UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
At July 31, 2007, 34,321,295 shares of the registrants common stock ($0.001 par value) were outstanding.
2
PART I - FINANCIAL INFORMATION
ITEM 1. | INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except par value and share data) |
June 30, 2007 |
December 31, 2006 |
||||||
Assets |
||||||||
Cash and due from banks |
$ | 350,301 | $ | 393,284 | ||||
Federal funds sold, securities purchased under agreement to resell and other short-term investment securities |
655,978 | 239,301 | ||||||
Investment securities |
1,593,957 | 1,692,343 | ||||||
Loans, net of unearned income |
3,762,446 | 3,482,402 | ||||||
Allowance for loan losses |
(43,352 | ) | (42,747 | ) | ||||
Net loans |
3,719,094 | 3,439,655 | ||||||
Premises and equipment, net of accumulated depreciation and amortization |
40,028 | 37,306 | ||||||
Goodwill |
4,092 | 21,296 | ||||||
Accrued interest receivable and other assets |
241,630 | 258,267 | ||||||
Total assets |
$ | 6,605,080 | $ | 6,081,452 | ||||
Liabilities, Minority Interest and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand |
$ | 3,132,430 | $ | 3,039,528 | ||||
Negotiable order of withdrawal (NOW) |
31,389 | 35,983 | ||||||
Money market |
927,995 | 668,794 | ||||||
Time |
314,675 | 313,320 | ||||||
Total deposits |
4,406,489 | 4,057,625 | ||||||
Short-term borrowings |
305,000 | 683,537 | ||||||
Other liabilities |
169,393 | 193,296 | ||||||
Long-term debt |
838,116 | 352,465 | ||||||
Total liabilities |
5,718,998 | 5,286,923 | ||||||
Commitments and contingencies |
| | ||||||
Minority interest in capital of consolidated affiliates |
217,172 | 166,015 | ||||||
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; 34,387,390 and 34,401,230 shares outstanding at June 30, 2007 and December 31, 2006, respectively |
34 | 34 | ||||||
Additional paid-in capital |
3,851 | 4,873 | ||||||
Retained earnings |
690,350 | 641,528 | ||||||
Accumulated other comprehensive loss |
(25,325 | ) | (17,921 | ) | ||||
Total stockholders equity |
668,910 | 628,514 | ||||||
Total liabilities, minority interest and stockholders equity |
$ | 6,605,080 | $ | 6,081,452 | ||||
See accompanying notes to interim consolidated financial statements (unaudited).
3
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
(Dollars in thousands, except per share amounts) |
2007 | 2006 | 2007 | 2006 | ||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 89,051 | $ | 70,219 | $ | 174,283 | $ | 136,367 | ||||||||
Investment securities: |
||||||||||||||||
Taxable |
15,782 | 19,600 | 32,075 | 39,994 | ||||||||||||
Non-taxable |
557 | 781 | 1,164 | 1,604 | ||||||||||||
Federal funds sold, securities purchased under agreement to resell and other short-term investment securities |
4,341 | 2,530 | 8,175 | 4,570 | ||||||||||||
Total interest income |
109,731 | 93,130 | 215,697 | 182,535 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
2,568 | 2,336 | 4,756 | 4,661 | ||||||||||||
Borrowings |
12,587 | 5,032 | 23,001 | 8,233 | ||||||||||||
Total interest expense |
15,155 | 7,368 | 27,757 | 12,894 | ||||||||||||
Net interest income |
94,576 | 85,762 | 187,940 | 169,641 | ||||||||||||
Provision for loan losses |
8,117 | 4,602 | 7,710 | 2,128 | ||||||||||||
Net interest income after provision for loan losses |
86,459 | 81,160 | 180,230 | 167,513 | ||||||||||||
Noninterest income: |
||||||||||||||||
Gains on investment securities, net |
13,641 | 900 | 25,892 | 839 | ||||||||||||
Client investment fees |
12,652 | 10,972 | 24,686 | 20,609 | ||||||||||||
Foreign exchange fees |
5,805 | 5,100 | 11,064 | 10,312 | ||||||||||||
Deposit service charges |
3,567 | 2,310 | 6,778 | 4,488 | ||||||||||||
Gains on derivative instruments, net |
4,751 | 10,807 | 6,724 | 7,822 | ||||||||||||
Corporate finance fees |
3,487 | 2,775 | 6,402 | 5,213 | ||||||||||||
Letter of credit and standby letter of credit income |
2,761 | 2,642 | 5,692 | 4,992 | ||||||||||||
Other |
9,036 | 5,472 | 15,923 | 10,104 | ||||||||||||
Total noninterest income |
55,700 | 40,978 | 103,161 | 64,379 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Compensation and benefits |
51,957 | 48,675 | 105,317 | 93,196 | ||||||||||||
Impairment of goodwill |
17,204 | 18,434 | 17,204 | 18,434 | ||||||||||||
Professional services |
6,676 | 10,074 | 15,826 | 18,429 | ||||||||||||
Net occupancy |
6,285 | 4,298 | 11,089 | 8,503 | ||||||||||||
Furniture and equipment |
5,111 | 3,671 | 10,253 | 7,375 | ||||||||||||
Business development and travel |
3,403 | 2,987 | 6,318 | 5,741 | ||||||||||||
Correspondent bank fees |
1,311 | 1,452 | 2,860 | 2,582 | ||||||||||||
Telephone |
1,423 | 880 | 2,856 | 1,787 | ||||||||||||
Data processing services |
858 | 861 | 1,886 | 1,989 | ||||||||||||
Reduction of provision for unfunded credit commitments |
(696 | ) | (3,325 | ) | (1,805 | ) | (3,821 | ) | ||||||||
Other |
4,384 | 5,631 | 8,229 | 10,111 | ||||||||||||
Total noninterest expense |
97,916 | 93,638 | 180,033 | 164,326 | ||||||||||||
Income before minority interest in net income of consolidated affiliates and income tax expense |
44,243 | 28,500 | 103,358 | 67,566 | ||||||||||||
Minority interest in net income of consolidated affiliates |
(5,825 | ) | (5,814 | ) | (16,181 | ) | (6,058 | ) | ||||||||
Income before income tax expense |
38,418 | 22,686 | 87,177 | 61,508 | ||||||||||||
Income tax expense |
15,553 | 9,092 | 35,921 | 25,835 | ||||||||||||
Net income before cumulative effect of change in accounting principle |
22,865 | 13,594 | 51,256 | 35,673 | ||||||||||||
Cumulative effect of change in accounting principle, net of tax (1) |
| | | 192 | ||||||||||||
Net income |
$ | 22,865 | $ | 13,594 | $ | 51,256 | $ | 35,865 | ||||||||
Earnings per common sharebasic, before cumulative effect of change in accounting principle |
$ | 0.67 | $ | 0.39 | $ | 1.49 | $ | 1.02 | ||||||||
Earnings per common sharediluted, before cumulative effect of change in accounting principle |
$ | 0.61 | $ | 0.36 | $ | 1.38 | $ | 0.93 | ||||||||
Earnings per common sharebasic |
$ | 0.67 | $ | 0.39 | $ | 1.49 | $ | 1.02 | ||||||||
Earnings per common sharediluted |
$ | 0.61 | $ | 0.36 | $ | 1.38 | $ | 0.94 |
(1) | Represents the cumulative effect of change in accounting principle, net of taxes, on previously recognized share-based compensation for the effect of adopting Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment. |
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 June 30, |
Six months ended June 30, |
|||||||||||||||
(Dollars in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||||||
Net income |
$ | 22,865 | $ | 13,594 | $ | 51,256 | $ | 35,865 | ||||||||
Other comprehensive loss, net of tax: |
||||||||||||||||
Cumulative translation gains: |
||||||||||||||||
Translation gains, net of tax |
197 | 102 | 88 | 124 | ||||||||||||
Change in unrealized gains (losses) on available-for-sale investment securities: |
||||||||||||||||
Unrealized holding losses, net of tax |
(10,422 | ) | (3,641 | ) | (7,635 | ) | (14,161 | ) | ||||||||
Reclassification adjustment for gains (losses) included in net income, net of tax |
(45 | ) | (1,886 | ) | 143 | (1,787 | ) | |||||||||
Other comprehensive loss, net of tax |
(10,270 | ) | (5,425 | ) | (7,404 | ) | (15,824 | ) | ||||||||
Comprehensive income |
$ | 12,595 | $ | 8,169 | $ | 43,852 | $ | 20,041 | ||||||||
See accompanying notes to interim consolidated financial statements (unaudited).
5
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, | ||||||||
(Dollars in thousands) |
2007 | 2006 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 51,256 | $ | 35,865 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Impairment of goodwill |
17,204 | 18,434 | ||||||
Provision for loan losses |
7,710 | 2,128 | ||||||
Reduction of provision for unfunded credit commitments |
(1,805 | ) | (3,821 | ) | ||||
Changes in fair values of derivatives, net |
(5,355 | ) | (11,700 | ) | ||||
Gains on investment securities, net |
(25,892 | ) | (839 | ) | ||||
Depreciation and amortization |
|
10,176 |
|
|
5,456 |
| ||
Minority interest in net income of consolidated affiliates |
16,181 | 6,058 | ||||||
Tax benefit of original issue discount |
1,659 | 1,572 | ||||||
Tax benefits of share-based compensation and other |
|
940 |
|
5,235 | ||||
Amortization of share-based compensation |
8,245 | 11,545 | ||||||
Amortization of deferred warrant-related loan fees |
(3,538 | ) | (3,491 | ) | ||||
Deferred income tax expense |
|
(4,727 |
) |
(672 | ) | |||
Loss on sale of other real estate owned property |
1,368 | | ||||||
Changes in other assets and liabilities: |
||||||||
Accrued interest receivable |
974 | 1,600 | ||||||
Accounts receivable |
(7,467 | ) | (86 | ) | ||||
Income tax receivable, net |
(9,171 | ) | (12,800 | ) | ||||
Accrued retention, incentive plans and other compensation benefits payable |
(13,419 | ) | (20,583 | ) | ||||
Foreign exchange spot contract assets |
16,600 | | ||||||
Other, net |
|
5,181 |
|
|
475 |
| ||
Net cash provided by operating activities |
|
66,120 |
|
34,376 | ||||
Cash flows from investing activities: |
||||||||
Purchases of available-for-sale securities |
(23,420 | ) | (11,763 | ) | ||||
Proceeds from sales of available-for-sale securities |
4,524 | 123,049 | ||||||
Proceeds from maturities and pay downs of available-for-sale securities |
158,765 | 180,656 | ||||||
Purchases of nonmarketable securities (cost and equity method accounting) |
(15,495 | ) | (15,210 | ) | ||||
Proceeds from sales of nonmarketable securities (cost and equity method accounting) |
|
10,378 |
|
2,335 | ||||
Proceeds from nonmarketable securities (cost and equity method accounting) |
|
6,698 |
|
8,582 | ||||
Purchases of nonmarketable securities (investment fair value accounting) |
(37,064 | ) | (37,965 | ) | ||||
Proceeds from sales of nonmarketable securities (investment fair value accounting) |
|
12,649 |
|
8,890 | ||||
Net increase in loans |
(290,366 | ) | (115,141 | ) | ||||
Proceeds from recoveries of charged-off loans |
3,510 | 6,204 | ||||||
Proceeds from sale of other real estate owned |
4,309 | | ||||||
Purchases of premises and equipment |
(9,151 | ) | (10,304 | ) | ||||
Net cash (used for) provided by investing activities |
(174,663 | ) | 139,333 | |||||
Cash flows from financing activities: |
||||||||
Net increase (decrease) in deposits |
345,332 | (334,325 | ) | |||||
Proceeds from issuance of senior and subordinated notes, net |
495,030 | | ||||||
(Decrease) increase in short-term borrowings |
(378,537 | ) | 254,336 | |||||
Capital contributions from minority interest participants, net of distributions |
34,976 | 27,519 | ||||||
Stock compensation related tax benefits |
5,072 | 4,107 | ||||||
Proceeds from issuance of common stock |
19,667 | 26,146 | ||||||
Repurchases of common stock |
(39,303 | ) | (69,319 | ) | ||||
Net cash provided by (used for) financing activities |
482,237 | (91,536 | ) | |||||
Net increase in cash and cash equivalents |
373,694 | 82,173 | ||||||
Cash and cash equivalents at beginning of year |
632,585 | 462,098 | ||||||
Cash and cash equivalents at end of period |
$ | 1,006,279 | $ | 544,271 | ||||
See accompanying notes to interim consolidated financial statements (unaudited).
6
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. | Description of Business |
SVB Financial Group (SVB Financial or the Parent) is a bank holding company and financial holding company, incorporated in the state of Delaware in March 1999. SVB Financial and its subsidiaries (which we refer to collectively as we, our, us or the Company in this Quarterly Report on Form 10-Q) offer a variety of banking and financial products and services to support our clients throughout their life cycles.
We offer commercial banking products and services through our banking subsidiary, Silicon Valley Bank (the Bank), which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers brokerage, investment advisory and asset management services. We also offer non-banking financial products and services, such as funds management, private equity investment and equity valuation, through our other subsidiaries and divisions.
We primarily focus on serving corporate clients in the following niches: technology, life sciences, private equity and premium wine. Our corporate clients range in size and stage of maturity, from emerging growth companies to more mature companies. Our emerging growth clients tend to be privately held and funded by venture capital, and may have generally fewer employees, be primarily engaged in research and development, market relatively few products or services and/or have little or no revenue. Our more mature companies tend to be more established and may be publicly traded. Additionally, we focus on cultivating strong relationships with firms within the venture capital and private equity community worldwide, many of which are also our clients and may invest in our corporate clients.
We are headquartered in Santa Clara, California, and operate through 27 offices in the United States and three internationally in the United Kingdom, India and China.
For reporting purposes, SVB Financial Group has four operating segments in which we report our financial information: Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services. Financial information and results of operations for our operating segments are set forth in Note 12. Segment Reporting below and in Part I Item 2 of this report, Managements Discussion and Analysis of Financial Condition and Results of Operations Operating Segment Results.
Our Commercial Banking segment is comprised of the commercial banking and financial products and services of the Bank and its subsidiaries, through which we offer lending, deposit, cash management, global trade, brokerage and investment advisory products and services to our commercial clients, including private equity firms. Our SVB Capital segment consists of our private equity division which focuses primarily on funds management, as well as developing strategic business relationships with the private equity community. Funds managed or sponsored by SVB Capital also invest in portfolio companies and other funds. Our SVB Alliant segment is comprised of our investment banking subsidiaries, which provide advisory services in the areas of mergers and acquisitions, corporate finance, strategic alliances and private placements. In July 2007, we reached a decision to cease operations at SVB Alliant (see Note 17. Subsequent Events). Finally, our Other Business Services segment is comprised of all other businesses, such as SVB Private Client Services (private banking), SVB Global (global banking products) and SVB Analytics (equity valuation and management).
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited 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 financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 2007 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, 2006 (2006 Form 10-K).
