Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2011

OR

 

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

For the transition period from              to              .

Commission File Number: 000-15637

 

 

SVB FINANCIAL GROUP

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   91-1962278

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3003 Tasman Drive, Santa Clara, California   95054-1191
(Address of principal executive offices)   (Zip Code)

(408) 654-7400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At July 29, 2011, 43,220,293 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I - FINANCIAL INFORMATION      3   
Item 1.   Interim Consolidated Financial Statements (unaudited)      3   
  Interim Consolidated Balance Sheets (unaudited) as of June 30, 2011 and December 31, 2010      3   
  Interim Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2011 and 2010      4   
  Interim Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2011 and 2010      5   
  Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the six months ended June 30, 2011 and 2010      6   
  Interim Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2011 and 2010      7   
  Notes to Interim Consolidated Financial Statements (unaudited)      8   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      41   
Item 3.   Quantitative and Qualitative Disclosures about Market Risk      73   
Item 4.   Controls and Procedures      74   
PART II - OTHER INFORMATION      75   
Item 1.   Legal Proceedings      75   
Item 1A.   Risk Factors      75   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      75   
Item 3.   Defaults Upon Senior Securities      75   
Item 4.   (Removed and Reserved)      75   
Item 5.   Other Information      75   
Item 6.   Exhibits      75   
SIGNATURES      76   
INDEX TO EXHIBITS      77   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

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

   June 30,
2011
    December 31,
2010
 

Assets

  

Cash and due from banks

   $ 2,100,462      $ 2,672,725   

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

     464,757        403,707   
  

 

 

   

 

 

 

Cash and cash equivalents

     2,565,219        3,076,432   
  

 

 

   

 

 

 

Available-for-sale securities

     9,580,905        7,917,967   

Non-marketable securities

     875,194        721,520   
  

 

 

   

 

 

 

Investment securities

     10,456,099        8,639,487   
  

 

 

   

 

 

 

Loans, net of unearned income

     5,978,646        5,521,737   

Allowance for loan losses

     (82,155     (82,627
  

 

 

   

 

 

 

Net loans

     5,896,491        5,439,110   
  

 

 

   

 

 

 

Premises and equipment, net of accumulated depreciation and amortization

     49,452        44,545   

Accrued interest receivable and other assets

     399,474        328,187   
  

 

 

   

 

 

 

Total assets

   $ 19,366,735      $ 17,527,761   
  

 

 

   

 

 

 

Liabilities and total equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing demand

   $ 10,683,945      $ 9,011,538   

Interest-bearing deposits

     5,594,529        5,325,403   
  

 

 

   

 

 

 

Total deposits

     16,278,474        14,336,941   
  

 

 

   

 

 

 

Short-term borrowings

     —          37,245   

Other liabilities

     462,614        196,037   

Long-term debt

     609,596        1,209,260   
  

 

 

   

 

 

 

Total liabilities

     17,350,684        15,779,483   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

SVBFG stockholders’ equity:

    

Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, $0.001 par value, 150,000,000 shares authorized; 43,136,209 shares and 42,268,201 shares outstanding, respectively

     43        42   

Additional paid-in capital

     462,885        422,334   

Retained earnings

     926,588        827,831   

Accumulated other comprehensive income

     47,377        24,143   
  

 

 

   

 

 

 

Total SVBFG stockholders’ equity

     1,436,893        1,274,350   

Noncontrolling interests

     579,158        473,928   
  

 

 

   

 

 

 

Total equity

     2,016,051        1,748,278   
  

 

 

   

 

 

 

Total liabilities and total equity

   $ 19,366,735      $ 17,527,761   
  

 

 

   

 

 

 

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

 

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Table of Contents

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)

   2011     2010     2011     2010  

Interest income:

        

Loans

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

Available-for-sale securities:

        

Taxable

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

Non-taxable

     883        951        1,824        1,921   

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

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

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

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

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

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

Borrowings

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

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

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

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

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

Provision for (reduction of) loan losses

     134        7,408        (2,913     18,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

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

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Gains on investment securities, net

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

Foreign exchange fees

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

Deposit service charges

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

Gains on derivative instruments, net

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

Credit card fees

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

Client investment fees

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

Letters of credit and standby letters of credit income

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

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

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Compensation and benefits

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

Professional services

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

Premises and equipment

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

Business development and travel

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

Net occupancy

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

FDIC assessments

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

Correspondent bank fees

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

Provision for unfunded credit commitments

     976        2,376        76        869   

Other

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

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

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

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

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

Income tax expense

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

 

 

   

 

 

   

 

 

   

 

 

 

Net income before noncontrolling interests

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

Net income attributable to noncontrolling interests

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

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

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

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 1.53      $ 0.51      $ 2.31      $ 0.95   

Earnings per common share—diluted

     1.50        0.50        2.27        0.94   

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

 

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Table of Contents

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)

   2011     2010     2011     2010  

Net income before noncontrolling interests

   $ 89,732      $ 21,186      $ 162,827      $ 50,396   

Other comprehensive income, net of tax:

        

Change in cumulative translation gains:

        

Foreign currency translation gains (losses)

     926        (1,672     1,891        (152

Related tax (expense) benefit

     (379     682        (774     62   

Change in unrealized gains on available-for-sale securities:

        

Unrealized holding gains

     100,836        65,063        74,677        92,289   

Related tax expense

     (41,252     (27,083     (30,529     (37,642

Reclassification adjustment for gains included in net income

     (37,221     (841     (37,283     (868

Related tax benefit

     15,227        343        15,252        354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     38,137        36,492        23,234        54,043   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     127,869        57,678        186,061        104,439   

Comprehensive income attributable to noncontrolling interests

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

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income available to common stockholders

   $ 103,887      $ 57,612      $ 121,991      $ 93,720   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

    

 

Common Stock

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

(Dollars in thousands)

   Shares      Amount                 

Balance at December 31, 2009

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

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

     547,808         1         13,203        —           —          13,204        —           13,204   

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

     —           —           2,445        —           —          2,445        —           2,445   

Net income

     —           —           —          39,677         —          39,677        10,719         50,396   

Capital calls and distributions, net

     —           —           —          —           —          —          33,366         33,366   

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

     —           —           —          —           54,133        54,133        —           54,133   

Foreign currency translation adjustments, net of tax

     —           —           —          —           (90     (90     —           (90

Stock-based compensation expense

     —           —           6,247        —           —          6,247        —           6,247   

