9.3% effective ownership interest in Gold Hill, as well as a 90.7% majority interest in its general partner, GHLLC. The line of credit bears an interest rate of prime plus one percent. In January 2007, SVB Financial increased the revolving line of credit facility to Gold Hill from a total commitment amount of $40.0 million to $75.0 million. At the same time, SVB Financial syndicated $35.0 million, or 46.67% of the total facility, to another lender. The highest outstanding balance under the facility for the nine months ended September 30, 2008 was $69.0 million. At September 30, 2008, Gold Hills outstanding balance totaled $54.0 million.
During the nine months ended September 30, 2008, the Bank made loans to related parties, including companies with which certain of our directors are affiliated. Such loans: (a) were made in the ordinary course of business, (b) were made on substantially the
26
same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and (c) did not involve more than the normal risk of collectibility or present other unfavorable features.
18. Legal Matters
On October 4, 2007, a consolidated class action was filed in the United States District Court for the Central District of California, purportedly on behalf of a class of investors who purchased the common stock of Vitesse Semiconductor Corporation (Vitesse). The complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against Vitesse, the Bank and other named defendants in connection with alleged fraudulent recognition of revenue by Vitesse, specifically with respect to sales of certain accounts receivable to the Bank. The relief sought under the complaint included rescission of the Vitesse shares held by plaintiffs and other class members or the appropriate measure of damages, as well as prejudgment and post-judgment interest and certain fees, costs and expenses. On January 28, 2008, the court dismissed with prejudice all claims against the Bank under the action.
Additionally, certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. Based upon information available to us, our review of such claims to date and consultation with our outside legal counsel, management believes the liability relating to these actions, if any, will not have a material adverse effect on our liquidity, consolidated financial position, and/or results of operations. Where appropriate, as we determine, we establish reserves in accordance with SFAS No. 5, Accounting For Contingencies. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse effect on our liquidity, consolidated financial position, and/or results of operation.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements; Reclassifications
This Quarterly Report on Form 10-Q, including in particular Managements Discussion and Analysis of Financial Condition and Results of Operations under Part 1, Item 2 in this report, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management has in the past and might in the future make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include, but are not limited to, the following:
| Projections of our revenues, income, earnings per share, noninterest expenses, including professional service, compliance, compensation and other costs, cash flows, balance sheet, capital expenditures, capital structure or other financial items |
| Descriptions of strategic initiatives, plans or objectives of our management for future operations, including pending acquisitions |
| Forecasts of venture capital and private equity funding and investment levels |
| Forecasts of future interest rates |
| Forecasts of expected levels of provisions for loan losses, loan growth and client funds |
| Forecasts of future economic performance |
| Forecasts of future income on investments |
| Descriptions of assumptions underlying or relating to any of the foregoing |
In this Quarterly Report on Form 10-Q, we make forward-looking statements, including, but not limited to, those discussing our managements expectations about:
| Sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to earnings from a change in interest rates |
| Realization, timing, valuation and performance of equity or other investments |
| Management of our liquidity position |
| Growth in loan balances |
| Credit quality of our loan portfolio |
| Levels and trends of nonperforming loans |
| Capital and liquidity provided by funds generated through retained earnings |
| Activities for which capital will be used or required |
| Use of excess capital |
| Financial impact of continued growth of our funds management business |
| Expansion and growth of our noninterest income sources |
| Profitability of our products and services |
| Venture capital and private equity funding and investment levels |
| Strategic initiatives |
27
| Growth of our interest-bearing deposits |
| Management of interest rate risk |
| Introduction of new products, including deposit products |
| Effect of application of certain accounting pronouncements |
| Effect of lawsuits and claims |
| Changes in our unrecognized tax benefit and any associated impact |
| Recovery of unrealized losses from investments |
| Stock repurchase levels |
| Incurrence of losses relating to credit card guarantees and any associated impact. |
These and other forward-looking statements can be identified by our use of words such as becoming, may, will, should, predicts, potential, continue, anticipates, believes, estimates, seeks, expects, plans, intends, the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our beliefs as well as our assumptions, and such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our managements forward-looking statements.
For information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see Risk Factors under Part II, Item 1A in this report. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this report. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We assume no obligation and do not intend to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and accompanying notes as presented in Part I, Item 1 in this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K), as filed with the Securities and Exchange Commission (SEC).
Certain reclassifications have been made to prior years results to conform to the current periods presentations. Such reclassifications had no effect on our results of operations or stockholders equity.
Managements Overview of Third Quarter 2008 Performance
Our primary or core business consists of providing banking products and services to our clients in the technology, life science, private equity (including venture capital) and premium wine industries. Notwithstanding the impact of significant interest rate reductions, we believe that our core banking business performed well during the three months ended September 30, 2008, compared to the comparable 2007 period.