7
The accompanying interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Part II, Item 8. Consolidated Financial Statements and Supplementary DataNote 2. Summary of Significant Accounting Policies presented in our 2006 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentations.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS No. 157 on our consolidated financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value to measure certain financial assets and financial liabilities, on an instrument-by-instrument basis. If the fair value option is elected, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS No. 159, changes in fair value are recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 with earlier adoption permitted. We have elected not to early adopt and are currently assessing the impact of SFAS No. 159 on our consolidated financial position and results of operations.
In April 2007, the FASB issued FASB Staff Position (FSP) No. FIN 39-1, Amendment of FASB Interpretation No. 39. This FSP replaces certain terms in FIN No. 39 with derivative instruments (as defined in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133)) and permits the offsetting of fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The FSP is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of applying the guidance in this FSP.
In May 2007, the Accounting Standards Executive Committee of the AICPA issued Statement of Position (SOP) 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (SOP 07-1). This new standard provides guidance for determining whether an entity is an investment company, as defined, and whether the specialized industry accounting principles for investment companies should be retained in the consolidated financial statements of the parent or of an equity method investor. SOP 07-1 is effective on January 1, 2008. We are currently assessing the impact of SOP 07-1 on our consolidated financial position and results of operations.
3. | Earnings Per Share (EPS) |
The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2007 and 2006:
8
Three months ended June 30, |
Six months ended June 30, | |||||||||||
(Dollars and shares in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||
Numerator: |
||||||||||||
Net income |
$ | 22,865 | $ | 13,594 | $ | 51,256 | $ | 35,865 | ||||
Denominator: |
||||||||||||
Weighted average common shares outstanding-basic |
34,319 | 34,968 | 34,368 | 35,030 | ||||||||
Weighted average effect of dilutive securities: |
||||||||||||
Stock options |
1,364 | 1,500 | 1,344 | 1,641 | ||||||||
Restricted stock awards and units |
91 | 147 | 48 | 126 | ||||||||
Convertible debt |
1,575 | 1,376 | 1,455 | 1,419 | ||||||||
Warrants |
59 | | | | ||||||||
Denominator for diluted calculation |
37,408 | 37,991 | 37,215 | 38,216 | ||||||||
Net income per share: |
||||||||||||
Basic |
$ | 0.67 | $ | 0.39 | $ | 1.49 | $ | 1.02 | ||||
Diluted |
$ | 0.61 | $ | 0.36 | $ | 1.38 | $ | 0.94 | ||||
Stock options and warrants with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:
Three months ended June 30, |
Six months ended June 30, | |||||||
(Shares in thousands) |
2007 | 2006 | 2007 | 2006 | ||||
Stock options |
600 | 913 | 822 | 755 | ||||
Restricted stock awards and units |
| 52 | 10 | 26 | ||||
Warrants (Note 10 Derivative Financial Instruments) |
| 4,456 | 4,456 | 4,456 | ||||
Ending balance |
600 | 5,421 | 5,288 | 5,237 | ||||
In September 2004, the Emerging Issues Task Force (EITF) reached final consensus on EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share (EITF 04-8) whereby contingently convertible debt should be treated as convertible debt and included in the calculation of diluted EPS. We included the dilutive effect of the $150.0 million zero-coupon, convertible subordinated notes in our diluted EPS calculation using the treasury stock method, in accordance with the provisions of EITF No. 90-19, Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion (EITF 90-19) and SFAS No. 128, Earnings Per Share.
4. | Share-Based Compensation |
For the three months ended June 30, 2007 and 2006, we recorded share-based compensation expense of $4.4 million and $5.6 million, respectively, resulting in the recognition of $1.0 million and $1.2 million, respectively, in related tax benefits. For the six months ended June 30, 2007 and 2006, we recorded share-based compensation expense of $8.2 million and $11.5 million, respectively, resulting in the recognition of $1.7 million and $2.5 million, respectively, in related tax benefits.
Unrecognized Compensation Expense
At June 30, 2007, unrecognized share-based compensation expense was as follows:
(Dollars in thousands) |
Unrecognized Expense | Average Expected Recognition Period-in Years | |||
Stock options |
$ | 12,933 | 1.39 | ||
Restricted stock awards and units |
8,646 | 1.91 | |||
Total unrecognized share-based compensation expense |
$ | 21,579 | |||
Share-Based Payment Award Activity
The table below provides stock option information related to the 1989 Stock Option Plan, the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2007:
9
Shares | Weighted- Average |
Weighted- Average |
Aggregate Money Options | ||||||||
Outstanding at December 31, 2006 |
4,673,139 | $ | 31.74 | ||||||||
Granted |
279,326 | 49.45 | |||||||||
Exercised |
(669,164 | ) | 26.25 | ||||||||
Forfeited |
(114,724 | ) | 42.62 | ||||||||
Expired |
(2,239 | ) | 47.53 | ||||||||
Outstanding at June 30, 2007 |
4,166,338 | 33.50 | 3.89 | $ | 81,741,517 | ||||||
Vested and expected to vest at June 30, 2007 |
4,014,199 | 32.99 | 3.83 | 80,803,905 | |||||||
Exercisable at June 30, 2007 |
3,060,358 | $ | 29.61 | 3.54 | $ | 71,916,054 | |||||
The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value at June 30, 2007. This value is based on our closing stock price of $53.11 at June 30, 2007. The total intrinsic value of options exercised during the three and six months ended June 30, 2007 was $10.8 million and $16.3 million, respectively, and the total intrinsic value of options exercised during the three and six months ended June 30, 2006 was $6.6 million and $28.1 million, respectively.
The table below provides information for restricted stock awards and restricted stock units outstanding under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2007:
Shares | Weighted-Average Grant Date Fair Value | |||||
Nonvested at December 31, 2006 |
215,926 | $ | 40.03 | |||
Granted |
137,128 | 50.39 | ||||
Vested |
(64,695 | ) | 48.25 | |||
Forfeited |
(20,404 | ) | 52.65 | |||
Nonvested at June 30, 2007 |
267,955 | $ | 42.39 | |||
5. | Federal Funds Sold, Securities Purchased under Agreement to Resell and Other Short-Term Investment Securities |
The following table details the federal funds sold, securities purchased under agreement to resell and other short-term investment securities at June 30, 2007 and December 31, 2006, respectively:
(Dollars in thousands) |
June 30, 2007 | December 31, 2006 | ||||
Federal funds sold |
$ | 250,000 | $ | | ||
Securities purchased under agreement to resell |
139,491 | 40,734 | ||||
Interest-earning deposits |
56,088 | 34,357 | ||||
Other short-term investment securities |
210,399 | 164,210 | ||||
Total federal funds sold, securities purchased under agreement to resell and other short-term investment securities |
$ | 655,978 | $ | 239,301 | ||
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6. | Investment Securities |
The detailed composition of our investment securities at June 30, 2007 and December 31, 2006 is presented as follows:
(Dollars in thousands) |
June 30, 2007 | December 31, 2006 | ||||
Available-for-sale securities, at fair value |
$ | 1,300,279 | $ | 1,445,455 | ||
Marketable securities (investment company fair value accounting) |
14 | | ||||
Non-marketable securities (investment company fair value accounting): |
||||||
Private equity fund investments (1) |
156,514 | 126,475 | ||||
Other private equity investments (2) |
39,228 | 32,913 | ||||
Other investments (3) |
22,379 | 15,394 | ||||
Non-marketable securities (equity method accounting): |
||||||
Other investments (4) |
16,479 | 15,710 | ||||
Low income housing tax credit funds |
21,067 | 22,664 | ||||
Non-marketable securities (cost method accounting): |
||||||
Private equity fund investments |
29,754 | 27,771 | ||||
Other private equity investments |
8,243 | 5,961 | ||||
Total investment securities |
$ | 1,593,957 | $ | 1,692,343 | ||
(1) | Private equity fund investments at June 30, 2007 and December 31, 2006 includes the following investments: |
June 30, 2007 | December 31, 2006 | ||||||||
(Dollars in thousands) |
Amount | Ownership% | Amount | ||||||
SVB Strategic Investors Fund, LP |
$ | 67,729 | 12.6 | % | $ | 65,977 | |||
SVB Strategic Investors Fund II, LP |
65,133 | 8.6 | 47,668 | ||||||
SVB Strategic Investors Fund III, LP |
23,652 | 5.9 | % | 12,830 | |||||
Total private equity fund investments |
$ | 156,514 | $ | 126,475 | |||||
(2) | Other private equity investments at June 30, 2007 and December 31, 2006 include the following investments: |
June 30, 2007 | December 31, 2006 | ||||||||
(Dollars in thousands) |
Amount | Ownership% | Amount | ||||||
Silicon Valley BancVentures, LP |
$ | 29,127 | 10.7 | % | $ | 29,388 | |||
SVB Capital Partners II, LP (i) |
10,101 | 5.1 | % | 3,525 | |||||
Total other private equity investments |
$ | 39,228 | $ | 32,913 | |||||
(i) | At June 30, 2007 we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership of SVB Strategic Investors Fund II, LP. |
(3) | Includes $22.4 million and $15.4 million related to Partners for Growth, LP at June 30, 2007 and December 31, 2006, respectively. At June 30, 2007, we had a majority ownership interest of approximately 50.0% in the fund. |
(4) | Other investments at June 30, 2007 and December 31, 2006 include the following investments: |
June 30, 2007 | December 31, 2006 | ||||||||
(Dollars in thousands) |
Amount | Ownership% | Amount | ||||||
Gold Hill Venture Lending Partners 03, LLC |
$ | 7,324 | 90.7 | % | $ | 6,941 | |||
Gold Hill Venture Lending 03, LP (i) |
7,087 | 9.3 | 6,565 | ||||||
Partners for Growth II, LP |
2,068 | 24.2 | % | 2,204 | |||||
Total other investments |
$ | 16,479 | $ | 15,710 | |||||
(i) | At June 30, 2007, we had a direct ownership interest of 4.8% in the fund. In addition, at June 30, 2007, we had an indirect ownership interest of 4.5% in Gold Hill Venture Lending 03, LP and its parallel funds through our ownership of Gold Hill Venture Lending Partners 03, LLC. |
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 June 30, 2007:
11
June 30, 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. Treasury securities |
$ | 9,919 | $ | (17 | ) | $ | | $ | | $ | 9,919 | $ | (17 | ) | |||||||
U.S. agencies and corporations: |
|||||||||||||||||||||
Collateralized mortgage obligations (1) |
37,102 | (664 | ) | 533,392 | (18,036 | ) | 570,494 | (18,700 | ) | ||||||||||||
Mortgage-backed securities (1) |
36,684 | (931 | ) | 357,808 | (17,916 | ) | 394,492 | (18,847 | ) | ||||||||||||
U.S. agency debentures (1) |
9,850 | (150 | ) | 176,598 | (3,384 | ) | 186,448 | (3,534 | ) | ||||||||||||
Commercial mortgage-backed securities (1) |
| | 68,778 | (2,397 | ) | 68,778 | (2,397 | ) | |||||||||||||
Municipal bonds and notes |
381 | (1 | ) | | | 381 | (1 | ) | |||||||||||||
Marketable equity securities |
1,457 | (372 | ) | 117 | (29 | ) | 1,574 | (401 | ) | ||||||||||||
Total temporarily impaired securities |
$ | 95,393 | $ | (2,135 | ) | $ | 1,136,693 | $ | (41,762 | ) | $ | 1,232,086 | $ | (43,897 | ) | ||||||
(1) | As of June 30, 2007, we identified a total of 152 investments that were in unrealized loss positions, of which 131 investments totaling $1,136.6 million with unrealized losses of $41.7 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 $533.4 million with unrealized losses of $18.0 million were originally purchased between May 2002 and December 2005. Securities classified as mortgage-backed securities totaling $357.8 million with unrealized losses of $17.9 million were originally purchased between August 2002 and April 2005. Securities classified as U.S. agency debentures totaling $176.6 million with unrealized losses of $3.4 million were originally purchased between June 2003 and July 2005. Securities classified as commercial mortgage-backed securities totaling $68.8 million with unrealized losses of $2.4 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 the U.S. Treasury or a government sponsored enterprise. Because these securities are of superior credit quality, the unrealized losses are due solely to increases in market interest rates and as we expect to recover the impairment prior to or at maturity, we deem these impairments to be temporary. We have the intent and ability to hold the securities until the market value recovers or until 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, 2006:
December 31, 2006 | |||||||||||||||||||||
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. Treasury securities |
$ | | $ | | $ | 9,931 | $ | (56 | ) | $ | 9,931 | $ | (56 | ) | |||||||
U.S. agencies and corporations: |
|||||||||||||||||||||
Collateralized mortgage obligations |
13,170 | (16 | ) | 616,507 | (14,657 | ) | 629,677 | (14,673 | ) | ||||||||||||
Mortgage-backed securities |
17,380 | (164 | ) | 392,053 | (11,563 | ) | 409,433 | (11,727 | ) | ||||||||||||
U.S. agency debentures |
9,925 | (75 | ) | 220,898 | (4,086 | ) | 230,823 | (4,161 | ) | ||||||||||||
Commercial mortgage-backed securities |
| | 69,375 | (1,799 | ) | 69,375 | (1,799 | ) | |||||||||||||
Total temporarily impaired securities |
$ | 40,475 | $ | (255 | ) | $ | 1,308,764 | $ | (32,161 | ) | $ | 1,349,239 | $ | (32,416 | ) | ||||||
The following table presents the components of gains and losses on investment securities for the three and six months ended June 30, 2007 and 2006:
12
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
(Dollars in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||||||
Gross gains on investment securities: |
||||||||||||||||
Available-for-sale securities, at fair value |
$ | 78 | $ | | $ | 396 | $ | 170 | ||||||||
Marketable securities (investment company fair value accounting) |
50 | | 92 | | ||||||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||
Private equity fund investments |
6,683 | 4,613 | 19,275 | 7,180 | ||||||||||||
Other private equity investments |
1,289 | 384 | 1,336 | 386 | ||||||||||||
Other investments |
12,079 | 1,167 | 12,646 | 1,170 | ||||||||||||
Non-marketable securities (equity method accounting) |
211 | 313 | 535 | 520 | ||||||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||
Private equity fund investments |
572 | 286 | 796 | 362 | ||||||||||||
Other private equity investments |
5 | 109 | 232 | 109 | ||||||||||||
Total gross gains on investment securities |
20,967 | 6,872 | 35,308 | 9,897 | ||||||||||||
Gross losses on investment securities: |
||||||||||||||||
Available-for-sale securities, at fair value |
(154 | ) | (3,230 | ) | (154 | ) | (3,230 | ) | ||||||||
Non-marketable securities (investment company fair value accounting): |
||||||||||||||||
Private equity fund investments |
(5,531 | ) | (1,660 | ) | (6,737 | ) | (3,856 | ) | ||||||||
Other private equity investments |
(1,040 | ) | (475 | ) | (1,740 | ) | (475 | ) | ||||||||
Non-marketable securities (equity method accounting) |
(467 | ) | (209 | ) | (467 | ) | (761 | ) | ||||||||
Non-marketable securities (cost method accounting): |
||||||||||||||||
Private equity fund investments |
(134 | ) | (398 | ) | (318 | ) | (691 | ) | ||||||||
Other private equity investments |
| | | (45 | ) | |||||||||||
Total gross losses on investment securities |
(7,326 | ) | (5,972 | ) | (9,416 | ) | (9,058 | ) | ||||||||
Gains on investment securities, net (1) |
$ | 13,641 | $ | 900 | $ | 25,892 | $ | 839 | ||||||||
(1) | Net gains on investment securities of $13.6 million in the second quarter of 2007 were mainly attributable to net increases of $12.1 million in the fair value of two investments from one of our sponsored debt funds, which are subject to lock-up until the fourth quarter of 2007. Of the $12.1 million in gains, $6.0 million was attributable to minority interests and these amounts are reflected in the interim consolidated statements of income under the caption Minority Interest in Net Income of Consolidated Affiliates. Net gains on investment securities of $25.9 million for the six months ended June 30, 2007 were mainly attributable to net gains of $12.6 million from one of our sponsored debt funds and net gains of $11.8 million from two of our managed funds of funds, primarily related to net increases in the fair values of fund investments. Of the $24.4 million gain from these three consolidated funds, $17.2 million were attributable to minority interests. |
7. | Loans and Allowance for Loan Losses |
The detailed composition of loans, net of unearned income of $25.5 million and $27.2 million at June 30, 2007 and December 31, 2006, respectively, is presented in the following table:
(Dollars in thousands) |
June 30, 2007 | December 31, 2006 | ||||
Commercial loans |
$ | 3,204,608 | $ | 2,959,501 | ||
Vineyard development |
118,913 | 118,266 | ||||
Commercial real estate |
22,699 | 13,336 | ||||
Total real estate construction |
141,612 | 131,602 | ||||
Real estate termconsumer |
67,154 | 46,812 | ||||
Real estate termcommercial |
43,286 | 50,051 | ||||
Total real estate term |
110,440 | 96,863 | ||||
Consumer and other |
305,786 | 294,436 | ||||
Total loans, net of unearned income |
$ | 3,762,446 | $ | 3,482,402 | ||
The activity in the allowance for loan losses for the three and six months ended June 30, 2007 and 2006 was as follows:
13
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
(Dollars in thousands) |
2007 | 2006 | 2007 | 2006 | ||||||||||||
Beginning balance |
$ | 40,256 | $ | 35,982 | $ | 42,747 | $ | 36,785 | ||||||||
Provision for loan losses |
8,117 | 4,602 | 7,710 | 2,128 | ||||||||||||
Loan charge-offs |
(6,265 | ) | (5,850 | ) | (10,615 | ) | (7,211 | ) | ||||||||
Loan recoveries |
1,244 | 3,173 | 3,510 | 6,205 | ||||||||||||
Ending balance |
$ | 43,352 | $ | 37,907 | $ | 43,352 | $ | 37,907 | ||||||||
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 (SFAS No. 114) totaled $10.9 million and $11.0 million at June 30, 2007 and December 31, 2006, respectively. The allocation of the allowance for loan losses related to impaired loans was $0.7 million at June 30, 2007. There was no allocation of the allowance for loan losses related to impaired loans at December 31, 2006. Average impaired loans for the three months ended June 30, 2007 and 2006 was $10.5 million and $6.1 million, respectively, and average impaired loans for the six months ended June 30, 2007 and 2006 was $10.5 million and $5.9 million, respectively. If these loans had not been impaired, $0.2 million and $0.1 million in interest income would have been recorded during the three months ended June 30, 2007 and 2006, respectively, and $0.6 million and $0.3 million in interest income would have been recorded during the six months ended June 30, 2007 and 2006, respectively.