Repurchase of warrant under Capital Purchase Program

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

Other-net

     —           —           (44     8         —          (36     —           (36
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2010

     41,886,197       $ 42       $ 404,521      $ 772,592       $ 59,948      $ 1,237,103      $ 389,852       $ 1,626,955   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at December 31, 2010

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

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

     866,984         1         26,129        —           —          26,130        —           26,130   

Common stock issued upon settlement of 3.875% Convertible Notes, net of shares received from associated convertible note hedge

     1,024         —           —          —           —          —          —           —     

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

     —           —           5,563        —           —          5,563        —           5,563   

Net income

     —           —           —          98,757         —          98,757        64,070         162,827   

Capital calls and distributions, net

     —           —           —          —           —          —          41,160         41,160   

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

     —           —           —          —           22,117        22,117        —           22,117   

Foreign currency translation adjustments, net of tax

     —           —           —          —           1,117        1,117        —           1,117   

Stock-based compensation expense

     —           —           8,859        —           —          8,859        —           8,859   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

     43,136,209       $ 43       $ 462,885      $ 926,588       $ 47,377      $ 1,436,893      $ 579,158       $ 2,016,051   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six months ended
June 30,
 

(Dollars in thousands)

   2011     2010  

Cash flows from operating activities:

    

Net income before noncontrolling interests

   $ 162,827      $ 50,396   

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

    

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

     (3,123     —     

(Reduction of) provision for loan losses

     (2,913     18,153   

Provision for unfunded credit commitments

     76        869   

Changes in fair values of derivatives, net

     (13,211     2,926   

Gains on investment securities, net

     (123,017     (20,809

Depreciation and amortization

     13,834        11,188   

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

     8,904        10,339   

Tax benefit (expense) from stock exercises

     759        (330

Amortization of share-based compensation

     8,949        6,296   

Amortization of deferred loan fees

     (28,458     (24,094

Deferred income tax expense

     2,423        2,732   

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

     —          24   

Changes in other assets and liabilities:

    

Accrued interest receivable and payable, net

     (8,348     (1,349

Accounts receivable

     (3,678     (667

Accounts payable

     82,271        (371

Income tax receivable, net

     3,854        (886

Prepaid FDIC assessments and amortization

     5,082        5,118   

Accrued compensation

     (12,535     7,545   

Foreign exchange spot contracts, net

     65,536        13,215   

Other, net

     12,574        14,697   
  

 

 

   

 

 

 

Net cash provided by operating activities

     171,806        94,992   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (4,334,481     (2,371,038

Proceeds from sales of available-for-sale securities

     1,414,096        160,350   

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

     1,322,555        892,588   

Purchases of nonmarketable securities (cost and equity method accounting)

     (28,355     (20,103

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

     13,888        6,691   

Purchases of nonmarketable securities (investment fair value accounting)

     (82,574     (44,939

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

     45,855        15,874   

Net (increase) decrease in loans

     (449,114     89,979   

Proceeds from recoveries of charged-off loans

     11,056        9,499   

Proceeds from sale of other real estate owned

     —          196   

Payment for acquisition of intangibles, net of cash acquired

     —          (360

Purchases of premises and equipment

     (12,843     (13,220
  

 

 

   

 

 

 

Net cash used for investing activities

     (2,099,917     (1,274,483
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     1,941,533        1,808,476   

(Decrease) increase in short-term borrowings

     (37,245     5,980   

Payments for repurchases of 5.70% Senior Notes and 6.05% Subordinated Notes, including repurchase premiums and associated fees

     (346,443     —     

Proceeds from termination of portions of interest rate swaps associated with 5.70% Senior Notes and 6.05% Subordinated Notes

     36,959        —     

Payments for settlement of 3.875% Convertible Notes

     (250,000     —     

Capital contributions from noncontrolling interests, net of distributions

     41,160        33,366   

Tax benefit from stock exercises

     4,804        2,775   

Proceeds from issuance of common stock and Employee Stock Purchase Plan

     26,130        13,204   

Repurchase of warrant under Capital Purchase Program

     —          (6,820
  

 

 

   

 

 

 

Net cash provided by financing activities

     1,416,898        1,856,981   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (511,213     677,490   

Cash and cash equivalents at beginning of period

     3,076,432        3,512,853   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,565,219      $ 4,190,343   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Cash paid during the period for:

    

Interest

   $ 25,625      $ 18,991   

Income taxes

     53,336        20,876   

Noncash items during the period:

    

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

   $ 22,117      $ 54,133   

Net change in fair value of interest rate swaps

     (1,762     13,276   

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

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

The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of results to be expected for any future periods. These interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”).

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

The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include the valuation of non-marketable securities, the allowance for loan losses, valuation of equity warrant assets, the recognition and measurement of income tax assets and liabilities, the adequacy of the reserve for unfunded credit commitments, and share-based compensation.

Principles of Consolidation and Presentation

Our consolidated financial statements include the accounts of SVB Financial Group and entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity or a variable interest entity. All significant intercompany accounts and transactions have been eliminated.

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

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

 

  1. We have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and,

 

  2. The aggregate indirect and direct variable interests held by the Company have the obligation to absorb losses or the right to receive benefits from the entity that could be significant to the VIE.

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

 

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We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide. We are variable interest holders in certain partnerships for which we are the primary beneficiary. We perform on-going reassessments of whether facts or circumstances have changed in relation to previously evaluated voting interest entities and our involvement in VIEs which could cause the Company’s consolidation conclusion to change.

Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard (ASU No. 2011-02), which requires new disclosures and provides additional guidance to creditors for determining whether a modification or restructuring of a receivable is a troubled debt restructuring (“TDR”). The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered TDR’s. The new disclosures and guidance are effective for interim and annual reporting periods beginning on or after June 15, 2011, with retrospective disclosures required for all TDR activities that have occurred from the beginning of the annual period of adoption. This standard clarifies how TDR’s are determined and increases the disclosure requirements for TDR’s, however we do not expect it to have a material impact on our financial position, results of operations or stockholders’ equity.

In May 2011, the FASB issued a new accounting standard (ASU No. 2011-04), which requires new disclosures and clarifies existing guidance surrounding fair value measurement. This standard was issued concurrent with the International Accounting Standards Board’s (“IASB”) issuance of a fair value measurement standard with the objective of a converged definition of fair value measurement and disclosure guidance. The new guidance clarifies that the principal market for a financial instrument should be determined based on the market with the greatest volume and level of activity. This new guidance is effective on a prospective basis for interim and annual reporting periods beginning after December 15, 2011. This standard clarifies how fair value is measured and increases the disclosure requirements for fair value measurements. We are currently assessing the impact of this guidance, however we do not expect it to have a material impact on our financial position, results of operations or stockholders’ equity.

