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
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant 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 registrants common stock ($0.001 par value) were outstanding.
2
PART I - FINANCIAL INFORMATION
ITEM 1. | INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except par value and share data) |
June 30, 2011 |
December 31, 2010 |
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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 | ||||||
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Cash and cash equivalents |
2,565,219 | 3,076,432 | ||||||
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|
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Available-for-sale securities |
9,580,905 | 7,917,967 | ||||||
Non-marketable securities |
875,194 | 721,520 | ||||||
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|
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Investment securities |
10,456,099 | 8,639,487 | ||||||
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Loans, net of unearned income |
5,978,646 | 5,521,737 | ||||||
Allowance for loan losses |
(82,155 | ) | (82,627 | ) | ||||
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Net loans |
5,896,491 | 5,439,110 | ||||||
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|
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Premises and equipment, net of accumulated depreciation and amortization |
49,452 | 44,545 | ||||||
Accrued interest receivable and other assets |
399,474 | 328,187 | ||||||
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Total assets |
$ | 19,366,735 | $ | 17,527,761 | ||||
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Liabilities and total equity |
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Liabilities: |
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Deposits: |
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Noninterest-bearing demand |
$ | 10,683,945 | $ | 9,011,538 | ||||
Interest-bearing deposits |
5,594,529 | 5,325,403 | ||||||
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Total deposits |
16,278,474 | 14,336,941 | ||||||
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Short-term borrowings |
| 37,245 | ||||||
Other liabilities |
462,614 | 196,037 | ||||||
Long-term debt |
609,596 | 1,209,260 | ||||||
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Total liabilities |
17,350,684 | 15,779,483 | ||||||
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Commitments and contingencies (Note 11) |
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SVBFG stockholders equity: |
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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 | ||||||
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|
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Total SVBFG stockholders equity |
1,436,893 | 1,274,350 | ||||||
Noncontrolling interests |
579,158 | 473,928 | ||||||
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|
|
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Total equity |
2,016,051 | 1,748,278 | ||||||
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|
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Total liabilities and total equity |
$ | 19,366,735 | $ | 17,527,761 | ||||
|
|
|
|
See accompanying notes to interim consolidated financial statements (unaudited).
3
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
(Dollars in thousands, except per share amounts) |
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 | ||||||||||||
|
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|
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|
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Total interest income |
140,161 | 116,245 | 274,262 | 226,264 | ||||||||||||
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Interest expense: |
||||||||||||||||
Deposits |
2,559 | 3,867 | 5,664 | 7,532 | ||||||||||||
Borrowings |
7,149 | 5,942 | 17,846 | 11,456 | ||||||||||||
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|||||||||
Total interest expense |
9,708 | 9,809 | 23,510 | 18,988 | ||||||||||||
|
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|
|
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|
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Net interest income |
130,453 | 106,436 | 250,752 | 207,276 | ||||||||||||
Provision for (reduction of) loan losses |
134 | 7,408 | (2,913 | ) | 18,153 | |||||||||||
|
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|
|||||||||
Net interest income after provision for loan losses |
130,319 | 99,028 | 253,665 | 189,123 | ||||||||||||
|
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|
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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 | ||||||||||||
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|
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Total noninterest income |
123,708 | 40,157 | 213,662 | 89,430 | ||||||||||||
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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 | ||||||||||||
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Total noninterest expense |
121,032 | 104,180 | 238,467 | 202,756 | ||||||||||||
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Income before income tax expense |
132,995 | 35,005 | 228,860 | 75,797 | ||||||||||||
Income tax expense |
43,263 | 13,819 | 66,033 | 25,401 | ||||||||||||
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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 | ) | ||||||||
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Net income available to common stockholders |
$ | 65,750 | $ | 21,120 | $ | 98,757 | $ | 39,677 | ||||||||
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Earnings per common sharebasic |
$ | 1.53 | $ | 0.51 | $ | 2.31 | $ | 0.95 | ||||||||
Earnings per common sharediluted |
1.50 | 0.50 | 2.27 | 0.94 |
See accompanying notes to interim consolidated financial statements (unaudited).