8. | Goodwill |
We conducted our annual goodwill impairment analysis of the SVB Alliant reporting unit during the second quarter of 2007. 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. As required by SFAS No. 142, Goodwill and Other Intangible Assets, in measuring the amount of goodwill impairment, we made a hypothetical allocation of the reporting units estimated fair value to the tangible and intangible assets (other than goodwill) for the reporting unit. Based on this allocation, we concluded that the entire amount of the remaining $17.2 million of goodwill was impaired and was required to be expensed as a noncash charge to continuing operations during the second quarter of 2007. Subsequently, in July 2007, we reached a decision to cease operations at SVB Alliant. (See Note 17. Subsequent Events). Goodwill at June 30, 2007 relates to the acquisition of a majority ownership interest in eProsper in 2006, a equity ownership data management services company.
9. | Short-Term Borrowings and Long-Term Debt |
The following table shows information regarding our short-term borrowings and long-term debt outstanding at June 30, 2007 and December 31, 2006:
(Dollars in thousands) |
Maturity |
June 30, 2007 | December 31, 2006 | |||||
Short-term borrowings: |
||||||||
Federal funds purchased and securities sold under agreement to repurchase |
Less than One Month(1) | $ | 205,000 | $ | 483,537 | |||
FHLB advances |
Less than One Month(1) | 100,000 | 200,000 | |||||
Total short-term borrowings |
$ | 305,000 | $ | 683,537 | ||||
Long-term debt: |
||||||||
FHLB advances |
(2) | $ | 150,000 | $ | 150,000 | |||
5.70% senior notes |
June 1, 2012 | 245,603 | | |||||
6.05% subordinated notes |
June 1, 2017 | 241,500 | | |||||
Contingently convertible debt |
June 15, 2008 | 148,905 | 148,441 | |||||
7.0% junior subordinated debentures |
October 15, 2033 | 49,439 | 51,355 | |||||
8.0% long-term notes payable (3) |
November 30, 2009 | 2,669 | 2,669 | |||||
Total long-term debt |
$ | 838,116 | $ | 352,465 | ||||
(1) | Represents remaining maturity as of the date reported. |
(2) | Represents Federal Home Loan Bank (FHLB) advances maturing in November 2008, May 2009 and November 2009. |
(3) | Debt assumed in relation to the acquisition of a 65% interest in eProsper during the third quarter of 2006. |
14
Interest expense related to short-term borrowings and long-term debt were $12.6 million and $5.0 million for the three months ended June 30, 2007 and 2006, respectively, and $23.0 million and $8.2 million for the six months ended June 30, 2007 and 2006, respectively. The weighted average interest rates associated with our short-term borrowings and long-term debt outstanding for the six months ended June 30, 2007 and 2006, were 4.81 percent and 3.67 percent, respectively.
Senior Notes and Subordinated Notes
On May 15, 2007, the Bank issued 5.70% senior notes, due June 1, 2012, in an aggregate principal amount of $250.0 million and 6.05% subordinated notes, due June 1, 2017, in an aggregate principal amount of $250.0 million (collectively, the Notes). The discount and issuance costs related to the Notes were $0.8 million and $4.2 million, respectively, and the net proceeds from the offering of the Notes were $495.0 million. The Notes are not redeemable prior to maturity and interest is payable semi-annually. Proceeds from the issuance of these Notes were used for repayment of certain short-term borrowings. Debt issuance costs of $2.0 million and $2.2 million related to the senior and subordinated notes, respectively, were deferred and are being amortized to interest expense over the term of the Notes, using the effective yield method. Concurrent with the issuance of the Notes, we entered into fixed-to-variable interest rate swap agreements related to both the senior notes and the subordinated notes (see Note 10. Derivative Financial Instruments).
Contingently Convertible Debt
The fair value of the convertible debt at June 30, 2007 and December 31, 2006 was $236.6 million and $207.7 million, respectively, based on quoted market prices. We intend to settle the outstanding principal amount in cash. During the second quarter of 2007, our note holders held the right, at their option, to convert their notes, in whole or in part, subject to certain limitations, at the conversion price of $33.6277. No conversion occurred during the second quarter of 2007.
Concurrent with the issuance of the convertible notes, we entered into a convertible note hedge (see Note 10. Derivative Financial InstrumentsDerivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock).
7.0% Junior Subordinated Debentures
On October 30, 2003, we issued $51.5 million in 7.0% junior subordinated debentures to a special-purpose trust, SVB Capital II. Distributions to SVB Capital II are cumulative and are payable quarterly at a fixed rate of 7.0% per annum of the face value of the junior subordinated debentures. Distributions were $0.9 million for both the three months ended June 30, 2007 and 2006, respectively, and $1.8 million for both the six months ended June 30, 2007 and 2006, respectively. We entered into a fixed-to-variable interest rate swap agreement related to these junior subordinated debentures (see Note 10. Derivative Financial Instruments).
Available Lines of Credit
At June 30, 2007, we have available uncommitted federal funds lines of credit totaling $1.25 billion of which $1.04 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. As of June 30, 2007, 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 June 30, 2007 totaled $350.5 million, of which $83.9 million was unused. The market value of collateral pledged at the discount window of the Federal Reserve Bank at June 30, 2007 totaled $63.4 million, of which the entire portion was unused.
10. | Derivative Financial Instruments |
The total notional or contractual amounts, credit risk amount and estimated net fair value for derivatives at June 30, 2007 and December 31, 2006 were as follows:
15
June 30, 2007 | December 31, 2006 | |||||||||||||||||||
(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 | $ | | $ | (4,167 | ) | $ | | $ | | $ | | |||||||
Interest rate swap - subordinated notes |
250,000 | | (7,957 | ) | | | | |||||||||||||
Interest rate swap - junior subordinated debt |
50,000 | | (3,584 | ) | 50,000 | | (1,890 | ) | ||||||||||||
Derivatives - Other |
||||||||||||||||||||
Foreign exchange forwards |
640,864 | 10,729 | 103 | 562,205 | 7,284 | (164 | ) | |||||||||||||
Foreign currency options |
7,401 | 9 | | 27,579 | 140 | | ||||||||||||||
Equity warrant assets |
$ | 111,790 | $ | 35,536 | $ | 35,536 | $ | 113,276 | $ | 37,725 | $ | 37,725 |
(1) | Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by all such counterparties. |
Fair Value Hedges
Concurrent with the issuance of $250.0 million in 5.70% senior notes and $250.0 million in 6.05% subordinated notes, we entered into interest rate swap agreements to hedge against the risk of changes in fair values due to changes in interest rates for both issuances. We use the shortcut method for these fair value hedges as SFAS No. 133 allows us to assume no ineffectiveness if the hedging relationship involves an interest-bearing financial asset or liability and an interest rate swap. In order to assume no ineffectiveness, we ensure that all the shortcut method requirements of SFAS No. 133 for this type of hedge relationship are met. The interest rate swap agreements resulted in interest expense of $0.1 million for the senior notes and $0.1 million for the subordinated notes for the three months ended June 30, 2007, which was recognized in the consolidated statements of income as an increase in interest expense.
The interest rate swap agreement related to our 7.0% junior subordinated debentures provided a cash benefit of $19.2 thousand and $0.1 million for the three months ended June 30, 2007 and 2006, respectively, and $0.1 million and $0.3 million for the six months ended June 30, 2007 and 2006, respectively, related to interest expense that would have been incurred under a 7.0% fixed interest rate. The cash benefit was recognized in the consolidated statements of income as a reduction in interest expense. For the three and six months ended June 30, 2007, we recorded a non-cash increase of $0.6 million and $0.3 million, respectively, for the fair value hedge implemented in April 2006 in connection with our junior subordinated debentures, which was reflected in gains on derivative instruments, net.
Derivatives - Other
We enter into various derivative contracts primarily to provide derivative products or services to customers. All of these contracts are carried at fair value with changes in fair value recorded as gains (losses) on derivatives, net as part of our 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 $4.6 million and $11.4 million for the three months ended June 30, 2007 and 2006, respectively, and $6.0 million and $11.7 million for the six months ended June 30, 2007 and 2006, respectively.
Derivative Fair Value Instruments Indexed to and Potentially Settled in a Companys Own Stock
Concurrent with the issuance of the $150.0 million principal amount of contingently convertible notes, we entered into a convertible note hedge (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 contingently convertible notes.
At issuance, under the terms of the convertible note hedge, upon the occurrence of conversion events, we acquired the right to purchase up to approximately 4,460,610 shares of our common stock from the counterparty at a price of $33.6277 per common share. 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. In 2006, we exercised our right to purchase 3,093 shares under the terms of the convertible bond hedge. We did not exercise any of these options during the six months ended June 30, 2007.
16
At issuance, under the warrant agreement, the counterparty could purchase up to approximately 4,460,608 shares of our common stock at $51.34 per share, upon the occurrence of certain conversion events. Due to conversion events in 2006, the counterparty exercised their right to purchase our stock under the warrant agreement has been decreased by 3,093 shares. No warrants were exercised during the six months ended June 30, 2007.
11. | Common Stock Repurchases |
During the six months ended June 30, 2007, we repurchased 0.8 million shares of our common stock totaling $39.3 million. Subsequently, on July 26, 2007, our Board of Directors authorized a new stock repurchase program that enables us to purchase up to $250.0 million of our common stock, which replaces all existing share repurchase programs. (See Note 17. Subsequent Events).
12. | 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 report information through four strategic operating segments: Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services. In July 2007, we reached a decision to cease operations at SVB Alliant (see Note 17. Subsequent Events). Our Other Business Services group includes SVB Global, SVB Private Client Services and SVB Analytics. Beginning with the first quarter of 2007, income generated by banking services and financial solutions provided to private equity clients is included under the Commercial Banking segment, rather than the SVB Capital segment as previously reported. All prior period amounts have been reclassified to conform with current presentations.
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, SVB Capital and SVB Alliant were determined to be reportable segments as of June 30, 2007. SVB Global, SVB Private Client Services and SVB Analytics did not meet the separate reporting thresholds and as a result, in the table below, have been aggregated in a column labeled Other Business Services for segment reporting purposes. Previously, the Other Business Services segment included Reconciling Items, as described below. All prior period amounts have been reclassified to conform with current presentations.
The Reconciling Items column reflects those 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. 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.