Reclassifications

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

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

Earnings Per Share

Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options and restricted stock units and awards outstanding under our equity incentive plans, our Employee Stock Purchase Plan (“ESPP”), our 3.875% convertible senior notes (“3.875% Convertible Notes”) and associated convertible note hedge and warrant agreement. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be anti-dilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three months ended June 30,      Six months ended June 30,  

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

   2011      2010      2011      2010  

Numerator:

           

Net income available to common stockholders

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

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average common shares outstanding-basic

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

Weighted average effect of dilutive securities:

           

Stock options and ESPP

     654         694         678         712   

Restricted stock units

     101         62         100         70   

3.875% Convertible Notes

     61         —           77         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted calculation

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

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

           

Basic

   $ 1.53       $ 0.51       $ 2.31       $ 0.95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 1.50       $ 0.50       $ 2.27       $ 0.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be anti-dilutive for the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three months ended June 30,      Six months ended June 30,  

(Shares in thousands)

   2011      2010      2011      2010  

Stock options

     44         7         60         8   

Restricted stock units

     —           1         2         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     44         8         62         15   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the above, at June 30, 2011, 4.7 million common shares under warrants associated with our 3.875% Convertible Notes were outstanding but also excluded from the diluted EPS calculation as they were deemed to be anti-dilutive based on the conversion price of $64.43 per common share. Concurrent with the issuance of our 3.875% Convertible Notes, we entered into a convertible note hedge and warrant agreement. For more information on our 3.875% Convertible Notes and associated convertible note hedge and warrant agreement, see Note 7—“Short-Term Borrowings and Long-Term Debt” and Note 8—“Derivative Financial Instruments”.

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

3. Share-Based Compensation

For the three and six months ended June 30, 2011 and 2010, we recorded share-based compensation and related tax benefits as follows:

 

     Three months ended June 30,     Six months ended June 30,  

(Dollars in thousands)

   2011     2010     2011     2010  

Share-based compensation expense

   $ 4,706      $ 3,005      $ 8,949      $ 6,296   

Income tax benefit related to share-based compensation expense

     (1,243     (673     (2,276     (1,445

Unrecognized Compensation Expense

At June 30, 2011, unrecognized share-based compensation expense was as follows:

 

(Dollars in thousands)

   Unrecognized
Expense
     Average  Expected
Recognition
Period - in Years
 

Stock options

   $ 15,884         3.04   

Restricted stock units

     23,549         2.94   
  

 

 

    

Total unrecognized share-based compensation expense

   $ 39,433      
  

 

 

    

 

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Share-Based Payment Award Activity

The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2011:

 

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

Outstanding at December 31, 2010

     3,112,253      $ 37.88         

Granted

     365,583        59.97         

Exercised

     (707,770     33.89         

Forfeited

     (23,823     42.20         

Expired

     (1,426     35.53         
  

 

 

         

Outstanding at June 30, 2011

     2,744,817        41.81         3.70       $ 49,351,094   
  

 

 

         

Vested and expected to vest at June 30, 2011

     2,599,938        41.41         3.56         47,762,256   
  

 

 

         

Exercisable at June 30, 2011

     1,642,080        39.16         2.30         33,733,082   
  

 

 

         

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $59.71 as of June 30, 2011. The total intrinsic value of options exercised during the three and six months ended June 30, 2011 was $6.9 million and $15.8 million, respectively, compared to $4.0 million and $7.2 million for the comparable 2010 periods.

The table below provides information for restricted stock units under the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the six months ended June 30, 2011:

 

     Shares     Weighted Average
Grant  Date Fair
Value
 

Nonvested at December 31, 2010

     395,950      $ 43.49   

Granted

     312,735        60.06   

Vested

     (112,528     43.80   

Forfeited

     (9,746     47.51   
  

 

 

   

Nonvested at June 30, 2011

     586,411        52.20   
  

 

 

   

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

The following table details the securities purchased under agreements to resell and other short-term investment securities at June 30, 2011 and December 31, 2010, respectively:

 

(Dollars in thousands)

   June 30, 2011      December 31, 2010  

Securities purchased under agreements to resell

   $ 302,003       $ 60,345   

Short-term agency discount notes

     —           330,370   

Other short-term investment securities

     162,754         12,992   
  

 

 

    

 

 

 

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

   $ 464,757       $ 403,707   
  

 

 

    

 

 

 

In addition, as of June 30, 2011 and December 31, 2010, $1.5 billion and $2.2 billion, respectively, of our cash and due from banks was deposited with the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $260.4 million and $246.3 million, respectively.

 

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5. Investment Securities

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

The major components of our investment securities portfolio at June 30, 2011 and December 31, 2010 are as follows:

 

    June 30, 2011     December 31, 2010  

(Dollars in thousands)

  Amortized
Cost
    Unrealized
Gains
    Unrealized
Losses
    Carrying
Value
    Amortized
Cost
    Unrealized
Gains
    Unrealized
Losses
    Carrying
Value
 

Available-for-sale securities, at fair value:

               

U.S. treasury securities

  $ 25,321      $ 907      $ —        $ 26,228      $ 25,408      $ 1,002      $ —        $ 26,410   

U.S. agency debentures

    3,181,788        18,226        (5,650     3,194,364        2,844,973        7,077        (16,957     2,835,093   

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

    1,323,747        19,574        (1,271     1,342,050        1,234,120        15,487        (1,097     1,248,510   

Agency-issued collateralized mortgage obligations - fixed rate

    2,156,358        36,703        (425     2,192,636        806,032        24,435        (1     830,466   

Agency-issued collateralized mortgage obligations - variable rate

    2,697,867        6,293        (1,530     2,702,630        2,870,570        10,394        (1,439     2,879,525   

Commercial mortgage-backed securities

    25,313        423        —          25,736        —          —          —          —     

Municipal bonds and notes

    92,274        4,570        (246     96,598        96,381        2,164        (965     97,580   

Equity securities

    633        76        (46     663        358        34        (9     383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 9,503,301      $ 86,772      $ (9,168   $ 9,580,905      $ 7,877,842      $ 60,593      $ (20,468   $ 7,917,967   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-marketable securities:

               

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

               

Venture capital and private equity fund investments (1)

          515,118              391,247   

Other venture capital investments (2)