Our net income for the three months ended September 30, 2008 was $27.0 million, or $0.80 per diluted common share, compared to $38.1 million, or $1.03 per diluted common share for the comparable 2007 period. The weighted average diluted shares used to calculate our diluted earnings per share decreased by 3.1 million from September 30, 2007 to September 30, 2008 primarily due to the following:
| The dilutive impact of our $150 million zero-coupon convertible subordinated notes (2003 Convertible Notes) for the three months ended September 30, 2007, and |
| A reduction in the weighted average shares for the three months ended September 30, 2008 as a result of common stock repurchases subsequent to September 30, 2007 |
Exceptional loan growth, solid deposit growth and contained expenses contributed to this strong performance, despite the impact of significant interest rate reductions, lower valuations and distributions from our investment fund portfolio, and lower gains from valuations of our equity warrant assets.
Average loans grew by $1.23 billion, or 34.0 percent, to $4.86 billion for the three months ended September 30, 2008, compared to $3.63 billion for the comparable 2007 period driven primarily by loan growth increases from all client industry segments, with strong growth in loans to software, hardware and private equity clients. We also had strong growth in average deposit balances, primarily due to our money market deposit product for early stage clients introduced in May 2007 and our sweep deposit product introduced in October 2007.
We continued to maintain good credit quality with net charge-offs in the third quarter of 2008 of 47 basis points (annualized) of total gross loans, compared to 24 basis points for the comparable 2007 period. Gross charge-offs increased by $2.9 million to $7.0 million (or 52 basis points annualized) compared to $4.1 million (or 43 basis points annualized) for the comparable 2007 period, but remained within our expectations. Gross charge-offs of $7.0 million for the three months ended September 30, 2008 primarily
28
came from our early-stage client loan portfolio. Our total provision for loan losses was $13.7 million for the three months ended September 30, 2008, compared to $3.2 million for the comparable 2007 period. The increase was principally due to our significant loan growth, as well as an increase of $4.0 million in net charge-offs from September 30, 2007 to September 30, 2008.
Our net interest margin was 5.73 percent for the three months ended September 30, 2008, compared to 7.18 percent for the comparable 2007 period. This decline was consistent with our expectations and primarily reflects the impact of interest rate cuts by the Federal Reserve in late 2007 and 2008.
Noninterest income was $41.7 million for the three months ended September 30, 2008, compared to $65.0 million for the comparable 2007 period. This decrease primarily related to lower valuations and lower distributions from our investment securities portfolio, which resulted in net losses of $0.9 million (or $2.1 million in net losses after minority interest) on investment securities for the three months ended September 30, 2008, compared to net gains of $14.7 million (or $2.8 million after minority interest) for the comparable 2007 period. Net gains on equity warrant assets, a component of net gains on derivatives instruments, also decreased from $9.2 million for the three months ended September 30, 2007, to $1.4 million for the three months ended September 30, 2008, mainly attributable to higher net gains recognized in the third quarter of 2007 due to valuation adjustments arising from initial public offerings of stock by certain companies in our warrant portfolio. Although total noninterest income decreased, noninterest income from our core fee-based products, which includes client investment fees, foreign exchange fees, deposit service charges and letter of credit and standby letter of credit income, increased by $5.1 million, or 19.3 percent, to $31.5 million for the three months ended September 30, 2008, compared to $26.4 million for the comparable 2007 period.
Expense growth remained contained, aided by lower incentive compensation expenses in the third quarter of 2008 compared to 2007. Noninterest expense was $80.4 million for the three months ended September 30, 2008, compared to $83.0 million for the comparable 2007 period.
We continued to have strong levels of capital during the third quarter of 2008. Our ratio of tangible common equity to tangible assets was 9.20 percent in the three months ended September 30, 2008, compared to 10.80 percent in the comparable 2007 period. The decrease was due largely to strong loan growth in 2007 and the first nine months of 2008, as well as significant share repurchases in late 2007 and early 2008.