Our segment information at and for the three and six months ended June 30, 2007 and 2006 is as follows:
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(Dollars in thousands) |
Commercial Banking |
SVB Capital |
SVB Alliant |
Other Business Services |
Reconciling Items |
Total | ||||||||||||||||||
Three months ended June 30, 2007 |
||||||||||||||||||||||||
Net interest income |
$ | 86,865 | $ | 244 | $ | 199 | $ | 5,529 | $ | 1,739 | $ | 94,576 | ||||||||||||
Provision for loan losses (1) |
(5,021 | ) | | | | (3,096 | ) | (8,117 | ) | |||||||||||||||
Noninterest income (2) |
30,427 | 6,569 | 3,422 | 1,538 | 13,744 | 55,700 | ||||||||||||||||||
Noninterest expense (3) |
(60,132 | ) | (2,061 | ) | (5,675 | ) | (7,898 | ) | (4,946 | ) | (80,712 | ) | ||||||||||||
Impairment of goodwill |
| | (17,204 | ) | | | (17,204 | ) | ||||||||||||||||
Minority interest in net income of consolidated affiliates |
| | | | (5,825 | ) | (5,825 | ) | ||||||||||||||||
Income (loss) before income tax expense (4) |
$ | 52,139 | $ | 4,752 | $ | (19,258 | ) | $ | (831 | ) | $ | 1,616 | $ | 38,418 | ||||||||||
Total average loans |
$ | 2,953,644 | $ | | $ | | $ | 425,465 | $ | 47,578 | 3,426,687 | |||||||||||||
Total average assets (5) |
4,168,190 | 277,489 | 58,661 | 527,689 | 901,958 | 5,933,987 | ||||||||||||||||||
Total average deposits |
3,621,377 | | | 213,110 | 16,523 | 3,851,010 | ||||||||||||||||||
Goodwill at June 30, 2007 |
$ | | $ | | $ | | $ | 4,092 | $ | | $ | 4,092 | ||||||||||||
Three months ended June 30, 2006 |
||||||||||||||||||||||||
Net interest income |
$ | 75,148 | $ | 375 | $ | 166 | $ | 4,832 | $ | 5,241 | $ | 85,762 | ||||||||||||
Provision for loan losses (1) |
(2,677 | ) | | | | (1,925 | ) | (4,602 | ) | |||||||||||||||
Noninterest income (2) |
26,832 | 5,392 | 2,772 | 501 | 5,481 | 40,978 | ||||||||||||||||||
Noninterest expense (3) |
(60,427 | ) | (2,274 | ) | (5,379 | ) | (4,303 | ) | (2,821 | ) | (75,204 | ) | ||||||||||||
Impairment of goodwill |
| | (18,434 | ) | | | (18,434 | ) | ||||||||||||||||
Minority interest in net income of consolidated affiliates |
| | | | (5,814 | ) | (5,814 | ) | ||||||||||||||||
Income (loss) before income tax expense (4) |
$ | 38,876 | $ | 3,493 | $ | (20,875 | ) | $ | 1,030 | $ | 162 | $ | 22,686 | |||||||||||
Total average loans |
$ | 2,355,321 | $ | | $ | | $ | 341,521 | $ | 34,035 | $ | 2,730,877 | ||||||||||||
Total average assets (5) |
4,243,006 | 208,750 | 70,218 | 449,253 | 325,233 | 5,296,460 | ||||||||||||||||||
Total average deposits |
3,742,212 | | | 206,649 | 15,808 | 3,964,669 | ||||||||||||||||||
Goodwill at June 30, 2006 |
$ | | $ | | $ | 17,204 | $ | | $ | | $ | 17,204 | ||||||||||||
Six months ended June 30, 2007 |
||||||||||||||||||||||||
Net interest income |
$ | 171,322 | $ | 365 | $ | 399 | $ | 11,014 | $ | 4,840 | $ | 187,940 | ||||||||||||
Provision for loan losses (1) |
(7,005 | ) | | | (100 | ) | (605 | ) | (7,710 | ) | ||||||||||||||
Noninterest income (2) |
60,438 | 11,337 | 6,345 | 2,584 | 22,457 | 103,161 | ||||||||||||||||||
Noninterest expense (3) |
(124,647 | ) | (6,443 | ) | (9,264 | ) | (15,059 | ) | (7,416 | ) | (162,829 | ) | ||||||||||||
Impairment of goodwill |
| | (17,204 | ) | | | (17,204 | ) | ||||||||||||||||
Minority interest in net income of consolidated affiliates |
| | | | (16,181 | ) | (16,181 | ) | ||||||||||||||||
Income (loss) before income tax expense (4) |
$ | 100,108 | $ | 5,259 | $ | (19,724 | ) | $ | (1,561 | ) | $ | 3,095 | $ | 87,177 | ||||||||||
Total average loans |
$ | 2,878,821 | $ | | $ | | $ | 424,886 | $ | 38,857 | $ | 3,342,564 | ||||||||||||
Total average assets (5) |
4,169,088 | 260,582 | 60,400 | 523,314 | 815,429 | 5,828,813 | ||||||||||||||||||
Total average deposits |
3,623,985 | | | 211,017 | 16,011 | 3,851,013 | ||||||||||||||||||
Goodwill at June 30, 2007 |
$ | | $ | | $ | | $ | 4,092 | $ | | $ | 4,092 | ||||||||||||
Six months ended June 30, 2006 |
||||||||||||||||||||||||
Net interest income |
$ | 147,050 | $ | 440 | $ | 279 | $ | 8,790 | $ | 13,082 | $ | 169,641 | ||||||||||||
(Provision for) recovery of loan losses (1) |
(2,107 | ) | | | 1,090 | (1,111 | ) | (2,128 | ) | |||||||||||||||
Noninterest income (2) |
48,349 | 5,827 | 5,210 | 1,431 | 3,562 | 64,379 | ||||||||||||||||||
Noninterest expense (3) |
(109,186 | ) | (4,354 | ) | (10,784 | ) | (9,952 | ) | (11,616 | ) | (145,892 | ) | ||||||||||||
Impairment of goodwill |
| | (18,434 | ) | | | (18,434 | ) | ||||||||||||||||
Minority interest in net income of consolidated affiliates |
| | | | (6,058 | ) | (6,058 | ) | ||||||||||||||||
Income (loss) before income tax expense (4) |
$ | 84,106 | $ | 1,913 | $ | (23,729 | ) | $ | 1,359 | $ | (2,141 | ) | $ | 61,508 | ||||||||||
Total average loans |
$ | 2,332,493 | $ | | $ | | $ | 334,522 | $ | 30,334 | $ | 2,697,349 | ||||||||||||
Total average assets (5) |
4,319,427 | 195,253 | 73,246 | 420,290 | 272,533 | 5,280,749 | ||||||||||||||||||
Total average deposits |
3,803,063 | | | 183,415 | 26,399 | 4,012,877 | ||||||||||||||||||
Goodwill at June 30, 2006 |
$ | | $ | | $ | 17,204 | $ | | $ | | $ | 17,204 |
(1) | For segment reporting purposes, we report net charge-offs as the provision for or recovery of loan losses. Thus, the Reconciling Items column includes $3.1 million and $1.9 million of net charge-offs for the three months ended June 30, 2007 and 2006, respectively, and $0.6 million and $1.1 million for the six months ended June 30, 2007 and 2006, respectively, which represents the difference between net charge-offs and the provision for loan losses. |
(2) | Noninterest income presented in the Commercial Banking segment includes warrant income of $4.0 million and $3.5 million for the three months ended June 30, 2007 and 2006, respectively and $7.8 million and $3.8 million for the six months ended June 30, 2007 and 2006, respectively. |
(3) | The Commercial Banking segment includes direct depreciation and amortization of $0.9 million and $0.8 million for the three months ended June 30, 2007 and 2006, respectively and $1.7 million and $1.6 million for the six months ended June 30, 2007 and 2006, respectively. |
(4) | The internal reporting model used by management to assess segment performance does not calculate tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates. |
(5) | Total Average Assets equals the greater of total loans or the sum of total deposits and total stockholders equity for each segment. |
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13. | 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 funds. 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.
Commitments to Extend Credit
Commitments which are available for funding, due to clients meeting all collateral, compliance, and financial covenants required under loan commitment agreements, totaled $4.1 billion at each of June 30, 2007 and December 31, 2006, respectively. Out of these available commitment balances, fixed interest rate commitments were $450.0 million and $611.7 million at June 30, 2007 and December 31, 2006, respectively. Commitments which are unavailable for funding, due to clients not meeting all collateral, compliance, and financial covenants required under loan commitment agreements, totaled $0.8 billion and $0.6 billion at June 30, 2007 and December 31, 2006, respectively. Additionally, at June 30, 2007 and December 31, 2006, we had an aggregate maximum lending limit of $497.6 million and $468.1 million, respectively, related to our accounts receivable factoring arrangements. We extend credit under accounts receivable factoring arrangements when our clients sales invoices are deemed credit worthy under existing underwriting practices.
Commercial and Standby Letters of Credit
The table below summarizes our commercial and standby letters of credit at June 30, 2007. 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 |
$ | 594,555 | $ | 32,738 | $ | 627,293 | $ | 627,293 | ||||
Performance standby letters of credit |
22,437 | 6,384 | 28,821 | 28,821 | ||||||||
Commercial letters of credit |
14,579 | | 14,579 | 14,579 | ||||||||
Total |
$ | 631,571 | $ | 39,122 | $ | 670,693 | $ | 670,693 | ||||
At June 30, 2007 and December 31, 2006, deferred fees related to financial and performance standby letters of credit were $3.5 million and $3.9 million, respectively. At June 30, 2007, collateral in the form of cash and investment securities available to us to reimburse losses, if any, under financial and performance standby letters of credits was $269.9 million.
Credit Card Guarantees
The total amount of credit card guarantees was $76.4 million at June 30, 2007. It is not considered probable that material losses would be incurred by the Bank as a result of these arrangements. Credit card fees totaled $1.6 million and $1.0 million for the three months ended June 30, 2007 and 2006, respectively, and $2.8 million and $2.2 million for the six months ended June 30, 2007 and 2006, respectively.
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Commitments to Invest in Private Equity Funds
The following table details our total capital commitments and our unfunded commitments at June 30, 2007.
Our Ownership in Limited Partner (Dollars in thousands) |
Our Capital Commitment |
Our Unfunded Commitment |
Our Ownership | ||||||
Silicon Valley BancVentures, LP |
$ | 6,000 | $ | 660 | 10.7 | % | |||
SVB Capital Partners II, LP (1) |
1,200 | 1,050 | 5.1 | ||||||
SVB Strategic Investors Fund, LP |
15,300 | 3,213 | 12.6 | ||||||
SVB Strategic Investors Fund II, LP |
15,000 | 9,300 | 8.6 | ||||||
SVB Strategic Investors Fund III, LP |
15,000 | 12,750 | 5.9 | ||||||
Partners for Growth, LP |
25,000 | 9,750 | 50.0 | ||||||
Partners for Growth II, LP |
15,000 | 12,750 | 24.2 | ||||||
Gold Hill Venture Lending 03, LP (2) |
20,000 | 3,800 | 9.3 | ||||||
SVB India Capital Partners I, LP |
7,500 | 6,000 | 13.9 | ||||||
Other Fund Investments (3) |
|
138,016 |
|
79,792 |
| % | |||
Total |
$ | 258,016 | $ | 139,065 | |||||
(1) | Includes 1.3% direct ownership in SVB Capital Partners II, LP through SVB Capital Partners II, LLC, and 3.8% indirect ownership through our investment in SVB Strategic Investors Fund II, LP. |
(2) | Includes 4.8% direct ownership in Gold Hill Venture Lending 03, LP and its parallel funds. In addition, includes 4.5% indirect ownership interest through Gold Hill Venture Lending Partners, 03, LLC. |
(3) | Represents commitments to 310 private equity funds where our ownership interest is less than 5%. |
14. | Income Taxes |
On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the entitys financial statements in accordance with SFAS No. 109. As a result, there was no cumulative effect relating to our adoption of FIN 48.
The total amount of unrecognized tax benefits at January 1, 2007 was $1.0 million, all of which related to tax benefits that, if recognized, would reduce our effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits as a component of operating expenses. Total accrued interest and penalties at January 1, 2007 were immaterial. At June 30, 2007, our unrecognized tax benefits increased by $0.1 million to $1.1 million, the recognition of which would have an effect of $1.1 million on the effective tax rate. Total accrued interest and penalties at June 30, 2007 was $0.1 million.
We expect that the amount of unrecognized tax benefits will change in the next 12 months; however we do not expect the change to have a significant 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 2003 and subsequent years remain open to examination by the Internal Revenue Service. Our California and Massachusetts tax returns for the years 2002 through 2006 and 2003 through 2006, respectively, remain open to examination.
15. | Related Party Transactions |
In January 2007, SVB Financial increased the revolving line of credit facility to Gold Hill Venture Lending 03, LP, a venture debt fund (Gold Hill) and its affiliated funds, from a total commitment amount of $40.0 million to $75.0 million. Contemporaneously with the increase, SVB Financial syndicated $35.0 million, or 46.667% of the total facility, to another lender. SVB Financial has a 9.3% effective ownership interest in Gold Hill, as well as a 90.7% majority interest in its general partner, Gold Hill Venture Lending Partners 03, LLC. The highest outstanding balance under the facility for the six months ended June 30, 2007 was $42.0 million.
In May 2007, SVB Business Partners (Shanghai) Co., Ltd., a wholly-owned subsidiary of SVB Financial (SVB Shanghai), amended its agreement with New Enterprise Associates (Beijing), Ltd. (NEA Beijing), under which SVB Shanghai provides business consulting services, to increase its annual services fees to $87,000. The original agreement was entered into in October 2006 for a three year term. NEA Beijing is a wholly-owned subsidiary of NEA Management Company, LLC, a company in which Richard Kramlich, a director of SVB Financial, has an ownership interest.
In June 2007, Mr. Felda Hardymon, a director of SVB Financial, invested $0.5 million in SVB Capital Partners II, L.P., a fund in the current amount of $90.3 million that invests in privately held companies (SCPII). SCPII is managed by its general partner, a wholly-owned subsidiary of SVB Financial, which holds a minority interest in the fund. Additionally in June 2007, Mr. Jim Porter, also a director of SVB Financial, invested $0.2 million in SVB India Capital Partners I, L.P. (SICP), a $53.9 million fund which primarily invests in privately-held companies in India. SICP is managed by its general partner, a wholly-owned subsidiary of SVB Financial, which holds a minority interest in the fund.
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16. | Legal Matters |
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, reserves have been established 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 operations.
17. | Subsequent Events |
Stock Repurchase Program
On July 26, 2007, our Board of Directors authorized a stock repurchase program that enables us to purchase up to $250.0 million of our common stock. This program expires on July 31, 2008 and replaces all share repurchase programs. We may, at our discretion, exercise this additional repurchase authority any time on or before July 31, 2008 in the open market, through block trades, through an accelerated stock repurchase program or otherwise, pursuant to applicable securities laws. Depending on market conditions, availability of funds, and other relevant factors, we may begin or suspend repurchases at any time prior to the termination of the repurchase program on July 31, 2008, without any prior notice.
For the period July 1, 2007 through August 1, 2007, we repurchased under a non-discretionary automatic repurchase plan 172,500 shares of our common stock at a total cost of $9.2 million. As of close of business, August 1, 2007, $247.5 million of our common shares may still be repurchased under our current common stock repurchase program.
SVB Alliant
In July 2007, we reached a decision to cease operations at SVB Alliant. We will bring SVB Alliants activities to an orderly close following notification of and coordination with its clients and subject to compliance with regulatory and legal requirements. The decision affects SVB Alliant and SVB Alliant Europe Limited. We are working with SVB Alliants managing director team to finalize client arrangements and will make an assessment of costs related to employment matters and other activities necessary to conclude the units business operations. We are currently not able in good faith to make a determination of the estimates or range of estimates with respect to the cessation of operations of SVB Alliant. We expect costs associated with concluding SVB Alliants business operations to occur primarily in the third quarter of 2007.