          114,070              111,843   

Other investments (3)

          995              981   

Non-marketable securities (equity method accounting):

               

Other investments (4)

          70,401              67,031   

Low income housing tax credit funds

          35,657              27,832   

Non-marketable securities (cost method accounting):

               

Venture capital and private equity fund investments (5)

          125,580              110,466   

Other venture capital investments

          13,373              12,120   
       

 

 

         

 

 

 

Total non-marketable securities

          875,194              721,520   
       

 

 

         

 

 

 

Total investment securities

        $ 10,456,099            $ 8,639,487   
       

 

 

         

 

 

 

 

(1) The following table shows the amount of venture capital and private equity fund investments by the following consolidated funds and our ownership of each fund at June 30, 2011 and December 31, 2010:

 

     June 30, 2011     December 31, 2010  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

SVB Strategic Investors Fund, LP

   $ 44,643         12.6   $ 44,722         12.6

SVB Strategic Investors Fund II, LP

     116,475         8.6        94,694         8.6   

SVB Strategic Investors Fund III, LP

     185,067         5.9        146,613         5.9   

SVB Strategic Investors Fund IV, LP

     83,506         5.0        40,639         5.0   

SVB Capital Preferred Return Fund, LP

     35,802         20.0        23,071         20.0   

SVB Capital—NT Growth Partners, LP

     36,934         33.0        28,624         33.0   

SVB Capital Partners II, LP (i)

     4,925         5.1        4,506         5.1   

Other private equity fund (ii)

     7,766         58.2        8,378         60.6   
  

 

 

      

 

 

    

Total venture capital and private equity fund investments

   $ 515,118         $ 391,247      
  

 

 

      

 

 

    

 

  (i) At June 30, 2011, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership interest of SVB Strategic Investors Fund II, LP.
  (ii) At June 30, 2011, we had a direct ownership interest of 41.5% and an indirect ownership interest of 12.6% and 4.1% in the fund through our ownership interests of SVB Capital—NT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively.

 

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(2) The following table shows the amount of other venture capital investments by the following consolidated funds and our ownership of each fund at June 30, 2011 and December 31, 2010:

 

     June 30, 2011     December 31, 2010  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

Silicon Valley BancVentures, LP

   $ 22,250         10.7   $ 21,371         10.7

SVB Capital Partners II, LP (i)

     47,568         5.1        51,545         5.1   

SVB India Capital Partners I, LP

     42,777         14.4        38,927         14.4   

SVB Capital Shanghai Yangpu Venture Capital Fund

     1,475         6.8        —           —     
  

 

 

      

 

 

    

Total other venture capital investments

   $ 114,070         $ 111,843      
  

 

 

      

 

 

    

 

  (i) At June 30, 2011, we had a direct ownership interest of 1.3% and an indirect ownership interest of 3.8% in the fund through our ownership of SVB Strategic Investors Fund II, LP.

 

(3) Other investments within non-marketable securities (investment company fair value accounting) include our ownership in Partners for Growth, LP, a consolidated debt fund. At both June 30, 2011 and December 31, 2010 we had a majority ownership interest of slightly more than 50.0% in the fund. Partners for Growth, LP is managed by a third party and we do not have an ownership interest in the general partner of this fund.

 

(4) The following table shows the carrying value and our ownership percentage of each investment at June 30, 2011 and December 31, 2010:

 

     June 30, 2011     December 31, 2010  

(Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

Gold Hill Venture Lending 03, LP (i)

   $ 17,043         9.3   $ 17,826         9.3

Gold Hill Capital 2008, LP (ii)

     15,601         15.5        12,101         15.5   

Partners for Growth II, LP

     8,156         24.2        10,465         24.2   

Other investments

     29,601         N/A        26,639         N/A   
  

 

 

      

 

 

    

Total other investments

   $ 70,401         $ 67,031      
  

 

 

      

 

 

    

 

  (i) At June 30, 2011, we had a direct ownership interest of 4.8% in the fund and an indirect interest in the fund through our investment in Gold Hill Venture Lending Partners 03, LLC (“GHLLC”) of 4.5%. Our aggregate direct and indirect ownership in the fund is 9.3%.
  (ii) At June 30, 2011, we had a direct ownership interest of 11.5% in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0%. Our aggregate direct and indirect ownership in the fund is 15.5%.

 

(5) Represents investments in 334 and 343 funds (primarily venture capital funds) at June 30, 2011 and December 31, 2010, respectively, where our ownership interest is less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships operating and financial policies. For the three months ended June 30, 2011, we recognized other-than-temporary impairment (“OTTI”) losses of $0.3 million resulting from other-than-temporary declines in value for 10 of the 334 investments. For the six months ended June 30, 2011, we recognized OTTI losses of $0.4 million resulting from other-than-temporary declines in value for 18 of the 334 investments. The OTTI losses are included in net gains on investment securities, a component of noninterest income. For the remaining 316 investments at June 30, 2011, we concluded that declines in value, if any, were temporary and as such, no OTTI was required to be recognized. At June 30, 2011, the carrying value of these venture capital and private equity fund investments (cost method accounting) was $125.6 million, and the estimated fair value was $141.1 million.

 

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The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months, or 12 months or longer as of June 30, 2011:

 

     June 30, 2011  
     Less than 12 months     12 months or longer      Total  

(Dollars in thousands)

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

U.S. agency debentures

   $ 963,408       $ (5,650   $ —         $ —         $ 963,408       $ (5,650

Residential mortgage-backed securities:

                

Agency-issued mortgage-backed securities

     98,038         (1,271     —           —           98,038         (1,271

Agency-issued collateralized mortgage obligations—fixed rate

     306,876         (425     —           —           306,876         (425

Agency-issued collateralized mortgage obligations—variable rate

     600,587         (1,530     —           —           600,587         (1,530

Municipal bonds and notes

     8,578         (246     —           —           8,578         (246

Equity securities

     509         (46     —           —           509         (46
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities (1)

   $ 1,977,996       $ (9,168   $ —         $ —         $ 1,977,996       $ (9,168
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of June 30, 2011, we identified a total of 75 investments that were in unrealized loss positions. Based on the underlying credit quality of the investments, we do not intend to sell any of our securities prior to recovery of our adjusted cost basis and as of June 30, 2011, it is more likely than not that we will not be required to sell any of our debt securities prior to recovery of our adjusted cost basis. Based on our analysis we deem all impairments to be temporary and changes in value for our temporarily impaired securities as of June 30, 2011 are included in other comprehensive income. Market valuations and impairment analyses on assets in the investment securities portfolio are reviewed and monitored on a quarterly basis.