The key highlights of our performance for the three and nine months ended September 30, 2008 and 2007, respectively, are as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
(Dollars in thousands) |
2008 | 2007 | Change | 2008 | 2007 | Change | ||||||||||||||||
Average loans, net of unearned income |
$ | 4,863,706 | $ | 3,630,279 | 34.0 | % | $ | 4,433,731 | $ | 3,439,524 | 28.9 | % | ||||||||||
Average noninterest-bearing deposits |
2,826,289 | 2,867,812 | (1.4 | ) | 2,852,851 | 2,838,187 | 0.5 | |||||||||||||||
Average interest-bearing deposits |
1,993,967 | 1,068,815 | 86.6 | 1,782,523 | 1,041,678 | 71.1 | ||||||||||||||||
Average total deposits |
4,820,256 | 3,936,627 | 22.4 | 4,635,374 | 3,879,865 | 19.5 | ||||||||||||||||
Diluted earnings per share |
$ | 0.80 | $ | 1.03 | (22.3 | ) | $ | 2.22 | $ | 2.41 | (7.9 | ) | ||||||||||
Net income |
27,008 | 38,116 | (29.1 | ) | 76,206 | 89,372 | (14.7 | ) | ||||||||||||||
Net interest income |
95,129 | 95,708 | (0.6 | )% | 275,074 | 283,648 | (3.0 | )% | ||||||||||||||
Net interest margin |
5.73 | % | 7.18 | % | (145 | ) bps | 5.91 | % | 7.38 | % | (147 | ) bps | ||||||||||
Average SVB prime lending rate |
5.00 | % | 8.19 | % | (319 | ) bps | 5.44 | % | 8.23 | % | (279 | ) bps | ||||||||||
Provision for loan losses |
$ | 13,682 | $ | 3,155 | 333.7 | % | $ | 29,756 | $ | 10,865 | 173.9 | % | ||||||||||
Gross charge-offs as a percentage of total gross loans (annualized) |
0.52 | % | 0.43 | % | 9 | bps | 0.56 | % | 0.51 | % | 5 | bps | ||||||||||
Net charge-offs as a percentage of total gross loans (annualized) |
0.47 | 0.24 | 23 | bps | 0.42 | 0.33 | 9 | bps | ||||||||||||||
Noninterest income (1) |
$ | 41,747 | $ | 65,034 | (35.8 | )% | $ | 127,249 | $ | 168,195 | (24.3 | )% | ||||||||||
Noninterest expense (2) |
80,431 | 82,959 | (3.0 | ) | 251,057 | 262,992 | (4.5 | ) | ||||||||||||||
Return on average stockholders equity (annualized) |
15.09 | % | 22.35 | % | (32.5 | ) | 14.70 | % | 17.96 | % | (18.2 | ) | ||||||||||
Return on average assets (annualized) |
1.42 | 2.48 | (42.7 | ) | 1.42 | 2.02 | (29.7 | ) | ||||||||||||||
Tangible common equity to tangible assets (3) |
9.20 | 10.80 | (14.8 | ) | 9.20 | 10.80 | (14.8 | ) | ||||||||||||||
Operating efficiency ratio (4) |
58.51 | % | 51.52 | % | 13.6 | 62.14 | % | 58.09 | % | 7.0 | ||||||||||||
Period end full-time equivalent employees |
1,237 | 1,141 | 8.4 | % | 1,237 | 1,141 | 8.4 | % | ||||||||||||||
Non-GAAP measures: |
||||||||||||||||||||||
Non-GAAP operating efficiency ratio (5) |
56.91 | % | 54.29 | % | 4.8 | % | 59.28 | % | 56.85 | % | 4.3 | % | ||||||||||
Non-GAAP noninterest income, net of minority interest |
$ | 40,705 | $ | 52,268 | (22.1 | ) | $ | 127,106 | $ | 134,412 | (5.4 | ) | ||||||||||
Non-GAAP noninterest expense, net of minority interest |
77,567 | 80,874 | (4.1 | ) | 239,119 | 237,599 | 0.6 |
29
(1) | Noninterest income included $1.4 million and $1.9 million attributable to minority interests for the three and nine months ended September 30, 2008, respectively, compared to $12.4 million and $31.0 million for the comparable 2007 periods. See Results of Operations Noninterest Income for a description of noninterest income attributable to minority interests. |
(2) | Noninterest expense included $2.9 million and $8.1 million attributable to minority interests for the three and nine months ended September 30, 2008, respectively, compared to $2.7 million and $8.2 million for the comparable 2007 periods. See Results of Operations Noninterest Income for a description of noninterest expense attributable to minority interests. |
(3) | Tangible common equity consists of total stockholders equity (excluding unrealized gains and losses on investments) less acquired intangibles and goodwill. Tangible assets represent total assets (excluding unrealized gains and losses on investments) less acquired intangibles and goodwill. |
(4) | The operating efficiency ratio is calculated by dividing noninterest expense by total taxable-equivalent revenue. Noninterest expense included a non-tax deductible loss of $3.9 million related to our cash settlement of the conversion of certain 2003 Convertible Notes for the nine months ended September 30, 2008, as well as a $17.2 million pre-tax goodwill impairment charge for the nine months ended September 30, 2007. Noninterest expense also included $2.9 million and $8.1 million attributable to minority interests for the three and nine months ended September 30, 2008, respectively, compared to $2.7 million and $8.2 million for the comparable 2007 periods. |
(5) | The non-GAAP operating efficiency ratio is calculated by dividing noninterest expense (excluding (i) the non-tax deductible $3.9 million loss recorded in the second quarter of 2008 related to our cash settlement of the conversion of certain zero-coupon convertible subordinated notes prior to the notes maturity, (ii) goodwill impairment charges of $17.2 million recorded in the second quarter of 2007 and (iii) the portion of noninterest expense attributable to minority interests of $2.9 and $2.7 million for the three months ended September 30, 2008 and 2007, respectively, and $8.1 million and $8.2 million for the nine months ended September 30, 2008 and 2007, respectively) by total taxable-equivalent income (excluding taxable-equivalent income attributable to minority interests of 1.2 million and $13.1 million for the three months ended September 30, 2008 and 2007 respectively, and $0.6 million and $34.8 million for the nine months ended September 30, 2008 and 2007, respectively). |
Critical Accounting Policies and Estimates
The accompanying managements discussion and analysis of results of operations and financial condition are based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Other than the adoption of the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157), there have been no significant changes during the nine months ended September 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in Managements Discussion and Analysis of Financial Condition and Results of Operations under Part II, Item 7 of our 2007 Form 10-K.