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 Part 1. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations below, 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 costs (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, objectives and expectations of our management for the Company |
| Forecasts of expected levels of provisions for loan losses, loan growth and client funds |
| Forecasts of venture capital and private equity funding levels |
| Forecasts of future interest rates and future economic performance |
| 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 impact to earnings from a change in interest rates |
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| Realization, timing and performance of equity or other investments |
| Management of our liquidity position |
| Development of our later-stage corporate technology lending efforts |
| Growth in loan balances |
| Credit quality of our loan portfolio |
| Levels of nonperforming loans |
| Capital and liquidity provided by funds generated through retained earnings |
| Activities for which capital will be required |
| Ability to expand on opportunities to increase our liquidity |
| Use of excess capital |
| Volatility of performance of our investment portfolio |
| Impact of our tax obligations and positions |
| Profitability of our products and services |
| Venture capital and private equity funding levels |
| Strategic initiatives |
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 Part II. Item 1A. Risk Factors below. 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 of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2006 (2006 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.
Overview of Company Operations
SVB Financial Group is a diversified financial services company, as well as a bank holding company and financial holding company. The company was incorporated in the state of Delaware in March 1999. We offer commercial banking products and services through our banking subsidiary, Silicon Valley Bank (the Bank), which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. The Banks deposits are insured by the Federal Deposit Insurance Corporation. We operate through 27 offices in the United States and three internationally in the United Kingdom, India and China. Our corporate headquarters is located at 3003 Tasman Drive, Santa Clara, California 95054, and our telephone number is 408.654.7400. Hereafter when we refer to we, our, us or the Company, we mean SVB Financial Group and all of its subsidiaries collectively, including the Bank. When we refer to SVB Financial or the parent company, we are referring only to the parent company, SVB Financial Group.
For more than 20 years, we have been dedicated to helping entrepreneurs succeed, especially in the technology, life science, private equity and premium wine industries. We provide our clients with a diversity of products and services to support them throughout their life cycles, regardless of their size or stage of maturity. We offer a range of financial services that generate three distinct primary sources of income: interest rate differentials, fee-based services and investments in private equity funds and other securities.
In part, our income is generated from interest rate differentials. The difference between the interest rates received on interest-earning assets, such as loans extended to clients and securities held in our investment portfolio, and the interest rates
22
paid by us on interest-bearing liabilities, such as deposits and borrowings, accounts for the major portion of our earnings. Our deposits are largely obtained from commercial clients within our technology, life science, private equity, and premium wine industry sectors, and, to a lesser extent, from individuals served by our SVB Private Client Services group. We do not obtain deposits from conventional retail sources and currently have no brokered deposits.
Fee-based services also generate income for our business. We market a full range of financial services to all of our commercial and private equity firm clients. In addition to commercial banking and private client services, we offer through our various subsidiaries fee-based investment advisory, asset management, global consulting and valuation services. Our ability to integrate and cross-sell our diverse financial services to our clients is a strength of our business model.
We also generate income from other sources. We seek to obtain returns through investments in private equity funds. As of June 30, 2007, we managed six limited partnerships: three private equity funds that invest directly in privately held companies and three funds that invest in other private equity funds. Additionally, as part of negotiated credit facilities and certain other services, we frequently obtain rights to acquire stock in the form of warrants in certain client companies.
We have four operating segments in which we report our financial information: Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services.
SVB Alliant
In July 2007, we reached a decision to cease operations at SVB Alliant. We will bring SVB Alliants activities to an orderly close following notification of and coordination with its clients and subject to compliance with regulatory and legal requirements. The decision affects SVB Alliant and SVB Alliant Europe Limited. We are working with SVB Alliants managing director team to finalize client arrangements and will make an assessment of costs related to employment matters and other activities necessary to conclude the units business operations. We are currently not able in good faith to make a determination of the estimates or range of estimates with respect to the cessation of operations of SVB Alliant. We expect costs associated with concluding SVB Alliants business operations to occur primarily in the third quarter of 2007.
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 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, and 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.
There have been no significant changes during the six months ended June 30, 2007 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 in our 2006 Form 10-K.
Recent Accounting Pronouncements
Please refer to the discussion of our recent accounting pronouncements in Note 2 of the Notes to Interim Consolidated Financial Statements (unaudited) in Part I, Item 1, above.
Results of Operations
Net Interest Income and Margin (Fully Taxable-Equivalent Basis)
Net interest income is defined as the difference between interest earned primarily on loans, investment securities, federal funds sold, securities purchased under agreement to resell and other short-term investment securities, and interest paid on funding sources. 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.
Net Interest Income (Fully Taxable-Equivalent Basis)
Net interest income was $94.9 million for the three months ended June 30, 2007, an increase of $8.7 million or 10.1 percent, compared to $86.2 million for the comparable 2006 period. The increase in net interest income was primarily due to an $18.8 million increase in income from our loan portfolio, partially offset by a $4.2 million decrease in interest income from our investment securities portfolio and an increase in interest expense of $7.8 million.
23
The increase in interest income from our loan portfolio is primarily related to growth in our loan portfolio. Average loans outstanding for the three months ended June 30, 2007 totaled $3.43 billion, compared to $2.73 billion for the comparable 2006 period. The increase in average loans outstanding of $695.8 million was driven by our commercial loan portfolio, which increased by $592.2 million as a result of our focus on serving later-staged clients, loan growth increases from all core industry segments, with particularly strong growth in loans to private equity firms for capital calls, as well as improvements in economic activity in the markets served by us. The average yield on our loan portfolio was 10.42 percent for the three months ended June 30, 2007, compared to 10.31 percent for the comparable 2006 period.
The decrease in interest income from our investment securities portfolio reflects lower levels of investment securities due to scheduled maturities and prepayments. Average investment securities were $1.39 billion for the three months ended June 30, 2007, a decrease of $389.4 million or 21.9 percent, from $1.78 billion for the comparable 2006 period.
The increase in interest expense is primarily related to increases in short-term borrowings and long-term debt. Average short-term borrowings increased by $100.7 million to $415.1 million for the three months ended June 30, 2007, compared to $314.4 million for the comparable 2006 period, and average long-term debt increased by $403.0 million to $602.2 million for the three months ended June 30, 2007, compared to $199.2 million for the comparable 2006 period. In May 2007, we issued $250.0 million in senior notes due in 2012 with a fixed coupon of 5.70%, and $250.0 million in subordinated notes due in 2017 with a fixed coupon of 6.05% (the Notes). Both debt issuances were swapped to a floating rate for interest rate risk management purposes. The increases in average short-term borrowings and long-term debt were used to fund the growth of our loan portfolio.
Net interest income was $188.6 million for the six months ended June 30, 2007, an increase of $18.1 million or 10.6 percent, compared to $170.5 million for the comparable 2006 period. The increase in net interest income was primarily due to an increase of $37.9 million, primarily related to growth in our loan portfolio, the effect of increases in our base prime lending rate, which increased to 8.25 percent for the six months ended June 30, 2007, compared to 7.65 percent for the comparable 2006 period, as well as a $1.3 million increase of fee income, which resulted from loan prepayments recorded in the first quarter of 2007. This increase was partially offset by a decrease of $8.6 million in interest income from our investment securities portfolio due to scheduled maturities and prepayments and the sale of $119.1 million of securities in the second quarter of 2006, as well as an increase of $14.9 million in interest expense primarily from short-term borrowings and long-term debt.
Net Interest Margin (Fully Taxable-Equivalent Basis)
Net interest margin was 7.39 percent for the three months ended June 30, 2007, compared to 7.30 percent for the comparable 2006 period. The increase in net interest margin was largely due to growth in our loan portfolio, as well as increases in yield of our loan portfolio driven by increases in short-term interest rates, partially offset by increases in the balances outstanding of our short-term borrowings and long-term debt used to fund the growth of our loan portfolio.
Net interest margin was 7.48 percent for the six months ended June 30, 2007, compared to 7.28 percent for the comparable 2006 period. The increase in net interest margin was largely due to growth and increases in yield of our loan portfolio and increased fee income due to loan prepayments, partially offset by increases in the balances outstanding of our short-term borrowings and long-term debt used to fund the growth of our loan portfolio.
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 table sets 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 six months ended June 30, 2007 and 2006, respectively.
24
Average Balances, Rates and Yields Three Months Ended June 30, 2007 and 2006
Three months ended June 30, | ||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||
(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 agreement to resell and other short-term investment securities (1) |
$ | 335,248 | $ | 4,341 | 5.19 | % | $ | 225,294 | $ | 2,530 | 4.50 | % | ||||||||
Investment securities: |
||||||||||||||||||||
Taxable |
1,341,339 | 15,782 | 4.72 | 1,709,396 | 19,600 | 4.60 | ||||||||||||||
Non-taxable (2) |
49,410 | 857 | 6.96 | 70,778 | 1,202 | 6.81 | ||||||||||||||
Loans: |
||||||||||||||||||||
Commercial |
2,889,025 | 78,933 | 10.96 | 2,296,860 | 62,037 | 10.83 | ||||||||||||||
Real estate construction and term |
238,967 | 4,024 | 6.75 | 181,012 | 3,069 | 6.80 | ||||||||||||||
Consumer and other |
298,695 | 6,094 | 8.18 | 253,005 | 5,113 | 8.11 | ||||||||||||||
Total loans, net of unearned income |
3,426,687 | 89,051 | 10.42 | 2,730,877 | 70,219 | 10.31 | ||||||||||||||
Total interest-earning assets |
5,152,684 | 110,031 | 8.57 | 4,736,345 | 93,551 | 7.92 | ||||||||||||||
Cash and due from banks |
267,797 | 236,714 | ||||||||||||||||||
Allowance for loan losses |
(40,136 | ) | (37,149 | ) | ||||||||||||||||
Goodwill |
21,107 | 35,435 | ||||||||||||||||||
Other assets (3) |
532,535 | 325,115 | ||||||||||||||||||
Total assets |
$ | 5,933,987 | $ | 5,296,460 | ||||||||||||||||
Funding sources: |
||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
NOW deposits |
$ | 40,494 | $ | 40 | 0.40 | % | $ | 38,749 | $ | 43 | 0.45 | % | ||||||||
Regular money market deposits |
167,893 | 507 | 1.21 | 211,356 | 462 | 0.88 | ||||||||||||||
Bonus money market deposits |
487,826 | 1,204 | 0.99 | 593,297 | 1,299 | 0.88 | ||||||||||||||
Time deposits |
326,557 | 817 | 1.00 | 321,778 | 532 | 0.66 | ||||||||||||||
Total interest-bearing deposits |
1,022,770 | 2,568 | 1.01 | 1,165,180 | 2,336 | 0.80 | ||||||||||||||
Short-term borrowings |
415,093 | 5,561 | 5.37 | 314,431 | 3,987 | 5.09 | ||||||||||||||
Senior and subordinated notes |
249,608 | 3,845 | 6.18 | | | | ||||||||||||||
Contingently convertible debt |
148,792 | 240 | 0.65 | 147,895 | 233 | 0.63 | ||||||||||||||
Junior subordinated debentures |
51,173 | 874 | 6.85 | 49,498 | 797 | 6.46 | ||||||||||||||
Other long-term debt |
152,669 | 2,067 | 5.43 | 1,788 | 15 | 3.36 | ||||||||||||||
Total interest-bearing liabilities |
2,040,105 | 15,155 | 2.98 | 1,678,792 | 7,368 | 1.76 | ||||||||||||||
Portion of noninterest-bearing funding sources |
3,112,579 | 3,057,553 | ||||||||||||||||||
Total funding sources |
5,152,684 | 15,155 | 1.18 | 4,736,345 | 7,368 | 0.62 | ||||||||||||||
Noninterest-bearing funding sources: |
||||||||||||||||||||
Demand deposits |
2,828,240 | 2,799,489 | ||||||||||||||||||
Other liabilities |
193,279 | 95,068 | ||||||||||||||||||
Minority interest in capital of consolidated affiliates |
200,815 | 138,864 | ||||||||||||||||||
Stockholders equity |
671,548 | 584,247 | ||||||||||||||||||
Portion used to fund interest-earning assets |
(3,112,579 | ) | (3,057,553 | ) | ||||||||||||||||
Total liabilities, minority interest, and stockholders equity |
$ | 5,933,987 | $ | 5,296,460 | ||||||||||||||||
Net interest income and margin |
$ | 94,876 | 7.39 | % | $ | 86,183 | 7.30 | % | ||||||||||||
Total deposits |
$ | 3,851,010 | $ | 3,964,669 | ||||||||||||||||
(1) | Includes average interest-bearing deposits in other financial institutions of $50.9 million and $32.3 million for the three months ended June 30, 2007 and 2006, 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. The tax equivalent adjustments were $0.3 million and $0.4 million for the three months ended June 30, 2007 and 2006, respectively. |
(3) | Average equity investments of $237.7 million and $129.5 million for the three months ended June 30, 2007 and 2006, respectively, were classified as Other Assets as they were noninterest-earning assets. |
25
Average Balances, Rates and Yields Six Months Ended June 30, 2007 and 2006
Six months ended June 30, | ||||||||||||||||||||
2007 | 2006 | |||||||||||||||||||
(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 agreement to resell and other short-term investment securities (1) |
$ | 314,526 | $ | 8,175 | 5.24 | % | $ | 211,643 | $ | 4,570 | 4.35 | % | ||||||||
Investment securities: |
||||||||||||||||||||
Taxable |
1,372,996 | 32,075 | 4.71 | 1,744,578 | 39,994 | 4.62 | ||||||||||||||
Non-taxable (2) |
51,702 | 1,791 | 6.99 | 72,693 | 2,468 | 6.85 | ||||||||||||||
Loans: |
||||||||||||||||||||
Commercial |
2,810,384 | 154,254 | 11.07 | 2,269,060 | 120,601 | 10.72 | ||||||||||||||
Real estate construction and term |
234,534 | 7,847 | 6.75 | 177,874 | 6,009 | 6.81 | ||||||||||||||
Consumer and other |
297,646 | 12,182 | 8.25 | 250,415 | 9,757 | 7.86 | ||||||||||||||
Total loans, net of unearned income |
3,342,564 | 174,283 | 10.51 | 2,697,349 | 136,367 | 10.19 | ||||||||||||||
Total interest-earning assets |
5,081,788 | 216,324 | 8.58 | 4,726,263 | 183,399 | 7.83 | ||||||||||||||
Cash and due from banks |
272,386 | 241,607 | ||||||||||||||||||
Allowance for loan losses |
(41,864 | ) | (37,590 | ) | ||||||||||||||||
Goodwill |
21,201 | 35,536 | ||||||||||||||||||
Other assets (3) |
495,302 | 314,933 | ||||||||||||||||||
Total assets |
$ | 5,828,813 | $ | 5,280,749 | ||||||||||||||||
Funding sources: |
||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||
NOW deposits |
$ | 38,893 | $ | 76 | 0.39 | % | $ | 40,279 | $ | 84 | 0.42 | % | ||||||||
Regular money market deposits |
167,933 | 901 | 1.08 | 247,195 | 997 | 0.81 | ||||||||||||||
Bonus money market deposits |
501,419 | 2,265 | 0.91 | 606,473 | 2,537 | 0.84 | ||||||||||||||
Time deposits |
319,640 | 1,514 | 0.96 | 317,856 | 1,043 | 0.66 | ||||||||||||||
Total interest-bearing deposits |
1,027,885 | 4,756 | 0.93 | 1,211,803 | 4,661 | 0.78 | ||||||||||||||
Short-term borrowings |
481,592 | 12,855 | 5.38 | 253,699 | 6,230 | 4.95 | ||||||||||||||
Senior and subordinated notes |
130,716 | 3,845 | 5.93 | | | | ||||||||||||||
Contingently convertible debt |
148,676 | 478 | 0.65 | 147,800 | 465 | 0.63 | ||||||||||||||
Junior subordinated debentures |
51,165 | 1,710 | 6.74 | 49,842 | 1,517 | 6.14 | ||||||||||||||
Other long-term debt |
152,669 | 4,113 | 5.43 | 967 | 21 | 4.38 | ||||||||||||||
Total interest-bearing liabilities |
1,992,703 | 27,757 | 2.81 | 1,664,111 | 12,894 | 1.56 | ||||||||||||||
Portion of noninterest-bearing funding sources |
3,089,085 | 3,062,152 | ||||||||||||||||||
Total funding sources |
5,081,788 | 27,757 | 1.10 | 4,726,263 | 12,894 | 0.55 | ||||||||||||||
Noninterest-bearing funding sources: |
||||||||||||||||||||
Demand deposits |
2,823,128 | 2,801,074 | ||||||||||||||||||
Other liabilities |
167,592 | 107,202 | ||||||||||||||||||
Minority interest in capital of consolidated affiliates |
186,130 | 129,886 | ||||||||||||||||||
Stockholders equity |
659,260 | 578,476 | ||||||||||||||||||
Portion used to fund interest-earning assets |
(3,089,085 | ) | (3,062,152 | ) | ||||||||||||||||
Total liabilities, minority interest, and stockholders equity |
$ | 5,828,813 | $ | 5,280,749 | ||||||||||||||||
Net interest income and margin |
$ | 188,567 | 7.48 | % | $ | 170,505 | 7.28 | % | ||||||||||||
Total deposits |
$ | 3,851,013 | $ | 4,012,877 | ||||||||||||||||
(1) | Includes average interest-bearing deposits in other financial institutions of $46.4 million and $30.0 million for the six months ended June 30, 2007 and 2006, 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. The tax equivalent adjustments were $0.6 million and $0.9 million for the six months ended June 30, 2007 and 2006, respectively. |
(3) | Average equity investments of $224.4 million and $128.6 million for the six months ended June 30, 2007 and 2006, respectively, were classified as Other Assets as they were noninterest-earning assets. |
26
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. 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 amount 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.