The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months, or 12 months or longer as of December 31, 2010:

 

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

(Dollars in thousands)

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

U.S. agency debentures

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

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

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

Agency-issued collateralized mortgage obligations—fixed rate

     322         (1     —           —          322         (1

Agency-issued collateralized mortgage obligations—variable rate

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

Municipal bonds and notes

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

Equity securities

     148         (9     —           —          148         (9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of June 30, 2011. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.0 percent. The weighted average yield is computed using the amortized cost of debt securities, which are reported at fair value. For U.S. treasury securities, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for most U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure.

 

     June 30, 2011  
     Total     One Year
or Less
    After One
Year to
Five Years
    After Five
Years to
to Ten Years
    After
Ten Years
 

(Dollars in thousands)

   Carrying
Value
     Weighted-
Average
Yield
    Carrying
Value
     Weighted-
Average
Yield
    Carrying
Value
     Weighted-
Average
Yield
    Carrying
Value
     Weighted-
Average
Yield
    Carrying
Value
     Weighted-
Average
Yield
 

U.S. treasury securities

   $ 26,228         2.39   $ —           —     $ 26,228         2.39   $ —           —     $ —           —  

U.S. agency debentures

     3,194,364         1.52        108,583         2.00        3,060,089         1.48        25,692         4.07        —           —     

Residential mortgage-backed securities:

                         

Agency-issued mortgage-backed securities

     1,342,050         2.76        —           —          —           —          1,102,807         2.71        239,243         2.96   

Agency-issued collateralized mortgage obligations—fixed rate

     2,192,636         2.80        —           —          —           —          —           —          2,192,636         2.80   

Agency-issued collateralized mortgage obligations—variable rate

     2,702,630         0.70        —           —          —           —          —           —          2,702,630         0.70   

Commercial mortgage-backed securities

     25,736         2.70        —           —          —           —          —           —          25,736         2.70   

Municipal bonds and notes

     96,598         6.00        569         5.38        10,035         5.45        44,861         5.95        41,133         6.20   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 9,580,242         1.81      $ 109,152         2.02      $ 3,096,352         1.50      $ 1,173,360         2.86      $ 5,201,378         1.74   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

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Table of Contents

The following table presents the components of gains and losses (realized and unrealized) on investment securities for the three and six months ended June 30, 2011 and 2010:

 

     Three months ended June 30,     Six months ended June 30,  

(Dollars in thousands)

   2011     2010     2011     2010  

Gross gains on investment securities:

        

Available-for-sale securities, at fair value (1)

   $ 37,314      $ 3,101      $ 37,377      $ 3,132   

Marketable securities (investment company fair value accounting)

     —          —          442        51   

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

        

Venture capital and private equity fund investments

     37,205        8,853        82,704        28,645   

Other venture capital investments

     2,071        4,453        7,019        4,937   

Other investments

     —          —          20        27   

Non-marketable securities (equity method accounting):

        

Other investments

     3,132        598        6,516        2,141   

Non-marketable securities (cost method accounting):

        

Venture capital and private equity fund investments

     801        243        1,056        558   

Other investments

     2,256        102        2,429        102   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross gains on investment securities

     82,779        17,350        137,563        39,593   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross losses on investment securities:

        

Available-for-sale securities, at fair value (1)

     (93     (2,260     (94     (2,264

Marketable securities (investment company fair value accounting)

     (3,307     (57     (4,115     (57

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

        

Venture capital and private equity fund investments

     (4,845     (4,784     (6,901     (9,120

Other venture capital investments

     (1,420     (4,151     (1,664     (5,712

Other investments

     —          (79     —          (79

Non-marketable securities (equity method accounting):

        

Other investments

     (1,110     (612     (1,309     (613

Non-marketable securities (cost method accounting):

        

Venture capital and private equity fund investments

     (293     (602     (432     (939

Other investments

     (31     —          (31     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross losses on investment securities

     (11,099     (12,545     (14,546     (18,784
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains on investment securities, net

   $ 71,680      $ 4,805      $ 123,017      $ 20,809   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains attributable to noncontrolling interests, including carried interest

   $ 26,437      $ 3,564      $ 69,822      $ 16,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The cost basis of available-for-sale securities sold is determined on a specific identification basis.

 

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Table of Contents

6. Loans and Allowance for Loan Losses

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

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

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

The composition of loans, net of unearned income of $52.3 million and $45.5 million at June 30, 2011 and December 31, 2010, respectively, is presented in the following table:

 

(Dollars in thousands)

   June 30, 2011      December 31, 2010  

Commercial loans:

     

Software

   $ 2,034,257       $ 1,820,385   

Hardware

     645,967         561,610   

Clean technology

     237,430         159,502   

Venture capital/private equity

     1,009,604         1,036,077   

Life science

     624,944         568,739   

Premium wine (1)

     128,232         144,972   

Other

     257,546         303,492   
  

 

 

    

 

 

 

Commercial loans (2)

     4,937,980         4,594,777   
  

 

 

    

 

 

 

Real estate secured loans:

     

Premium wine (1)

     341,659         312,255   

Consumer loans (3)

     462,922         361,704   
  

 

 

    

 

 

 

Real estate secured loans

     804,581         673,959   
  

 

 

    

 

 

 

Construction loans

     37,871         60,178   

Consumer loans

     198,214         192,823   
  

 

 

    

 

 

 

Total loans, net of unearned income

   $ 5,978,646       $ 5,521,737   
  

 

 

    

 

 

 

 

(1) Included in our premium wine portfolio are gross construction loans of $109.5 million and $119.0 million at June 30, 2011 and December 31, 2010, respectively.
(2) Included within our commercial loans portfolio are business credit card loans to commercial clients. At June 30, 2011 and December 31, 2010, our business credit card loans portfolio totaled $42.1 million and $32.5 million, respectively.
(3) Consumer loans secured by real estate at June 30, 2011 and December 31, 2010 were comprised of the following:

 

(Dollars in thousands)

   June 30, 2011      December 31, 2010  

Loans for personal residence

   $ 286,106       $ 189,039   

Loans to eligible employees

     92,782         88,510   

Home equity lines of credit

     84,034         84,155   
  

 

 

    

 

 

 

Consumer loans secured by real estate

   $ 462,922       $ 361,704   
  

 

 

    

 

 

 

 

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Table of Contents

The activity in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010 was as follows:

 

     Three months ended June 30,     Six months ended June 30,  

(Dollars in thousands)

   2011     2010     2011     2010  

Allowance for loan losses, beginning balance

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

Provision for (reduction of) loan losses

     134        7,408        (2,913     18,153   

Gross loan charge-offs

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

Loan recoveries

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

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, ending balance

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

 

 

   

 

 

   

 

 

   

 

 

 

Credit Quality

The composition of loans, net of unearned income, broken out by portfolio segment (which we have identified as our commercial and consumer loan categories) and class of financing receivable (which we have identified as our client industry segments of software, hardware, etc.) as of June 30, 2011 and December 31, 2010, is as follows:

 

(Dollars in thousands)

   June 30, 2011      December 31, 2010  

Commercial loans:

     

Software

   $ 2,061,588       $ 1,820,680   

Hardware

     754,361         641,052   

Venture capital/private equity

     1,009,653         1,036,201   

Life science

     645,371         575,944   

Premium wine

     469,891         457,227   

Other

     376,646         436,106   
  

 

 

    

 

 

 

Total commercial loans

     5,317,510         4,967,210   
  

 

 

    

 

 

 

Consumer loans:

     

Real estate secured loans

     462,922         361,704   

Other consumer loans

     198,214         192,823   
  

 

 

    

 

 

 

Total consumer loans

     661,136         554,527   
  

 

 

    

 

 

 

Total loans, net of unearned income

   $ 5,978,646       $ 5,521,737   
  

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of June 30, 2011 and December 31, 2010:

 

(Dollars in thousands)

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

June 30, 2011:

                 

Commercial loans:

                 

Software

   $ 311       $ 1,209       $ 1       $ 1,521       $ 2,080,138       $ 1   

Hardware

     54         —           1         55         755,963         1   

Venture capital/private equity

     —           —           —           —           1,020,628         —     

Life science

     165         —           —           165         651,183         —     

Premium wine

     —           —           —           —           468,351         —     

Other

     98         —           —           98         375,061         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     628         1,209         2         1,839         5,351,324         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

                 

Real estate secured loans

     —           —           —           —           443,310         —     

Other consumer loans

     —           48         —           48         198,110         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     —           48         —           48         641,420         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans excluding impaired loans

     628         1,257         2         1,887         5,992,744         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

     1,955         6         1,371         3,332         33,003         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 2,583       $ 1,263       $ 1,373       $ 5,219       $ 6,025,747       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

                 

Commercial loans:

                 

Software

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

Hardware

     89         819         27         935         642,786         27   

Venture capital/private equity

     —           —           —           —           1,046,696         —     

Life science

     157         —           —           157         578,208         —     

Premium wine

     —           —           —           —           451,006         —     

Other

     —           —           —           —           438,345         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

                 

Real estate secured loans

     —           —           —           —           341,048         —     

Other consumer loans

     —           —           —           —           192,771         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     —           —           —           —           533,819         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans excluding impaired loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by portfolio segment and class of financing receivable as of June 30, 2011 and December 31, 2010:

 

(Dollars in thousands)

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

June 30, 2011:

           

Commercial loans:

           

Software

   $ 2,339       $ —         $ 2,339       $ 2,778   

Hardware

     6,543         —           6,543         7,022   

Life science

     898         140         1,038         1,202   

Premium wine

     73         1,279         1,352         1,444   

Other

     3,433         2,149         5,582         8,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     13,286         3,568         16,854         20,569   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

     19,481         —           19,481         21,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     19,481         —           19,481         21,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,767       $ 3,568       $ 36,335       $ 42,528   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

Commercial loans:

           

Software

   $ 2,958       $ 334       $ 3,292       $ 3,581   

Hardware

     3,517         307         3,824         3,931   

Life science

     2,050         1,362         3,412         4,433   

Premium wine

     2,995         3,167         6,162         7,129   

Other

     1,158         1,019         2,177         2,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     12,678         6,189         18,867         21,412   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

     20,559         —           20,559         22,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     20,559         —           20,559         22,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,237       $ 6,189       $ 39,426       $ 43,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during the three and six months ended June 30, 2011 and 2010, respectively:

 

     Three months ended June 30,      Six months ended June 30,  

(Dollars in thousands)

   2011      2010      2011      2010  

Average impaired loans:

           

Commercial loans:

           

Software

   $ 2,620       $ 7,213       $ 2,697       $ 6,990   

Hardware

     6,662         10,490         5,594         11,988   

Life science

     1,170         9,364         1,834         7,599   

Premium wine

     1,396         74         2,540         132   

Other

     3,588         2,242         2,878         2,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     15,436         29,383         15,543         29,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

     19,557         21,471         19,841         21,339   

Other consumer loans

     —           42         —           228   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     19,557         21,513         19,841         21,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total average impaired loans

   $ 34,993       $ 50,896       $ 35,384       $ 50,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

The following tables summarize the activity relating to our allowance for loan losses for the three and six months ended June 30, 2011, broken out by portfolio segment:

 

Three months ended June 30, 2011 (dollars in thousands)

   Beginning
Balance
March 31,
2011
     Charge-offs     Recoveries      Provision for
(Reduction  of)
    Ending
Balance
June 30,
2011
 

Commercial loans:

            

Software

   $ 30,479       $ (518   $ 2,639       $ (727   $ 31,873   

Hardware

     15,840         —          32         170        16,042   

Venture capital/private equity

     7,432         —          —           875        8,307   

Life science

     8,097         (471     505         (906     7,225   

Premium wine

     4,504         (449     590         (636     4,009   

Other

     6,433         (2,855     337         1,954        5,869   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial loans

     72,785         (4,293     4,103         730        73,325   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Consumer loans

     9,266         —          160         (596     8,830   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 82,051       $ (4,293   $ 4,263       $ 134      $ 82,155   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Six months ended June 30, 2011 (dollars in thousands)

   Beginning
Balance
December 31,
2010
     Charge-offs     Recoveries      (Reduction of)
Provision for
    Ending
Balance
June 30,
2011
 

Commercial loans:

            

Software

   $ 29,288       $ (1,622   $ 7,920       $ (3,713   $ 31,873   

Hardware

     14,688         (15     312         1,057        16,042   

Venture capital/private equity

     8,241         —          —           66        8,307   

Life science

     9,077         (3,662     1,128         682        7,225   

Premium wine

     5,492         (449     730         (1,764     4,009   

Other

     5,318         (2,867     407         3,011        5,869   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial loans