Fair Value Measurements
Please refer to the discussion of our fair value measurements in Note 16 (Fair Value Measurements) of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 in this report.
Recent Accounting Pronouncements
Please refer to the discussion of our recent accounting pronouncements in Note 2 (Recent Accounting Pronouncements) of the Notes to Interim Consolidated Financial Statements (unaudited) under Part I, Item 1 in this report.
Results of Operations
Net Interest Income and Margin (Fully Taxable-Equivalent Basis)
Net interest income is defined as the difference between interest earned on loans, investment securities, federal funds sold, securities purchased under agreements to resell and other short-term investment securities, and interest paid on funding sources including deposits and borrowings. Net interest income is our principal source of revenue. Net interest margin is defined as the amount of annualized net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable-equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the federal statutory tax rate of 35.0 percent.
30
Net Interest Income (Fully Taxable-Equivalent Basis)
Three months ended September 30, 2008 and 2007
Net interest income decreased by $0.3 million to $95.7 million for the three months ended September 30, 2008, compared to $96.0 million for the comparable 2007 period. The decrease in net interest income was the result of a 166 basis point decrease in yields earned on assets, partially offset by a 21 basis point decrease in the cost of our total funding sources.
The main factors affecting interest income and interest expense are discussed below:
| Interest income for the three months ended September 30, 2008 increased by $0.5 million primarily due to: |
¡ | A $1.0 million increase in interest income on loans as a result of a 34.0% increase in our average loan balances for the three months ended September 30, 2008 compared to the comparable 2007 period. However, this interest income increase from loans was offset as our loan yields decreased 248 basis points from 10.19% for the three months ended September 30, 2007 to 7.71% for the three months ended September 30, 2008. The decrease in loan yields was a direct result of a reduction in our Prime lending rate in response to decreases in the Federal Funds rates over the 12 month period from September 30, 2007 to September 30, 2008. Our average Prime lending rate decreased 319 basis points from an average of 8.19% for the three months ended September 30, 2007 to an average of 5.00% for the three months ended September 30, 2008. Subsequent to September 30, 2008, Federal Funds rates decreased by 100 basis points, which will reduce our average Prime lending rate subsequent to September 30, 2008. |
¡ | A $1.3 million increase in interest income on investment securities due principally to growth in balances. |
These increases were partially offset by a decrease of $1.8 million in interest income on short term investments primarily due to the decrease in the Federal Funds rates from September 30, 2007 to September 30, 2008.
| Interest expense for the three months ended September 30, 2008 increased by $0.8 million primarily due to: |
¡ | An increase in interest expense of $2.7 million from deposits, primarily due to a $925.2 million, or 86.6% increase in average interest bearing deposits as a result of our focus on growing on-balance sheet deposits. This increase was primarily related to growth in our money market deposit product for early stage clients introduced in May 2007 and our sweep deposit product introduced in late October 2007, both of which we introduced to provide funding for our loan growth. For the three months ended September 30, 2008, the average balance of our early stage money market deposit product was $560.5 million and interest expense was $2.1 million, compared to $144.9 million and $1.4 million, respectively, for the comparable 2007 period. The average balance of our sweep deposit product for the three months ended September 30, 2008 was $389.2 million and interest expense was $1.7 million. |
¡ | An increase of $0.3 million due to an increase in average balances of short-term borrowings to support our loan growth, partially offset by declining short-term market interest rates. Average short-term borrowings increased by $338.6 million to $544.3 million for the three months ended September 30, 2008, compared to $205.7 million for the comparable 2007 period. |
These increases were partially offset by a decrease in interest expense of $2.2 million from long-term debt, primarily due to a decrease in average interest rates, partially offset by an increase in average long-term debt balances. Average interest rates on long-term debt decreased due primarily to lower London Interbank Offered Rates (LIBOR) rates associated with our interest rate swap arrangements. Average long-term debt increased by $129.6 million to $976.8 million for the three months ended September 30, 2008, compared to $847.2 million for the comparable 2007 period, primarily due to the issuance of $250 million in 3.875% convertible senior notes (2008 Convertible Notes) in April 2008. The proceeds from the issuance of the 2008 Convertible Notes were used primarily to settle the conversion of our 2003 Convertible Notes, which matured in June 2008, and for other general corporate purposes.
Nine months ended September 30, 2008 and 2007
Net interest income decreased by $7.8 million, or 2.7 percent to $276.8 million for the nine months ended September 30, 2008, compared to $284.6 million for the comparable 2007 period. The decrease in net interest income was the result of a 155 basis point decrease in yields earned on assets, partially offset by a 9 basis point decrease in the cost of our total funding sources.