4
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended June 30, |
Six months ended June 30, |
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(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 | ||||||||||||
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Other comprehensive income, net of tax |
38,137 | 36,492 | 23,234 | 54,043 | ||||||||||||
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Comprehensive income |
127,869 | 57,678 | 186,061 | 104,439 | ||||||||||||
Comprehensive income attributable to noncontrolling interests |
(23,982 | ) | (66 | ) | (64,070 | ) | (10,719 | ) | ||||||||
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Comprehensive income available to common stockholders |
$ | 103,887 | $ | 57,612 | $ | 121,991 | $ | 93,720 | ||||||||
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See accompanying notes to interim consolidated financial statements (unaudited).
5
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 | |||||||||||||||||
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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 | ) | |||||||||||||||||||||
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Balance at June 30, 2010 |
41,886,197 | $ | 42 | $ | 404,521 | $ | 772,592 | $ | 59,948 | $ | 1,237,103 | $ | 389,852 | $ | 1,626,955 | |||||||||||||||||
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Balance at December 31, 2010 |
42,268,201 | $ | 42 | $ | 422,334 | $ | 827,831 | $ | 24,143 | $ | 1,274,350 | $ | 473,928 | $ | 1,748,278 | |||||||||||||||||
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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 | ||||||||||||||||||||||||
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Balance at June 30, 2011 |
43,136,209 | $ | 43 | $ | 462,885 | $ | 926,588 | $ | 47,377 | $ | 1,436,893 | $ | 579,158 | $ | 2,016,051 | |||||||||||||||||
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See accompanying notes to interim consolidated financial statements (unaudited).
6
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, |
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(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 | ||||||
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Net cash provided by operating activities |
171,806 | 94,992 | ||||||
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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 | ) | ||||
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|
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Net cash used for investing activities |
(2,099,917 | ) | (1,274,483 | ) | ||||
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|
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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 | ) | |||||
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|
|||||
Net cash provided by financing activities |
1,416,898 | 1,856,981 | ||||||
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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 | ||||||
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Cash and cash equivalents at end of period |
$ | 2,565,219 | $ | 4,190,343 | ||||
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Supplemental disclosures: |
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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).
7
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 DataNote 2Summary 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 entitys operations. For these types of entities, the Companys 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 entitys 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 entitys 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.
8
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 Companys 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 TDRs. 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 TDRs are determined and increases the disclosure requirements for TDRs, 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 Boards (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: |
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Net income available to common stockholders |
$ | 65,750 | $ | 21,120 | $ | 98,757 | $ | 39,677 | ||||||||
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Denominator: |
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Weighted average common shares outstanding-basic |
42,924 | 41,720 | 42,704 | 41,558 | ||||||||||||
Weighted average effect of dilutive securities: |
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Stock options and ESPP |
654 | 694 | 678 | 712 | ||||||||||||
Restricted stock units |
101 | 62 | 100 | 70 | ||||||||||||
3.875% Convertible Notes |
61 | | 77 | | ||||||||||||
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Denominator for diluted calculation |
43,740 | 42,476 | 43,559 | 42,340 | ||||||||||||
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Earnings per common share: |
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Basic |
$ | 1.53 | $ | 0.51 | $ | 2.31 | $ | 0.95 | ||||||||
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Diluted |
$ | 1.50 | $ | 0.50 | $ | 2.27 | $ | 0.94 | ||||||||
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9
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 | ||||||||||||
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Total |
44 | 8 | 62 | 15 | ||||||||||||
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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 7Short-Term Borrowings and Long-Term Debt and Note 8Derivative 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 | ||||||
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Total unrecognized share-based compensation expense |
$ | 39,433 | ||||||
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10
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 | |||||||||||||
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Outstanding at June 30, 2011 |
2,744,817 | 41.81 | 3.70 | $ | 49,351,094 | |||||||||||
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Vested and expected to vest at June 30, 2011 |
2,599,938 | 41.41 | 3.56 | 47,762,256 | ||||||||||||
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Exercisable at June 30, 2011 |
1,642,080 | 39.16 | 2.30 | 33,733,082 | ||||||||||||
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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 |
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Nonvested at December 31, 2010 |
395,950 | $ | 43.49 | |||||
Granted |
312,735 | 60.06 | ||||||
Vested |
(112,528 | ) | 43.80 | |||||
Forfeited |
(9,746 | ) | 47.51 | |||||
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Nonvested at June 30, 2011 |
586,411 | 52.20 | ||||||
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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 | ||||||
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Total federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
$ | 464,757 | $ | 403,707 | ||||
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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.