     72,104         (8,615     10,497         (661     73,325   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Consumer loans

     10,523         —          559         (2,252     8,830   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total allowance for loan losses

   $ 82,627       $ (8,615   $ 11,056       $ (2,913   $ 82,155   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2011 and December 31, 2010, broken out by portfolio segment:

 

     June 30, 2011      December 31, 2010  

(Dollars in thousands)

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

Commercial loans:

           

Software

   $ 1,083       $ 30,790       $ 986       $ 28,302   

Hardware

     2,713         13,329         1,348         13,340   

Venture capital/private equity

     —           8,307         —           8,241   

Life science

     58         7,167         346         8,731   

Premium wine

     73         3,936         438         5,054   

Other

     343         5,526         122         5,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     4,270         69,055         3,240         68,864   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans

     1,978         6,852         3,696         6,827   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 6,248       $ 75,907       $ 6,936       $ 75,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit Quality Indicators

For each individual client we establish an internal credit risk rating for that loan, which is used for assessing and monitoring credit risk as well as performance of the loan and the overall portfolio. Our internal credit risk ratings are also used to summarize the risk of loss due to failure by an individual borrower to repay the loan. For our internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk-rated 1 through 4 are performing loans and translate to an internal rating of “Pass”, with loans risk-rated 1 being cash secured. Loans risk-rated 5 through 7 are loans that are performing loans, however, we consider them as demonstrating higher risk which requires more frequent review of the individual exposures. These loans translate to an internal rating of “Performing (Criticized)”. A majority of our performing (criticized) loans are from our SVB Accelerator practice, serving our emerging or early stage clients. Loans risk-rated 8 and 9 are loans that are considered to be impaired and are on nonaccrual status. Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), or when we have determined, based upon most recent available information, that the timely collection of principal or interest is not probable; these loans are deemed “Impaired”. For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2010 Form 10-K. Loans rated 10 are charged-off and are not included as part of our loan portfolio balance. We review our credit quality indicators for performance and appropriateness of risk ratings as part of our evaluation process for our allowance for loan losses. The following table summarizes the credit quality indicators, broken out by portfolio segment and class of financing receivables as of June 30, 2011 and December 31, 2010:

 

(Dollars in thousands)

   Pass      Performing
(Criticized)
     Impaired      Total  

June 30, 2011:

           

Commercial loans:

           

Software

   $ 1,875,198       $ 206,461       $ 2,339       $ 2,083,998   

Hardware

     647,219         108,799         6,543         762,561   

Venture capital/private equity

     1,018,711         1,917         —           1,020,628   

Life science

     568,069         83,279         1,038         652,386   

Premium wine

     425,555         42,796         1,352         469,703   

Other

     353,076         22,083         5,582         380,741   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     4,887,828         465,335         16,854         5,370,017   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

     435,863         7,447         19,481         462,791   

Other consumer loans

     185,829         12,329         —           198,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     621,692         19,776         19,481         660,949   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

   $ 5,509,520       $ 485,111       $ 36,335       $ 6,030,966   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010:

           

Commercial loans:

           

Software

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

Hardware

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

Venture capital/private equity

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

Life science

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

Premium wine

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

Other

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

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

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

Other consumer loans

     181,561         11,210         —           192,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

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

 

 

    

 

 

    

 

 

    

 

 

 

Total gross loans

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

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

Included in the $36.3 million of impaired loans at June 30, 2011 are loans modified in troubled debt restructurings (“TDRs”), where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. At June 30, 2011, all TDRs were included as part of our impaired loan balances. In order for these loan balances to return to accrual status, the borrower must demonstrate a sustained period of timely payments and the ultimate collectability of all amounts contractually due is not in doubt. There were no commitments available for funding to any of the clients associated with these TDRs as of June 30, 2011. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables as of June 30, 2011:

 

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Table of Contents

(Dollars in thousands)

   June 30, 2011  

Loans modified in TDRs:

  

Commercial loans:

  

Software

   $ 2,248   

Hardware

     6,543   

Life science

     140   

Premium wine

     73   

Other

     2,148   
  

 

 

 

Total commercial loans

     11,152   
  

 

 

 

Consumer loans:

  

Real estate secured loans

     18,802   
  

 

 

 

Total consumer loans

     18,802   
  

 

 

 

Total

   $ 29,954   
  

 

 

 

7. Short-Term Borrowings and Long-Term Debt

The following table represents outstanding short-term borrowings and long-term debt at June 30, 2011 and December 31, 2010:

 

                 Carrying Value  

(Dollars in thousands)

  

Maturity

   Principal value      June 30, 2011      December 31, 2010  

Short-term borrowings:

           

Other short-term borrowings

   (1)    $ —         $ —         $ 37,245   
        

 

 

    

 

 

 

Total short-term borrowings

         $ —         $ 37,245   
        

 

 

    

 

 

 

Long-term debt:

           

5.375% Senior Notes

   September 15, 2020      350,000       $ 347,696       $ 347,601   

5.70% Senior Notes (2)

   June 1, 2012      141,429         147,446         265,613   

6.05% Subordinated Notes (3)

   June 1, 2017      45,964         53,150         285,937   

3.875% Convertible Notes

   April 15, 2011      —           —           249,304   

7.0% Junior Subordinated Debentures

   October 15, 2033      50,000         55,461         55,548   

4.99% long-term notes payable

   (4)      5,843         5,843         5,257   
        

 

 

    

 

 

 

Total long-term debt

         $ 609,596       $ 1,209,260   
        

 

 

    

 

 

 

 

(1) At December 31, 2010, represented cash collateral received from counterparties for our interest rate swap agreements related to our 5.70% Senior Notes and 6.05% Subordinated Notes. Due to the repurchase of $312.6 million of these notes and termination of associated portions of interest rate swaps (see discussion below) in May 2011, the notional value of our swaps fell below the $10 million threshold specified in the agreement, and therefore, the full collateral was returned to the counterparties.
(2) At June 30, 2011 and December 31, 2010, included in the carrying value of our 5.70% Senior Notes are $6.1 million and $15.7 million, respectively, related to the fair value of the interest rate swap associated with the notes.
(3) At June 30, 2011 and December 31, 2010, included in the carrying value of our 6.05% Subordinated Notes are $7.2 million and $36.3 million, respectively, related to the fair value of the interest rate swap associated with the notes.
(4) Represents long-term notes payable related to one of our debt fund investments, and was payable beginning April 30, 2009 with the last payment due in April 2012.

Interest expense related to short-term borrowings and long-term debt was $7.1 million and $17.8 million for the three and six months ended June 30, 2011, respectively, and $5.9 million and $11.5 million for the three and six months ended June 30, 2010, respectively. Interest expense is net of the cash flow impact from our interest rate swap agreements related to our 5.70% Senior Notes and 6.05% Subordinated Notes. The weighted average interest rate associated with our short-term borrowings as of December 31, 2010 was 0.13 percent.

 

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Table of Contents

Senior Notes and Subordinated Notes

We repurchased $108.6 million of our 5.70% Senior Notes and $204.0 million of our 6.05% Subordinated Notes through a tender offer transaction on May 2, 2011. These repurchases resulted in a gross loss from extinguishment of debt of $33.9 million, which included the payment of the repurchase premiums, transaction fees, and discount and origination fee accretion related to the notes. In connection with these repurchases, we terminated corresponding amounts of the interest rate swaps associated with these notes (see Note 8—“Derivative Financial Instruments”), resulting in a gross gain on swap termination of $37.0 million. The net gain from the note repurchases and the termination of corresponding portions of the interest rate swaps was $3.1 million (on a pre-tax basis), and was recognized during the second quarter of 2011 as a reduction in noninterest expense, which is included in the line item “Other”.

3.875% Convertible Notes

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

Concurrent with the issuance of our 3.875% Convertible Notes, we entered into a convertible note hedge and warrant agreement (see Note 8—“Derivative Financial Instruments”), which effectively increased the economic conversion price of our 3.875% Convertible Notes to $64.43 per share of common stock. The terms of the hedge and warrant agreement were not part of the terms of the notes and did not affect the rights of the holders of the notes. The warrants expire ratably over 60 business days beginning on July 15, 2011.

The effective interest rate for our 3.875% Convertible Notes for the three and six months ended June 30, 2011 was 6.84 percent and 5.92 percent, respectively, and interest expense was $0.7 million and $4.2 million, respectively. For the three and six months ended June 30, 2010, the effective interest rate was 5.72 percent and 5.75 percent, respectively, and interest expense was $3.5 million and $7.1 million, respectively.

Available Lines of Credit

We have certain facilities in place providing us access to short-term borrowings on a secured basis (using available-for-sale securities as collateral) and on an unsecured basis. These include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of June 30, 2011, we had not borrowed against any of our repurchase lines or any of our uncommitted federal funds lines. We also pledge securities to the Federal Home Loan Bank of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the Federal Home Loan Bank of San Francisco (comprised entirely of U.S. agency debentures) at June 30, 2011 totaled $1.6 billion, all of which was unused and available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at June 30, 2011 totaled $96.6 million, all of which was unused and available to support additional borrowings.

8. Derivative Financial Instruments

We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk, equity market price risk and to assist customers with their risk management objectives. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in primarily private, venture-backed companies in the technology and life science industries.

 

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Table of Contents

Interest Rate Risk

Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate-sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk for our 5.70% Senior Notes, and 6.05% Subordinated Notes, we entered into fixed-for-floating interest rate swap agreements at the time of debt issuance based upon London Interbank Offered Rates (“LIBOR”) with matched-terms. Prior to our termination of portions of our interest rate swap agreements (discussed below), we used the shortcut method to assess hedge effectiveness and evaluate the hedging relationships for qualification under the shortcut method requirements for each reporting period. Net cash benefits associated with our interest rate swaps were recorded in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swaps was calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Increases from changes in fair value were included in other assets and decreases from changes in fair value were included in other liabilities.

In connection with the repurchase of portions of our 5.70% Senior Notes and 6.05% Subordinated Notes in May 2011, we terminated corresponding amounts of the associated interest rate swaps. As a result of these terminations, the remaining portions of the interest rate swaps no longer qualify for the shortcut method to assess hedge effectiveness under Accounting Standards Codification (“ASC”) 815, and going forward will be accounted for under the long-haul method. Any differences associated with our interest rate swaps that arise as a result of hedge ineffectiveness will be recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

Currency Exchange Risk

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

Equity Market Price Risk

Our 3.875% Convertible Notes, which matured in April 2011, contained conversion options that enabled holders to convert the notes, subject to certain conditions. Upon conversion of the notes, we paid the outstanding principal amount in cash as required by the terms of the notes, and to the extent that the conversion value exceeded the principal amount, we had the option to pay cash or shares of our common stock (or a combination of cash and shares) in respect of the excess amount. The conversion option represented an equity risk exposure for the excess conversion value and was an equity derivative classified in stockholders’ equity. We managed equity market price risk of our 3.875% Convertible Notes by entering into a convertible note hedge and warrant agreement at a net cost of $20.6 million, which effectively increased the economic conversion price from $53.04 per common share to $64.43, and decreased potential dilution to stockholders resulting from the conversion option. For the three and six months ended June 30, 2011 and 2010, there were no conversions or exercises under the warrant agreement as the warrants were not convertible. The warrants expire ratably over 60 business days beginning on July 15, 2011.

For more information on the 3.875% Convertible Notes, see our Consolidated Financial Statements and Supplementary Data—Note 12—“Short-Term Borrowings and Long-Term Debt” under Part II, Item 8 of our 2010 Form 10-K.

Other Derivative Instruments

Equity Warrant Assets

Our equity warrant assets are concentrated in private, venture-backed companies in the technology and life science industries. Most of these warrant agreements contain net share settlement provisions, which permit us to pay the warrant exercise price using shares issuable under the warrant (“cashless exercise”). Because we can net settle these warrant agreements, these equity warrant assets qualify as derivative instruments. We value our equity warrant assets using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. We make valuation adjustments for estimated remaining life and marketability for warrants issued by private companies. Equity warrant assets are recorded at fair value in other assets, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

 

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Table of Contents

Loan Conversion Options

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

Other Derivatives

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

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

Counterparty Credit Risk

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

The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at June 30, 2011 and December 31, 2010, respectively, were as follows:

 

          June 30, 2011     December 31, 2010  

(Dollars in thousands)

  Balance Sheet
Location
    Notional or
Contractual
Amount
    Fair Value     Collateral
(1)
    Net
Exposure
(2)
    Notional or
Contractual
Amount
    Fair Value     Collateral
(1)
    Net
Exposure
(2)
 

Derivatives designated as hedging instruments:

                 

Interest rate risks:

                 

Interest rate swaps

    Other assets      $ 187,393      $ 13,296      $ —        $