2007 Compared to 2006 | 2007 Compared to 2006 | |||||||||||||||||||||||
Three Months Ended June 30, Increase (Decrease) Due to Change in |
Six Months Ended June 30, Increase (Decrease) Due to Change in |
|||||||||||||||||||||||
(Dollars in thousands) |
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Federal funds sold, securities purchased under agreement to resell and other short-term investment securities |
$ | 1,379 | $ | 432 | $ | 1,811 | $ | 2,540 | $ | 1,065 | $ | 3,605 | ||||||||||||
Investment securities (Taxable) |
(4,319 | ) | 501 | (3,818 | ) | (8,667 | ) | 748 | (7,919 | ) | ||||||||||||||
Investment securities (Non-Taxable) |
(370 | ) | 25 | (345 | ) | (729 | ) | 52 | (677 | ) | ||||||||||||||
Loans |
18,075 | 757 | 18,832 | 33,523 | 4,393 | 37,916 | ||||||||||||||||||
Increase in interest income, net |
14,765 | 1,715 | 16,480 | 26,667 | 6,258 | 32,925 | ||||||||||||||||||
Interest expense: |
||||||||||||||||||||||||
NOW deposits |
2 | (5 | ) | (3 | ) | (2 | ) | (6 | ) | (8 | ) | |||||||||||||
Regular money market deposits |
(107 | ) | 152 | 45 | (372 | ) | 276 | (96 | ) | |||||||||||||||
Bonus money market deposits |
(248 | ) | 153 | (95 | ) | (464 | ) | 192 | (272 | ) | ||||||||||||||
Time deposits |
8 | 277 | 285 | 6 | 465 | 471 | ||||||||||||||||||
Short-term borrowings |
1,338 | 236 | 1,574 | 6,040 | 585 | 6,625 | ||||||||||||||||||
Senior and subordinated notes |
3,845 | | 3,845 | 3,845 | | 3,845 | ||||||||||||||||||
Contingently convertible debt |
1 | 6 | 7 | 3 | 10 | 13 | ||||||||||||||||||
Junior subordinated debentures |
28 | 49 | 77 | 41 | 152 | 193 | ||||||||||||||||||
Other long-term debt |
2,037 | 15 | 2,052 | 4,092 | | 4,092 | ||||||||||||||||||
Increase in interest expense, net |
6,904 | 883 | 7,787 | 13,189 | 1,674 | 14,863 | ||||||||||||||||||
Increase in net interest income |
$ | 7,861 | $ | 832 | $ | 8,693 | $ | 13,478 | $ | 4,584 | $ | 18,062 | ||||||||||||
Provision for Loan Losses
The provision for loan losses is based on our evaluation of the adequacy of the existing allowance for loan losses in relation to total loans and on our periodic assessment of the inherent and identified risk dynamics of the loan portfolio resulting from reviews of selected individual loans.
We recorded a provision for loan losses of $8.1 million and $7.7 million for the three and six months ended June 30, 2007, respectively, compared to $4.6 million and $2.1 million for the comparable 2006 periods. The provision of $8.1 million for the three months ended June 30, 2007 resulted from gross loan charge-offs of $6.3 million; and an increase in the provision of $3.0 million related to growth in our loan portfolio. These increases were partially offset by $1.2 million realized in loan recoveries. Our credit quality remains strong as we continue to experience historically low losses in our loan portfolio.
We realized net charge-offs of $5.1 million and $7.1 million for the three and six months ended June 30, 2007, respectively, compared to $2.7 million and $1.0 million for the comparable 2006 periods. Nonperforming loans were 0.32 percent of total gross loans at June 30, 2007, compared to 0.25 percent at June 30, 2006.
27
Noninterest Income
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||
Gains on investment securities, net |
$ | 13,641 | $ | 900 | | % | $ | 25,892 | $ | 839 | | % | ||||||
Client investment fees |
12,652 | 10,972 | 15.3 | 24,686 | 20,609 | 19.8 | ||||||||||||
Foreign exchange fees |
5,805 | 5,100 | 13.8 | 11,064 | 10,312 | 7.3 | ||||||||||||
Deposit service charges |
3,567 | 2,310 | 54.4 | 6,778 | 4,488 | 51.0 | ||||||||||||
Gains on derivative instruments, net |
4,751 | 10,807 | (56.0 | ) | 6,724 | 7,822 | (14.0 | ) | ||||||||||
Corporate finance fees |
3,487 | 2,775 | 25.7 | 6,402 | 5,213 | 22.8 | ||||||||||||
Letter of credit and standby letter of credit income |
2,761 | 2,642 | 4.5 | 5,692 | 4,992 | 14.0 | ||||||||||||
Other |
9,036 | 5,472 | 65.1 | 15,923 | 10,104 | 57.6 | ||||||||||||
Total noninterest income |
$ | 55,700 | $ | 40,978 | 35.9 | % | $ | 103,161 | $ | 64,379 | 60.2 | % | ||||||
Gains on Investment Securities, Net
Gains on investment securities, net was $13.6 million for the three months ended June 30, 2007, compared to $0.9 million for the comparable 2006 period. Net gains on investment securities of $13.6 million in the second quarter of 2007 were mainly attributable to net increases of $12.1 million in the fair value of two investments from one of our sponsored debt funds, which are subject to sale restrictions, or lock-up, until the fourth quarter of 2007. Of the $12.1 million in gains, $6.0 million was attributable to minority interests, and these amounts are reflected in the interim consolidated statements of income under the caption Minority Interest in Net Income of Consolidated Affiliates.
Gains on investment securities, net was $25.9 million for the six months ended June 30, 2007, compared to $0.8 million for the comparable 2006 period. Net gains on investment securities of $25.9 million for the six months ended June 30, 2007 were mainly attributable to net gains of $12.6 million from one of our sponsored debt funds and net gains of $11.8 million from two of our managed funds of funds, primarily related to net increases in the fair values of fund investments. Of the $24.4 million gain from these three consolidated funds, $17.2 million were attributable to minority interests, and these amounts are reflected in the interim consolidated statements of income under the caption Minority Interest in Net Income of Consolidated Affiliates.
At June 30, 2007, we held investments, either directly or through our managed investment funds, in 375 private equity funds, 54 companies and three venture debt funds.
Client Investment Fees
Client investment fees were $12.7 million and $24.7 million for the three and six months ended June 30, 2007, respectively, compared to $11.0 million and $20.6 million for the comparable 2006 periods. The increase in client investment fees was attributable to the growth in average client investment funds. The following table summarizes average client investment funds at June 30, 2007 and 2006.
June 30, | ||||||
(Dollars in millions) |
2007 | 2006 | ||||
Average client investment funds: |
||||||
Client directed investment assets (1) |
$ | 12,252 | $ | 10,774 | ||
Client investment assets under management |
5,476 | 4,252 | ||||
Sweep money market funds |
2,330 | 2,226 | ||||
Total average client investment funds (2) |
$ | 20,058 | $ | 17,252 | ||
(1) | Mutual funds and Repurchase Agreement Program assets. |
(2) | Client funds invested through SVB Financial Group are maintained at third party financial institutions. |
Foreign Exchange Fees
Foreign exchange fees represent the income differential between purchases and sales of foreign currency exchange on behalf of our clients. Foreign exchange fees were $5.8 million and $11.1 million for the three and six months ended June 30 2007, compared to $5.1 million and $10.3 million for the comparable 2006 periods. The increase was primarily due to increases in volumes and higher notional values of international trades by our clients. Foreign exchange fees were previously presented as a component of gains on derivative instruments, net, within noninterest income in the consolidated statements of income.
28
Deposit Service Charges
Deposit service charges were $3.6 million and $6.8 million for the three and six months ended June 30, 2007, compared to $2.3 million and $4.5 million for the comparable 2006 periods. The increases were attributable to an increase in fee rates and volumes of transactions.
Gains on Derivative Instruments, Net
Gains on derivative instruments, net, were $4.8 million for the three months ended June 30, 2007, compared to $10.8 million for the comparable 2006 period. The decrease of $6.0 million was primarily due to unfavorable changes related to equity warrant assets and losses from foreign exchange forwards used to reduce our exposure to foreign currency denominated loans, offset by favorable changes in the fair value hedge agreement for our junior subordinated debentures.
Gains on derivative instruments, net, were $6.7 million for the six months ended June 30, 2007, compared to $7.8 million for the comparable 2006 period. The decrease of $1.1 million was primarily due to unfavorable changes related to equity warrant assets, offset by favorable changes in the fair value hedge agreement for our junior subordinated debentures.
A summary of gains on derivative instruments, net, for the three and six months ended June 30, 2007 and 2006 is as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
(Losses) gains on foreign exchange forwards, net (1) |
$ | (421 | ) | $ | 1,019 | (141.3 | )% | $ | 471 | $ | 579 | (18.7 | )% | |||||||||
Change in fair value of interest rate swap (2) |
598 | (1,586 | ) | (137.7 | ) | 257 | (4,457 | ) | (105.8 | ) | ||||||||||||
Equity warrant assets: |
||||||||||||||||||||||
Gains on exercise, net |
883 | 3,180 | (72.2 | ) | 3,866 | 3,748 | 3.1 | |||||||||||||||
Change in fair value (3): |
||||||||||||||||||||||
Cancellations and expirations |
(720 | ) | (722 | ) | (0.3 | ) | (1,467 | ) | (1,476 | ) | (0.6 | ) | ||||||||||
Other changes in fair value |
4,411 | 8,916 | (50.5 | ) | 3,597 | 9,428 | (61.8 | ) | ||||||||||||||
Total net gains on equity warrant assets (4) |
4,574 | 11,374 | (59.8 | ) | 5,996 | 11,700 | (48.8 | ) | ||||||||||||||
Total gains on derivative instruments, net |
$ | 4,751 | $ | 10,807 | (56.0 | )% | $ | 6,724 | $ | 7,822 | (14.0 | )% | ||||||||||
(1) | Represents the change in the fair value of foreign exchange forward contracts executed on behalf of clients and contracts with correspondent banks to economically reduce our foreign exchange exposure risk related to certain foreign currency denominated loans. Revaluations of foreign currency denominated loans are recorded on the line item Other as part of noninterest income, a component of consolidated net income. |
(2) | For the three and six months ended June 30, 2007 and 2006, the amount represents the change in the fair value hedge implemented in April 2006. Prior to the fair value hedge implemented in April 2006, the amount represents the cumulative change in market value of the interest rate swap prior to its designation as a fair value hedge. Please refer to the discussion of our interest rate swap agreement related to our junior subordinated debentures in Note 10 of the Notes to Interim Consolidated Financial Statements (unaudited) in Part I, Item 1. |
(3) | At June 30, 2007, we held warrants in 1,202 companies, compared to 1,288 companies at June 30, 2006. |
(4) | Includes net gains on equity warrant assets held by consolidated investment affiliates. Relevant amounts attributable to minority interests are reflected in the interim consolidated statements of income under the caption Minority Interest in Net Income of Consolidated Affiliates. |
The change in the fair value of equity warrant assets was primarily attributable to changes in the value of the underlying assumptions used to value the equity warrant assets including changes in the risk-free interest rate, changes in the underlying value of the client companies stock, changes in the volatility of market-comparable public companies and changes in the expected life. The methodology used to calculate the fair value of equity warrant assets has been applied consistently.
Other Income
Other income was $9.0 million for the three months ended June 30, 2007, compared to $5.5 million for the comparable 2006 period. Other income largely consisted of fund management fees, credit card fees, service-based fee income associated with our valuation services and unused commitment fees. The increase of $3.5 million primarily relates to an increase in fund management fees of $1.8 million related to fund closings during the second quarter of 2007, a $0.6 million increase in income primarily related to activities of eProsper, a company in which we acquired a 65% ownership stake during the third quarter of 2006, and a $0.4 million increase in credit card fees. Fund management fees totaled $2.8 million and $1.0 million for the three months ended June 30, 2007 and 2006, respectively.
Other income was $15.9 million for the six months ended June 30, 2007, compared to $10.1 million for the comparable 2006 period. The increase of $5.8 million primarily relates to an increase in fund management fees of $3.1 million, a $1.1 million increase in income primarily related to activities of eProsper, and a $0.8 million increase in income related to our subsidiary, SVB Analytics, which commenced operations during the second quarter of 2006. Fund management fees totaled $4.7 million and $1.7 million for the six months ended June 30, 2007 and 2006, respectively.