The main factors affecting interest income and interest expense are discussed below:
| Interest income for the nine months ended September 30, 2008 decreased by $2.3 million primarily due to: |
¡ | A $2.1 million decrease in interest income on short term investments primarily due to the decrease in the Federal Funds rates, partially offset by growth in average short-term investment portfolio balances. |
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¡ | A $1.1 million decrease in interest income on our investment securities portfolio due principally to lower levels of taxable investment securities due to principal prepayments of U.S. agency securities, mortgage-backed securities collateralized mortgage obligations, partially offset by growth in average balances of our non-taxable investment securities portfolio. Average interest-earning investment securities decreased by $59.4 million to $1.33 billion for the nine months ended September 30, 2008, compared to $1.39 billion for the comparable 2007 period. |
These decreases were partially offset by a $1.0 million increase in interest income on loans as a result of a 28.9% increase in our average loan balances for the nine months ended September 30, 2008, compared to the comparable 2007 period. However, this interest income increase from loans was offset as our loan yields decreased 231 basis points from 10.40% for the nine months ended September 30, 2007 to 8.09% for the nine months ended September 30, 2008. The decrease in loan yields was a direct result of a reduction in our Prime lending rate in response to decreases in the Federal Funds rates over the 12 month period from September 30, 2007 to September 30, 2008. Our average Prime lending rate decreased 279 basis points from an average of 8.23% for the nine months ended September 30, 2007 to an average of 5.44% for the nine months ended September, 30, 2008.
| Interest expense for the nine months ended September 30, 2008 increased by $5.5 million primarily due to: |
¡ | An increase in interest expense of $8.6 million from deposits due to a $740.8 million, or 71.1% increase in average interest bearing deposits as a result of our focus on growing on-balance sheet deposits. The increase in deposits was primarily related to growth in our money market deposit product for early stage clients introduced in May 2007 and our sweep deposit product introduced in late October 2007, which we introduced to provide funding for our loan growth. For the nine months ended September 30, 2008, the average balance of our early stage money market deposit product was $464.5 million and interest expense was $5.7 million, compared to $56.9 million and $1.6 million, respectively, for the comparable 2007 period. The average balance of our Eurodollar sweep deposit product for the nine months ended September 30, 2008 was $285.7 million and interest expense was $3.9 million. |
¡ | An increase of $6.5 million from long-term debt, primarily due to an increase in average long-term debt balances, partially offset by a decrease in average interest rates. Average long-term debt increased by $389.0 million to $987.9 million for the nine months ended September 30, 2008, compared to $598.9 million for the comparable 2007 period, primarily due to the issuance of $500 million in senior and subordinated notes in May 2007 and our 2008 Convertible Notes in April 2008, partially offset by the maturity of our 2003 Convertible Notes in June 2008. Average interest rates on long-term debt decreased due primarily to lower LIBOR rates associated with our interest rate swap arrangements. |
These increases were partially offset by a decrease of $9.6 million from short-term borrowings, primarily due to declining short-term market interest rates, as well as a decrease in average balances of short-term borrowings.
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Analysis of Interest Changes Due to Volume and Rate (Fully Taxable-Equivalent Basis)
Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as volume change. Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as rate change. Changes in our Prime lending rate also impact our loan yields, and to a certain extent our interest-bearing deposits. The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the number of simultaneous changes attributable to both volume and rate changes for the periods indicated. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.
2008 Compared to 2007 | 2008 Compared to 2007 | |||||||||||||||||||||||
Three Months Ended September 30, Increase (Decrease) Due to Change in |
Nine Months Ended September 30, Increase (Decrease) Due to Change in |