11
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 |
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Available-for-sale securities, at fair value: |
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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: |
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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 | ||||||||||||||||||||||
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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 | ||||||||||||||
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Non-marketable securities: |
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Non-marketable securities (investment company fair value accounting): |
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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): |
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Other investments (4) |
70,401 | 67,031 | ||||||||||||||||||||||||||||||
Low income housing tax credit funds |
35,657 | 27,832 | ||||||||||||||||||||||||||||||
Non-marketable securities (cost method accounting): |
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Venture capital and private equity fund investments (5) |
125,580 | 110,466 | ||||||||||||||||||||||||||||||
Other venture capital investments |
13,373 | 12,120 | ||||||||||||||||||||||||||||||
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Total non-marketable securities |
875,194 | 721,520 | ||||||||||||||||||||||||||||||
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Total investment securities |
$ | 10,456,099 | $ | 8,639,487 | ||||||||||||||||||||||||||||
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(1) | The following table shows the amount of venture capital and private equity fund investments by the following consolidated funds and our ownership of each fund at 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 CapitalNT 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 | ||||||||||||
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Total venture capital and private equity fund investments |
$ | 515,118 | $ | 391,247 | ||||||||||||
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(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 CapitalNT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively. |
12
(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 | | | ||||||||||||
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Total other venture capital investments |
$ | 114,070 | $ | 111,843 | ||||||||||||
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(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 | ||||||||||||
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Total other investments |
$ | 70,401 | $ | 67,031 | ||||||||||||
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(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. |
13
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 |
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U.S. agency debentures |
$ | 963,408 | $ | (5,650 | ) | $ | | $ | | $ | 963,408 | $ | (5,650 | ) | ||||||||||
Residential mortgage-backed securities: |
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Agency-issued mortgage-backed securities |
98,038 | (1,271 | ) | | | 98,038 | (1,271 | ) | ||||||||||||||||
Agency-issued collateralized mortgage obligationsfixed rate |
306,876 | (425 | ) | | | 306,876 | (425 | ) | ||||||||||||||||
Agency-issued collateralized mortgage obligationsvariable 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 | ) | ||||||||||||||||
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Total temporarily impaired securities (1) |
$ | 1,977,996 | $ | (9,168 | ) | $ | | $ | | $ | 1,977,996 | $ | (9,168 | ) | ||||||||||
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(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 |
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U.S. agency debentures |
$ | 1,731,639 | $ | (16,957 | ) | $ | | $ | | $ | 1,731,639 | $ | (16,957 | ) | ||||||||||
Residential mortgage-backed securities: |
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Agency-issued mortgage-backed securities |
32,595 | (1,097 | ) | | | 32,595 | (1,097 | ) | ||||||||||||||||
Agency-issued collateralized mortgage obligationsfixed rate |
322 | (1 | ) | | | 322 | (1 | ) | ||||||||||||||||
Agency-issued collateralized mortgage obligationsvariable 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 | ) | ||||||||||||||||
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|||||||||||||
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 obligationsfixed rate |
2,192,636 | 2.80 | | | | | | | 2,192,636 | 2.80 | ||||||||||||||||||||||||||||||
Agency-issued collateralized mortgage obligationsvariable 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 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
14
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. |
15
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 | ||||
|
|
|
|
16
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 | ||||
|
|
|
|
17
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
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
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 | ||||||||
|
|
|
|
|
|
|
|
20
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 2Summary 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:
21
(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.
22
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 8Derivative 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 8Derivative 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.
23
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 expenseBorrowings, 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 currencys 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 DataNote 12Short-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.
24
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 | $ | | $ |