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Noninterest Expense
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
Compensation and benefits |
$ | 51,957 | $ | 48,675 | 6.7 | % | $ | 105,317 | $ | 93,196 | 13.0 | % | ||||||||||
Impairment of goodwill |
17,204 | 18,434 | (6.7 | ) | 17,204 | 18,434 | (6.7 | ) | ||||||||||||||
Professional services |
6,676 | 10,074 | (33.7 | ) | 15,826 | 18,429 | (14.1 | ) | ||||||||||||||
Net occupancy |
6,285 | 4,298 | 46.2 | 11,089 | 8,503 | 30.4 | ||||||||||||||||
Furniture and equipment |
5,111 | 3,671 | 39.2 | 10,253 | 7,375 | 39.0 | ||||||||||||||||
Business development and travel |
3,403 | 2,987 | 13.9 | 6,318 | 5,741 | 10.1 | ||||||||||||||||
Correspondent bank fees |
1,311 | 1,452 | (9.7 | ) | 2,860 | 2,582 | 10.8 | |||||||||||||||
Telephone |
1,423 | 880 | 61.7 | 2,856 | 1,787 | 59.8 | ||||||||||||||||
Data processing services |
858 | 861 | (0.3 | ) | 1,886 | 1,989 | (5.2 | ) | ||||||||||||||
Reduction of provision for unfunded credit commitments |
(696 | ) | (3,325 | ) | (79.1 | ) | (1,805 | ) | (3,821 | ) | (52.8 | ) | ||||||||||
Other |
4,384 | 5,631 | (22.1 | ) | 8,229 | 10,111 | (18.6 | ) | ||||||||||||||
Total noninterest expense |
$ | 97,916 | $ | 93,638 | 4.6 | % | $ | 180,033 | $ | 164,326 | 9.6 | % | ||||||||||
Compensation and Benefits
Compensation and benefits expense was $52.0 million for the three months ended June 30, 2007, compared to $48.7 million for the comparable 2006 period. The increase of $3.3 million was largely due to increases in average full-time equivalent (FTE) employees and higher rates of employee salaries and wages, partially offset by a decrease in share-based payment expense. Average FTE employees for the three months ended June 30, 2007 was 1,158, compared to 1,053 for the three months ended June 30, 2006.
Compensation and benefits expense was $105.3 million for the six months ended June 30, 2007, compared to $93.2 million for the comparable 2006 period. The increase of $12.1 million was largely due to an increase in contributions to our incentive compensation plan, as well as increases in FTE employees and higher rates of employee salaries and wages. These increases were offset by a decrease in share-based payment expense due to a decrease in stock option grants.
Incentive compensation plan expense was $11.4 million and $21.0 million for the three and six months ended June 30, 2007, respectively, compared to $9.0 million and $14.0 million for comparable 2006 periods. Average FTE employees for the six months ended June 30, 2007 was 1,158, compared to 1,042 for the six months ended June 30, 2006.
Impairment of Goodwill
In connection with our annual assessment of goodwill of SVB Alliant in the second quarter of 2007 and 2006, we recognized impairment charges of $17.2 million and $18.4 million, respectively, due to impairment of goodwill. The impairment resulted from changes in our outlook for SVB Alliants future financial performance.
Professional Services
Professional services expense was $6.7 million and $15.8 million for the three and six months ended June 30, 2007, compared to $10.1 million and $18.4 million for the comparable 2006 periods. Professional services include consulting, legal, audit and other fees. Also included in professional services expense is management fees paid by our managed funds to the general partners at SVB Capital for funds management. The decrease in professional services was largely due to decreases in consulting costs and audit related fees. We incurred higher consulting costs in the three months ended June 30, 2006 as part of our efforts to enhance and maintain compliance with various regulations as well as expenses associated with certain Information Technology (IT) projects. We incurred higher audit related fees in the three months ended June 30, 2006 associated with the commitment of resources to enhance and audit internal controls to accomplish and adhere to the provision of the Sarbanes-Oxley Act of 2002 and the independent audit of our internal controls.
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Net Occupancy
Net occupancy expense was $6.3 million for the three months ended June 30, 2007, compared to $4.3 million for the comparable 2006 period. The increase of $2.0 million was primarily due to lease exit costs of $1.7 million as we exited three domestic offices in a move to improve synergy and efficiency across business units.
Net occupancy expense was $11.1 million for the six months ended June 30, 2007, compared to $8.5 million for the comparable 2006 period. The increase of $2.6 million was primarily due to lease exit costs, as well as expenses associated with our facility in Salt Lake City, which opened during the second quarter of 2006.
Furniture and Equipment
Furniture and equipment expense was $5.1 million and $10.3 million for the three and six months ended June 30, 2007, compared to $3.7 million and $7.4 million for the comparable 2006 periods. The increase in furniture and equipment expense was primarily related to the expenses associated with our facility in Salt Lake City and office relocations.
Reduction of Provision for Unfunded Credit Commitments
We calculate the reduction of provision for unfunded credit commitments based on the credit commitments outstanding, as well as the credit quality of our loan commitments. We recorded a reduction of $0.7 million and $1.8 million to the liability for unfunded credit commitments for the three and six months ended June 30, 2007, respectively, compared to a reduction of $3.3 million and $3.8 million for the comparable 2006 periods.
Other Expense
Other expense was $4.4 million and $8.2 million for the three and six months ended June 30, 2007, respectively, compared to $5.6 million and $10.1 million for the comparable 2006 periods. The decrease in other expense is primarily related to a $1.8 million charge recorded during the three months ended June 30, 2006, in connection with the settlement of a litigation matter and a $0.7 million decrease in advertising and promotion expenses. The decreases were offset by a $1.4 million loss recorded during the three months ended June 30, 2007, on the sale of foreclosed property classified as Other Real Estate Owned (OREO).
Minority Interest in Net Income of Consolidated Affiliates
Minority interest in the net income of consolidated affiliates is primarily related to the minority interest holders portion of investment gains or losses and management fees in our managed funds.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
Net interest income (1) |
$ | 268 | $ | 684 | (60.8 | )% | $ | 688 | $ | 1,253 | (45.1 | )% | ||||||||||
Noninterest income (1) |
7,310 | 6,252 | 16.9 | 18,566 | 6,738 | 175.5 | ||||||||||||||||
Noninterest expense (1) |
(3,269 | ) | (1,122 | ) | 191.4 | (5,524 | ) | (1,933 | ) | 185.8 | ||||||||||||
Carried interest (2) |
1,516 | | | 2,451 | | | ||||||||||||||||
Minority interest in net income of consolidated affiliates |
$ | 5,825 | $ | 5,814 | 0.2 | % | $ | 16,181 | $ | 6,058 | 167.1 | % | ||||||||||
(1) | Represents minority interest share in net interest income, non interest income, and non interest expense of consolidated affiliates. |
(2) | Represents the preferred allocation of income earned by the General Partner managing one of our consolidated funds. |
Minority interest in net income of consolidated affiliates was $5.8 million for both the three months ended June 30, 2007 and the comparable 2006 period. Minority interest in net income of consolidated affiliates of $5.8 million for the second quarter of 2007 was primarily due to noninterest income of $7.3 million, primarily related to investment gains from our consolidated funds, particularly related to our sponsored debt fund, offset by expenses of $3.3 million primarily related to management fees paid by our managed funds to the general partners at SVB Capital for funds management.
Minority interest in net income of consolidated affiliates was $16.2 million for the six months ended June 30, 2007, compared to $6.1 million for the comparable 2006 period. Minority interest in net income of consolidated affiliates of $16.2
31
million for the six months ended June 30, 2007 was primarily due to noninterest income of $18.6 million, primarily related to investment gains from our consolidated funds, particularly related to investment gains from our sponsored debt fund and from two of our managed funds of funds, offset by expenses of $5.5 million primarily related to management fees paid by our managed funds.
Income Taxes
Our effective tax rate was 40.48 percent for the second quarter ended June 30, 2007, which was comparable to 40.08 percent for the comparable 2006 period.
Our effective tax rate was 41.20 percent for the six months ended June 30, 2007, compared to 42.00 percent for the comparable 2006 period. The decrease in the tax rate was primarily attributable to the tax impact of lower non-deductible share-based payment expenses on the overall pre-tax income.
On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the entitys financial statements in accordance with SFAS No. 109. As a result, there was no cumulative effect relating to our adoption of FIN 48.
The total amount of unrecognized tax benefits at January 1, 2007 was $1.0 million, all of which related to tax benefits that, if recognized, would reduce our effective tax rate.
We recognize interest and penalties related to unrecognized tax benefits as a component of operating expenses. Total accrued interest and penalties at January 1, 2007 were immaterial. At June 30, 2007, our unrecognized tax benefits increased by $0.1 million to $1.1 million, the recognition of which would have an effect of $1.1 million on the effective tax rate. Total accrued interest and penalties at June 30, 2007 was $0.1 million.
Operating Segment Results
We have four operating segments in which we report our financial information: Commercial Banking, SVB Capital, SVB Alliant, and Other Business Services. In accordance with SFAS No. 131, we report segment information based on the management approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments. Please refer to the discussion of our segment organization in Note 12 of the Notes to Interim Consolidated Financial Statements (unaudited) in Part I, Item 1, above.
Our primary source of revenue is from net interest income. Accordingly, our segments are reported using net interest income, 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. We also evaluate performance based on noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. We do not allocate income taxes to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore, period-end asset balances are not presented for segment reporting purposes. The following is our segment information for the three and six months ended June 30, 2007 and 2006.
Income generated by banking services and financial solutions provided to private equity clients is included under the Commercial Banking segment, rather than the SVB Capital segment as previously reported prior to January 1, 2007. All prior period amounts have been reclassified to conform with current presentations.
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Commercial Banking
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
Net interest income |
$ | 86,865 | $ | 75,148 | 15.6 | % | $ | 171,322 | $ | 147,050 | 16.5 | % | ||||||||||
Provision for loan losses |
(5,021 | ) | (2,677 | ) | 87.6 | (7,005 | ) | (2,107 | ) | 232.5 | ||||||||||||
Noninterest income |
30,427 | 26,832 | 13.4 | 60,438 | 48,349 | 25.0 | ||||||||||||||||
Noninterest expense |
(60,132 | ) | (60,427 | ) | (0.5 | ) | (124,647 | ) | (109,186 | ) | 14.2 | |||||||||||
Income before income tax expense |
$ | 52,139 | $ | 38,876 | 34.1 | $ | 100,108 | $ | 84,106 | 19.0 | ||||||||||||
Total average loans |
$ | 2,953,644 | $ | 2,355,321 | 25.4 | $ | 2,878,821 | $ | 2,332,493 | 23.4 | ||||||||||||
Total average assets |
4,168,190 | 4,243,006 | (1.8 | ) | 4,169,088 | 4,319,427 | (3.5 | ) | ||||||||||||||
Total average deposits |
$ | 3,621,377 | $ | 3,742,212 | (3.2 | )% | $ | 3,623,985 | $ | 3,803,063 | (4.7 | )% |
Income Before Income Tax Expense
Three months ended June 30, 2007 and 2006
Net interest income is the difference between interest earned on loans, net of funds transfer pricing, and interest paid on deposits, net of funds transfer pricing. Net interest income for the three months ended June 30, 2007 was $86.9 million, compared to $75.1 million for the comparable 2006 period. The increase of $11.8 million was driven by the positive impact of $8.5 million driven by higher loan volumes along with an increase of $4.8 million due to higher interest rates, partially offset by lower interest expense of $1.5 million due to lower average deposits.
Net loan loss charge-offs for the three months ended June 30, 2007 were $5.0 million, compared to $2.7 million for the comparable 2006 period.
Noninterest income was $30.4 million for the three months ended June 30, 2007, compared to $26.8 million for the comparable 2006 period. The increase of $3.6 million was primarily driven by a $1.4 million increase in client investment fees, a $1.2 million increase in deposit service charges and a $0.8 million increase in foreign exchange fees.
Noninterest expense was $60.1 million for the three months ended June 30, 2007, compared to $60.4 million for the comparable 2006 period. The decrease of $0.3 million was primarily related to a $4.8 million decrease in allocated expenses, partially offset by a $2.4 million increase in compensation and benefits, a $1.4 million increase in net occupancy expense and a $0.5 million increase in business development expenses. Allocated expenses are noninterest expenses allocated to the business units and include facility costs, general administrative and operational overhead expenses. The decrease in allocated expenses was primarily related to decreases in professional services expense. The increase in direct compensation and benefits expense of $2.4 million is primarily related to a $1.5 million increase in base compensation, a $0.6 million increase in incentive compensation and a $0.4 million increase in compensation cost allocations.
Six months ended June 30, 2007 and 2006
Net interest income for the six months ended June 30, 2007 was $171.3 million, compared to $147.1 million for the comparable 2006 period. The increase of $24.2 million was driven by the positive impact of $15.5 million driven by higher loan volumes along with an increase of $13.2 million due to higher interest rates, partially offset by lower interest expense of $4.5 million due to lower average deposits.
Net loan loss charge-offs for the six months ended June 30, 2007 were $7.0 million, compared to $2.1 million for the comparable 2006 period.
Noninterest income was $60.4 million for the six months ended June 30, 2007, compared to $48.3 million for the comparable 2006 period. The increase of $12.1 million was primarily driven by a $4.1 million increase in client investment fees, higher gains of $4.0 million related to the exercises of equity warrant assets, a $2.0 million increase in deposit service charges, a $1.1 million increase in foreign exchange fees and a $0.6 million increase in letter of credit fees.
Noninterest expense was $124.6 million for the six months ended June 30, 2007, compared to $109.2 million for the comparable 2006 period. The increase of $15.4 million was primarily related to a $7.0 million increase in allocated expenses, a $5.2 million increase in compensation and benefits, a $1.4 million increase in net occupancy expense and a $0.7 million increase in business development expenses. The increase in allocated expenses was primarily related to increases in compensation expense, furniture and equipment expense and net occupancy expense, partially offset by decreases in professional services expense. The increase in direct compensation and benefits expense of $5.2 million is primarily related to a $1.9 million increase in base compensation, a $1.3 million increase in benefits expense, a $1.2 million increase in incentive compensation and a $0.9 million increase in compensation cost allocations.
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Financial Condition
Commercial Bankings average loans were $3.0 billion and $2.9 billion for the three and six months ended June 30, 2007, respectively, compared to $2.4 billion and $2.3 billion for the comparable 2006 periods. The loan products with the largest growth in 2007, compared to 2006, were core commercial loans, which grew by $451.9 million and $413.2 million for the three and six months ended June 30, 2007, respectively, and asset-based lending, which grew by $112.4 million and $102.2 million for the three and six months ended June 30, 2007, respectively. The increase in average loans reflect a favorable funding environment for all core industry segments, with particularly strong growth in loans to private equity firms for capital calls.
Average deposits were $3.6 billion for both the three and six months ended June 30, 2007, compared to $3.7 billion and $3.8 billion for the comparable 2006 periods. The decrease for 2007, compared to 2006, was primarily due to clients seeking higher returns on deposits as a result of increases in short-term market interest rates.