|||||||||||||||||||||||
(Dollars in thousands) |
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
$ | 377 | $ | (2,150 | ) | $ | (1,773 | ) | $ | 4,723 | $ | (6,870 | ) | $ | (2,147 | ) | ||||||||
Investment securities (Taxable) |
108 | 298 | 406 | (3,822 | ) | 509 | (3,313 | ) | ||||||||||||||||
Investment securities (Non-Taxable) |
939 | (51 | ) | 888 | 2,389 | (191 | ) | 2,198 | ||||||||||||||||
Loans |
26,965 | (25,952 | ) | 1,013 | 67,820 | (66,816 | ) | 1,004 | ||||||||||||||||
Increase (decrease) in interest income, net |
28,389 | (27,855 | ) | 534 | 71,110 | (73,368 | ) | (2,258 | ) | |||||||||||||||
Interest expense: |
||||||||||||||||||||||||
NOW deposits |
14 | 8 | 22 | 26 | 28 | 54 | ||||||||||||||||||
Regular money market deposits |
(38 | ) | 55 | 17 | (177 | ) | 250 | 73 | ||||||||||||||||
Bonus money market deposits |
1,487 | (681 | ) | 806 | 3,840 | 403 | 4,243 | |||||||||||||||||
Time deposits |
168 | (15 | ) | 153 | 386 | (61 | ) | 325 | ||||||||||||||||
Sweep deposits |
1,697 | | 1,697 | 3,885 | | 3,885 | ||||||||||||||||||
Short-term borrowings |
2,543 | (2,202 | ) | 341 | (2,093 | ) | (7,506 | ) | (9,599 | ) | ||||||||||||||
Zero-coupon convertible subordinated notes |
(232 | ) | | (232 | ) | (272 | ) | 36 | (236 | ) | ||||||||||||||
3.875% convertible senior notes |
2,972 | | 2,972 | 5,695 | | 5,695 | ||||||||||||||||||
Junior subordinated debentures |
44 | (383 | ) | (339 | ) | 105 | (889 | ) | (784 | ) | ||||||||||||||
Senior and subordinated notes |
404 | (4,015 | ) | (3,611 | ) | 9,794 | (5,522 | ) | 4,272 | |||||||||||||||
Other long-term debt |
(9 | ) | (1,014 | ) | (1,023 | ) | (13 | ) | (2,368 | ) | (2,381 | ) | ||||||||||||
Increase (decrease) in interest expense, net |
9,050 | (8,247 | ) | 803 | 21,176 | (15,629 | ) | 5,547 | ||||||||||||||||
Increase (decrease) in net interest income |
$ | 19,339 | $ | (19,608 | ) | $ | (269 | ) | $ | 49,934 | $ | (57,739 | ) | $ | (7,805 | ) | ||||||||
Net Interest Margin (Fully Taxable-Equivalent Basis)
Our net interest margin was 5.73 percent and 5.91 percent for the three and nine months ended September 30, 2008, respectively, compared to 7.18 percent and 7.38 percent for the comparable 2007 periods. The decreases in net interest margin were primarily due to decreases in yields on our loan portfolio resulting from reductions in our Prime lending rate and increases in rates paid on our deposits due to our two interest-bearing deposit products introduced in 2007, partially offset by decreases in rates paid on our short-term borrowings and LIBOR rates associated with our interest rate swap agreements. Our net interest margin also decreased due to the impact of our deposit pricing strategies.
Average Balances, Yields and Rates Paid (Fully Taxable-Equivalent Basis)
The average yield earned on interest-earning assets is the amount of annualized fully taxable-equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is the amount of annualized interest expense expressed as a percentage of average funding sources. The following tables set forth average assets, liabilities, minority interest and stockholders equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three and nine months ended September 30, 2008 and 2007, respectively.
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Average Balances, Rates and Yields for the Three Months Ended September 30, 2008 and 2007
Three months ended September 30, | ||||||||||||||||||||
2008 | 2007 | |||||||||||||||||||
(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) |
$ | 383,009 | $ | 2,712 | 2.82 | % | $ | 350,833 | $ | 4,485 | 5.07 | % | ||||||||
Investment securities: |
||||||||||||||||||||
Taxable |
1,288,039 | 15,321 | 4.73 | 1,277,910 | 14,915 | 4.63 | ||||||||||||||
Non-taxable (2) |
108,115 | 1,701 | 6.26 | 48,486 | 813 | 6.65 | ||||||||||||||
Total loans, net of unearned income |
4,863,706 | 94,256 | 7.71 | 3,630,279 | 93,243 | 10.19 | ||||||||||||||
Total interest-earning assets |
6,642,869 | 113,990 | 6.82 | 5,307,508 | 113,456 | 8.48 | ||||||||||||||
Cash and due from banks |
243,621 | 283,711 | ||||||||||||||||||
Allowance for loan losses |
(55,998 | ) | (45,174 | ) | ||||||||||||||||
Goodwill |
4,092 | 4,092 | ||||||||||||||||||
Other assets (3) |
713,487 | 537,179 | ||||||||||||||||||
Total assets |
$ | 7,548,071 | $ | 6,087,316 | ||||||||||||||||
Funding sources: |
||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
NOW deposits |
$ | 42,538 | $ | 53 | 0.50 | % | $ | 30,647 | $ | 31 | 0.40 | % | ||||||||
Regular money market deposits |
139,210 | 530 | 1.51 | 149,580 | 513 | 1.36 | ||||||||||||||
Bonus money market deposits |
1,027,018 | 3,089 | 1.20 | 567,345 | 2,283 | 1.60 | ||||||||||||||
Time deposits |
395,970 | 898 | 0.90 | 321,243 | 745 | 0.92 | ||||||||||||||
Sweep deposits |
389,231 | 1,697 | 1.73 | | | | ||||||||||||||
Total interest-bearing deposits |
1,993,967 | 6,267 | 1.25 | 1,068,815 | 3,572 | 1.33 | ||||||||||||||
Short-term borrowings |
544,301 | 3,042 | 2.22 | 205,715 | 2,701 | 5.21 | ||||||||||||||
Zero-coupon convertible subordinated notes |
| | | 149,011 | 232 | 0.62 | ||||||||||||||
3.875% convertible senior notes |
250,000 | 2,972 | 4.73 | | | | ||||||||||||||
Junior subordinated debentures |
52,502 | 514 | 3.89 | 49,798 | 853 | 6.80 | ||||||||||||||
Senior and subordinated notes |
522,302 | 4,381 | 3.34 | 495,771 | 7,992 | 6.40 | ||||||||||||||
Other long-term debt |
151,998 | 1,090 | 2.85 | 152,669 | 2,113 | 5.49 | ||||||||||||||
Total interest-bearing liabilities |
3,515,070 | 18,266 | 2.07 | 2,121,779 | 17,463 | 3.27 | ||||||||||||||
Portion of noninterest-bearing funding sources |
3,127,799 | 3,185,729 | ||||||||||||||||||
Total funding sources |
6,642,869 | 18,266 | 1.09 | 5,307,508 | 17,463 | 1.30 | ||||||||||||||
Noninterest-bearing funding sources: |
||||||||||||||||||||
Demand deposits |
2,826,289 | 2,867,812 | ||||||||||||||||||
Other liabilities |
194,426 | 193,955 | ||||||||||||||||||
Minority interest in capital of consolidated affiliates |
300,305 | 227,072 | ||||||||||||||||||
Stockholders equity |
711,981 | 676,698 | ||||||||||||||||||
Portion used to fund interest-earning assets |
(3,127,799 | ) | (3,185,729 | ) | ||||||||||||||||
Total liabilities, minority interest, and stockholders equity |
$ | 7,548,071 | $ | 6,087,316 | ||||||||||||||||
Net interest income and margin |
$ | 95,724 | 5.73 | % | $ | 95,993 | 7.18 | % | ||||||||||||
Total deposits |
$ | 4,820,256 | $ | 3,936,627 | ||||||||||||||||
(1) | Includes average interest-bearing deposits in other financial institutions of $90.0 million and $59.4 million for the three months ended September 30, 2008 and 2007, respectively. |
(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 for all periods presented. The tax equivalent adjustments were $0.6 million and $0.3 million for the three months ended September 30, 2008 and 2007, respectively. |
(3) | Average investment securities of $388.2 million and $250.3 million for the three months ended September 30, 2008 and 2007, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable securities. |
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Average Balances, Rates and Yields for the Nine Months Ended September 30, 2008 and 2007
Nine months ended September 30, | ||||||||||||||||||||
2008 | 2007 | |||||||||||||||||||
(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) |
$ | 484,892 | $ | 10,513 | 2.90 | % | $ | 326,761 | $ | 12,660 | 5.18 | % | ||||||||
Investment securities: |
||||||||||||||||||||
Taxable |
1,231,948 | 43,677 | 4.74 | 1,340,953 | 46,990 | 4.69 | ||||||||||||||
Non-taxable (2) |
100,184 | 4,801 | 6.40 | 50,618 | 2,603 | 6.88 | ||||||||||||||
Total loans, net of unearned income |
4,433,731 | 268,530 | 8.09 | 3,439,524 | 267,526 | 10.40 | ||||||||||||||
Total interest-earning assets |
6,250,755 | 327,521 | 7.00 | 5,157,856 | 329,779 | 8.55 | ||||||||||||||
Cash and due from banks |
256,343 | 276,202 | ||||||||||||||||||
Allowance for loan losses |
(52,363 | ) | (42,979 | ) | ||||||||||||||||
Goodwill |
4,092 | 15,435 | ||||||||||||||||||
Other assets (3) |
695,343 | 509,414 | ||||||||||||||||||
Total assets |
$ | 7,154,170 | $ | 5,915,928 | ||||||||||||||||
Funding sources: |
||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
NOW deposits |
$ | 43,888 | $ | 161 | 0.49 | % | $ | 36,114 | $ | 107 | 0.40 | % | ||||||||
Regular money market deposits |
142,787 | 1,487 | 1.39 | 161,748 | 1,414 | 1.17 | ||||||||||||||
Bonus money market deposits |
934,253 | 8,791 | 1.26 | 523,636 | 4,548 | 1.16 | ||||||||||||||
Time deposits |
375,914 | 2,584 | 0.92 | 320,180 | 2,259 | 0.94 | ||||||||||||||
Sweep deposits |
285,681 | 3,885 | 1.82 | | | | ||||||||||||||
Total interest-bearing deposits |
1,782,523 | 16,908 | 1.27 | 1,041,678 | 8,328 | 1.07 | ||||||||||||||
Short-term borrowings |
329,198 | 5,957 | 2.42 | 388,622 | 15,556 | 5.35 | ||||||||||||||
Zero-coupon convertible subordinated notes |
94,146 | 473 | 0.67 | 148,789 | 709 | 0.64 | ||||||||||||||
3.875% convertible senior notes |
160,036 | 5,695 | 4.75 | | | | ||||||||||||||
Junior subordinated debentures |
52,853 | 1,779 | 4.50 | 50,704 | 2,563 | 6.76 | ||||||||||||||
Senior and subordinated notes |
528,565 | 16,109 | 4.07 | 246,775 | 11,837 | 6.41 | ||||||||||||||
Other long-term debt |
152,339 | 3,846 | 3.37 | 152,669 | 6,227 | 5.45 | ||||||||||||||
Total interest-bearing liabilities |
3,099,660 | 50,767 | 2.19 | 2,029,237 | 45,220 | 2.98 | ||||||||||||||
Portion of noninterest-bearing funding sources |
3,151,095 | 3,128,619 | ||||||||||||||||||
Total funding sources |
6,250,755 | 50,767 | 1.09 | 5,157,856 | 45,220 | 1.17 | ||||||||||||||
Noninterest-bearing funding sources: |
||||||||||||||||||||
Demand deposits |
2,852,851 | 2,838,187 | ||||||||||||||||||
Other liabilities |
227,628 | 183,440 | ||||||||||||||||||
Minority interest in capital of consolidated affiliates |
281,487 | 199,927 | ||||||||||||||||||
Stockholders equity |
692,544 | 665,137 | ||||||||||||||||||
Portion used to fund interest-earning assets |
(3,151,095 | ) | (3,128,619 | ) | ||||||||||||||||
Total liabilities, minority interest, and stockholders equity |
$ | 7,154,170 | $ | 5,915,928 | ||||||||||||||||
Net interest income and margin |
$ | 276,754 | 5.91 | % | $ | 284,559 | 7.38 | % | ||||||||||||
Total deposits |
$ | 4,635,374 | $ | 3,879,865 | ||||||||||||||||
(1) | Includes average interest-bearing deposits in other financial institutions of $90.7 million and $50.8 million for the nine months ended September 30, 2008 and 2007, respectively. |
(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 for all periods presented. The tax equivalent adjustments were $1.7 million and $0.9 million for the nine months ended September 30, 2008 and 2007, respectively. |
(3) | Average investment securities of $369.0 million and $233.2 million for the nine months ended September 30, 2008 and 2007, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable securities. |
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Provision for Loan Losses
Our provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total gross loans and on our periodic assessment of the inherent and identified risk dynamics of the loan portfolio resulting from reviews of selected individual loans. The following table summarizes our provision for loan losses for the three and nine months ended September 30, 2008 and 2007, respectively:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(Dollars in thousands) |
2008 | 2007 | 2008 | 2007 | ||||||||||||
Allowance for loan losses, beginning balance |
$ | 52,888 | $ | 43,352 | $ | 47,293 | $ | 42,747 | ||||||||
Provision for loan losses |
13,682 | 3,155 | 29,756 | 10,865 | ||||||||||||
Gross loan charge-offs |
(7,000 | ) | (4,138 | ) | (22,306 | ) | (14,754 | ) | ||||||||
Loan recoveries |
720 | 1,856 | 5,547 | 5,367 | ||||||||||||
Allowance for loan losses, ending balance |
$ | 60,290 | $ | 44,225 | $ | 60,290 | $ | 44,225 | ||||||||
Provision as a percentage of total gross loans (annualized) |
1.02 | % | 0.33 | % | 0.75 | % | 0.38 | % | ||||||||
Gross charge-offs as a percentage of total gross loans (annualized) |
0.52 | 0.43 | 0.56 | 0.51 | ||||||||||||
Net charge-offs as a percentage of total gross loans (annualized) |
0.47 | 0.24 | 0.42 | 0.33 | ||||||||||||
Allowance for loan losses as a percentage of total gross loans |
1.13 | % | 1.15 | % | 1.13 | % | 1.15 | % | ||||||||
Total gross loans at period end |
$ | 5,323,323 | $ | 3,844,185 | $ | 5,323,323 | $ | 3,844,185 |
Our provision for loan losses increased by $10.5 million to $13.7 million for the three months ended September 30, 2008, compared to $3.2 million for the comparable 2007 period. The increase in our provision for loan losses was primarily due to growth in our loan portfolio. Gross loan charge-offs of $7.0 million and loan recoveries of $0.7 million for the three months ended September 30, 2008 came primarily from our early-stage client portfolio. We consider our allowance for loan losses of $60.3 million adequate to cover credit losses inherent in the loan portfolio at September 30, 2008.
Our provision for loan losses increased by $18.9 million to $29.8 million for the nine months ended September 30, 2008, compared to a provision of $10.9 million for the comparable 2007 period. The increase in our provision for loan losses was primarily due to growth in our loan portfolio. For the nine months ended September 30, 2008, we grew total gross loans by $1.15 billion, compared to $334.6 million for the comparable 2007 period.
Noninterest Income
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
(Dollars in thousands) |
2008 | 2007 | % Change | 2008 | 2007 | % Change | ||||||||||||||
Client investment fees |
$ | 13,636 | $ | 13,127 | 3.9 | % | $ | 41,006 | $ | 37,813 | 8.4 | % | ||||||||
Foreign exchange fees |
8,641 | 6,714 | 28.7 | 24,446 | 17,778 | 37.5 | ||||||||||||||
Deposit service charges |
6,129 | &n |