SVB Capital
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
Net interest income |
$ | 244 | $ | 375 | (34.9 | )% | $ | 365 | $ | 440 | (17.0 | )% | ||||||||||
Noninterest income |
6,569 | 5,392 | 21.8 | 11,337 | 5,827 | 94.6 | ||||||||||||||||
Noninterest expense |
(2,061 | ) | (2,274 | ) | (9.4 | ) | (6,443 | ) | (4,354 | ) | 48.0 | |||||||||||
Income before income tax expense |
$ | 4,752 | $ | 3,493 | 36.0 | $ | 5,259 | $ | 1,913 | 174.9 | ||||||||||||
Total average assets |
$ | 277,489 | $ | 208,750 | 32.9 | % | $ | 260,582 | $ | 195,253 | 33.5 | % |
Income Before Income Tax Expense
Three months ended June 30, 2007 and 2006
Noninterest income was $6.6 million for the three months ended June 30, 2007, compared to $5.4 million for the comparable 2006 period. Investment gains or losses related to our managed funds are included in our consolidated noninterest income. Minority interest in the net gains or losses of these consolidated managed funds primarily represent net investment gains or losses and management fees expense attributable to the minority interest holders in these managed funds. The increase of $1.2 million was primarily a result of a $5.5 million increase in net gains on investments, net of minority interest, and a $1.8 million increase in fund management fees related to fund closings during the second quarter of 2007. The increase was partially offset by a $3.4 million decrease in income driven by lower gains related to exercised equity warrant assets, net of minority interest, and a preferred allocation of income of $1.6 million to the general partner managing one of our consolidated funds. The net gains on investments were primarily attributable to net increases in the fair value of two investments from one of our sponsored debt funds. Fund management fees totaled $2.8 million and $1.0 million for the three months ended June 30, 2007 and 2006, respectively.
Noninterest expense of $2.1 million for the three months ended June 30, 2007, was comparable to $2.3 million for the three months ended June 30, 2006.
Six months ended June 30, 2007 and 2006
Noninterest income was $11.3 million for the six months ended June 30, 2007, compared to $5.8 million for the comparable 2006 period. The increase of $5.5 million was primarily a result a $7.5 million increase in net gains on investments, net of minority interest and a $3.0 million increase in fund management fees. The increase was partially offset by a $3.1 million decrease in income driven by lower gains related to exercised equity warrant assets, net of minority interest, and a preferred allocation of income of $2.5 million to the general partner managing one of our consolidated funds. The net gains on investments were primarily attributable to net gains from one of our sponsored debt funds and net gains from two of our managed funds of funds, primarily related to net increases in the fair values of fund investments. Fund management fees totaled $4.7 million and $1.7 million for the six months ended June 30, 2007 and 2006, respectively.
Noninterest expense was $6.4 million for the six months ended June 30, 2007, compared to $4.4 million for the comparable 2006 period. The increase of $2.0 million was primarily attributable to a $0.9 million increase in compensation costs, specifically incentive compensation, and a $0.9 million increase in direct cost allocations and a $0.5 million increase in professional services expense. The increases were partially offset by a $0.5 million decrease in allocated expenses.
34
Financial Condition
SVB Capitals average assets were $277.5 million for the three months ended June 30, 2007, compared to $208.8 million for the comparable 2006 period. The growth in average assets of $68.7 million was due primarily to increased capital contributions in two of our managed funds of funds.
SVB Capitals average assets were $260.6 million for the six months ended June 30, 2007, compared to $195.3 million for the comparable 2006 period. The growth in average assets of $65.3 million was due primarily to increased capital contributions in two of our managed funds of funds.
SVB Alliant
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
Net interest income |
$ | 199 | $ | 166 | 19.9 | % | $ | 399 | $ | 279 | 43.0 | % | ||||||||||
Noninterest income |
3,422 | 2,772 | 23.4 | 6,345 | 5,210 | 21.8 | ||||||||||||||||
Noninterest expense |
(5,675 | ) | (5,379 | ) | 5.5 | (9,264 | ) | (10,784 | ) | (14.1 | ) | |||||||||||
Impairment of goodwill |
(17,204 | ) | (18,434 | ) | (6.7 | ) | (17,204 | ) | (18,434 | ) | (6.7 | ) | ||||||||||
Loss before income tax expense |
$ | (19,258 | ) | $ | (20,875 | ) | (7.7 | ) | $ | (19,724 | ) | $ | (23,729 | ) | (16.9 | ) | ||||||
Total average assets |
$ | 58,661 | $ | 70,218 | (16.5 | ) | $ | 60,400 | $ | 73,246 | (17.5 | ) | ||||||||||
Goodwill |
$ | | $ | 17,204 | (100.0 | )% | $ | | $ | 17,204 | (100.0 | )% |
Loss Before Income Tax Expense
Three months ended June 30, 2007 and 2006
Noninterest income was $3.4 million for the three months ended June 30, 2007, compared to $2.8 million for the comparable 2006 period. The increase of $0.6 million was due to increased corporate finance fees.
Noninterest expense was $22.9 million for the three months ended June 30, 2007, compared to $23.8 million for the comparable 2006 period. Noninterest expense included goodwill impairment charges of $17.2 million and $18.4 million for the three months ended June 30, 2007 and 2006, respectively. The decrease of $0.9 million was primarily due to a $1.2 million decrease in goodwill impairment, a $0.3 million decrease in cost allocations, a $0.5 million decrease in business development and travel expense and a $0.1 million decrease in professional services expense. The decreases were partially offset by a $0.8 million increase in compensation and benefits expense. The $0.8 million increase in compensation and benefits expense was related to a $1.1 million increase in incentive compensation, partially offset by a $0.3 million decrease in share-based payments.
Six months ended June 30, 2007 and 2006
Noninterest income was $6.3 million for the six months ended June 30, 2007, compared to $5.2 million for the comparable 2006 period. The increase of $1.1 million was primarily due to higher corporate finance fees.
Noninterest expense was $26.5 million for the six months ended June 30, 2007, compared to $29.2 million for the comparable 2006 period. Noninterest expense included goodwill impairment charges of $17.2 million and $18.4 million for the six months ended June 30, 2007 and 2006, respectively. The decrease of $2.7 million was primarily due to a $1.2 million decrease in impairment of goodwill charges, a $0.5 million decrease in compensation and benefits expense, a $0.3 million decrease in cost allocations, a $0.2 million decrease in business development and travel expense and a $0.2 million decrease in furniture and equipment expense.
Financial Condition
SVB Alliants average assets were $58.7 million for the three months ended June 30, 2007, compared to $70.2 million for the comparable 2006 period. The decrease in average assets of $11.5 million was mainly attributable to an $18.4 million decrease related to goodwill impairment incurred during the second quarter of 2006, partially offset by a $3.6 million increase in deferred tax receivables and a $2.8 million increase in cash and cash equivalent balances.
SVB Alliants average assets were $60.4 million for the six months ended June 30, 2007, compared to $73.2 million for the comparable 2006 period. The decrease in average assets of $12.8 million was mainly attributable to an $18.4 million decrease related to an impairment of goodwill incurred during the second quarter of 2006, partially offset by a $5.0 million increase in cash and cash equivalent balances.
35
Other Business Services
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
(Dollars in thousands) |
2007 | 2006 | % Change | 2007 | 2006 | % Change | ||||||||||||||||
Net interest income |
$ | 5,529 | $ | 4,832 | 14.4 | % | $ | 11,014 | $ | 8,790 | 25.3 | % | ||||||||||
(Provision for) recovery of loan losses |
| | | (100 | ) | 1,090 | (109.2 | ) | ||||||||||||||
Noninterest income |
1,538 | 501 | 207.0 | 2,584 | 1,431 | 80.6 | ||||||||||||||||
Noninterest expense |
(7,898 | ) | (4,303 | ) | 83.5 | (15,059 | ) | (9,952 | ) | 51.3 | ||||||||||||
(Loss) income before income tax expense |
$ | (831 | ) | $ | 1,030 | (180.7 | ) | $ | (1,561 | ) | $ | 1,359 | (214.9 | ) | ||||||||
Total average loans |
$ | 425,465 | $ | 341,521 | 24.6 | $ | 424,886 | $ | 334,522 | 27.0 | ||||||||||||
Total average assets |
527,689 | 449,253 | 17.5 | 523,314 | 420,290 | 24.5 | ||||||||||||||||
Total average deposits |
213,110 | 206,649 | 3.1 | 211,017 | 183,415 | 15.0 | ||||||||||||||||
Goodwill |
$ | 4,092 | $ | | | % | $ | 4,092 | $ | | | % |
(Loss) Income Before Income Tax Expense
Three months ended June 30, 2007 and 2006
Net interest income was $5.5 million for the three months ended June 30, 2007, compared to $4.8 million for the comparable 2006 period. The increase of $0.7 million was primarily attributable to higher loan and deposit volumes for SVB Private Client Services and SVB Global clients.
Noninterest income was $1.5 million for the three months ended June 30, 2007, compared to $0.5 million for the comparable 2006 period. The increase of $1.0 million was primarily due to an increase in income from SVB Analytics, which commenced operations during the second quarter of 2006.
Noninterest expense was $7.9 million for the three months ended June 30, 2007, compared to $4.3 million for the comparable 2006 period. The increase of $3.6 million was attributable to a $2.4 million increase in expenses for SVB Global, a $1.0 million increase in expenses for SVB Analytics and a $0.2 million increase in expenses for SVB Private Client Services.
Six months ended June 30, 2007 and 2006
Net interest income was $11.0 million for the six months ended June 30, 2007, compared to $8.8 million for the comparable 2006 period. The increase of $2.2 million was primarily attributable to higher loan and deposit volumes for SVB Private Client Services and SVB Global clients.
Net loan loss charge-offs for the six months ended June 30, 2007 were $0.1 million, compared to a $1.1 million net recovery of loan losses for the comparable 2006 period.
Noninterest income was $2.6 million for the six months ended June 30, 2007, compared to $1.4 million for the comparable 2006 period. The increase of $1.2 million was primarily due to an increase in income from SVB Analytics.
Noninterest expense was $15.1 million for the six months ended June 30, 2007, compared to $10.0 million for the comparable 2006 period. The increase of $5.1 million was attributable to a $3.2 million increase in expenses for SVB Global and a $2.6 million increase in expenses for SVB Analytics. The increase was partially offset by a $0.7 million decrease in expenses for SVB Private Client Services.
Financial Condition
Other Business Segments average loans for the three months ended June 30, 2007 were $425.5 million, compared to $341.5 million for the comparable 2006 period. The largest growth in 2007, compared to 2006, were real estate construction, real estate term, and consumer loans, which grew by $68.0 million. Foreign currency denominated loans grew by $20.6 million.
Average deposits for the three months ended June 30, 2007 were $213.1 million, compared to $206.6 million for the comparable 2006 period.
Other Business Segments average loans for the six months ended June 30, 2007 were $424.9 million, compared to $334.5 million for the comparable 2006 period. The largest growth in 2007, compared to 2006, were real estate construction, real estate term and consumer loans, which grew by $66.7 million. Foreign currency denominated loans grew by $20.8 million.
Average deposits for the six months ended June 30, 2007 were $211.0 million, compared to $183.4 million for the comparable 2006 period. This increase was primarily attributable to deposit growth from SVB Global clients.
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Consolidated Financial Condition SVB Financial Group and Subsidiaries
Total assets were $6.61 billion at June 30, 2007, an increase of $523.6 million or 8.6 percent, compared to $6.08 billion at December 31, 2006. Average assets for the three and six months ended June 30, 2007 were $5.93 billion and $5.83 billion, respectively, compared to $5.30 billion and $5.28 billion for each of the comparable 2006 periods.
Federal Funds Sold, Securities Purchased Under Agreement to Resell and Other Short-Term Investments
Interest earning deposits, federal funds sold, securities purchased under agreement to resell and other short-term investments were $656.0 million at June 30, 2007, an increase of $416.7 million or 174.1 percent, compared to $239.3 million outstanding at December 31, 2006. The increase was primarily due to higher levels of federal funds sold of $250.0 million and securities purchased under agreement to resell of $98.8 million, as well as an increase of $46.2 million in our portfolio of other short-term investment securities.
Investment Securities
Investment securities were $1.59 billion at June 30, 2007, a decrease of $98.4 million or 5.8 percent, compared to $1.69 billion at December 31, 2006. The decrease was primarily due to scheduled maturities of U.S. agency debentures and U.S. treasury bills and principal prepayments on mortgage-backed securities.
Loans
Loans, net of unearned income were $3.76 billion at June 30, 2007, an increase of $280.0 million or 8.0 percent, compared to $3.48 billion at December 31, 2006. Average loans, net of unearned income for the three and six months ended June 30, 2007 were $3.43 billion and $3.34 billion, respectively, compared to $2.73 billion and $2.70 billion for each of the comparable 2006 periods.
Our gross loans by industry niche at June 30, 2007 and December 31, 2006 were as follows:
(Dollars in thousands) |
June 30, 2007 | December 31, 2006 | ||||
Technology |
$ | 1,829,182 | $ | 1,813,039 | ||
Life Science |
379,729 | 357,624 | ||||
Venture Capital |
581,058 | 446,767 | ||||
Premium Winery |
366,132 | 381,138 | ||||
Private Client Service |
375,832 | 350,254 | ||||
All other sectors |
255,978 | 160,738 | ||||
Total Gross Loans |
$ | 3,787,911 | $ | 3,509,560 | ||
Credit Quality and the Allowance for Loan Losses
We incurred $6.3 million in gross loan charge-offs and realized $1.2 million in gross loan recoveries during the three months ended June 30, 2007. Both gross loan charge-offs and recoveries for the second quarter ended June 30, 2007 were primarily from technology sector clients. We incurred $10.6 million in gross loan charge-offs and realized $3.5 million in gross loan recoveries during the six months ended June 30, 2007.
Nonperforming assets consist of loans that are past due 90 days or more and are still accruing interest, loans on nonaccrual status, and foreclosed property classified as Other Real Estate Owned (OREO). During the second quarter ended June 30, 2007, we sold our OREO property, and recognized a $1.4 million loss on the sale, reflected in other noninterest expense. All nonperforming loans represent impaired loans. The table below sets forth certain data and ratios between nonperforming loans, nonperforming assets and the allowance for loan losses:
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(Dollars in thousands) |
June 30, 2007 | December 31, 2006 | ||||||
Nonperforming assets: |
||||||||
Loans Past Due 90 Days or More |
$ | 1,365 | $ | | ||||
Nonaccrual Loans |
10,882 | 10,977 | ||||||
Total nonperforming loans |
12,247 | 10,977 | ||||||
OREO |
| 5,677 | ||||||
Total nonperforming assets |
$ | 12,247 | $ | 16,654 | ||||
Nonperforming loans as a percentage of total gross loans |
0.32 | % | 0.31 | % | ||||
Nonperforming assets as a percentage of total assets |
0.19 | % | 0.27 | % | ||||
Allowance for loan losses |
$ | 43,352 | $ | 42,747 | ||||
As a percentage of total gross loans |
1.14 | % | 1.22 | % | ||||
As a percentage of nonperforming loans |
353.98 | % | 389.42 | % | ||||
Allowance for unfunded credit commitments (1) |
$ | 12,848 | $ | 14,653 |
(1) | The Allowance for unfunded credit commitments is included as a component of Other Liabilities. |
Derivatives
Derivative assets are recorded as a component of other assets and other liabilities and were comprised of the following at June 30, 2007 and December 31, 2006: