XNAS:SIVB SVB Financial Group Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from          to         .

Commission File Number: 000-15637

 

 

SVB FINANCIAL GROUP

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   91-1962278

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(408) 654-7400

(Registrant’s telephone number, including area code)

 

 

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

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

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

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

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

At April 30, 2012, 44,215,339 shares of the registrant’s common stock ($0.001 par value) were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

           

Page

 
PART I - FINANCIAL INFORMATION      4   

Item 1.

    

Interim Consolidated Financial Statements (unaudited)

     4   
    

Interim Consolidated Balance Sheets (unaudited) as of March 31, 2012 and December 31, 2011

     4   
    

Interim Consolidated Statements of Income (unaudited) for the three months ended March 31, 2012 and 2011

     5   
    

Interim Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2012 and 2011

     6   
    

Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended March 31, 2012 and 2011

     7   
    

Interim Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and 2011

     8   
    

Notes to Interim Consolidated Financial Statements (unaudited)

     9   

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   

Item 3.

    

Quantitative and Qualitative Disclosures about Market Risk

     68   

Item 4.

    

Controls and Procedures

     69   
PART II - OTHER INFORMATION      70   

Item 1.

    

Legal Proceedings

     70   

Item 1A.

    

Risk Factors

     70   

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

     70   

Item 3.

    

Defaults Upon Senior Securities

     70   

Item 4.

    

Mine Safety Disclosures

     70   

Item 5.

    

Other Information

     70   

Item 6.

    

Exhibits

     70   
SIGNATURES      71   
INDEX TO EXHIBITS      72   

 

2


Table of Contents

Glossary of Acronyms used in this Report

 

AICPA – American Institute of Certified Public Accountants

ASC — Accounting Standards Codification

ASU – Accounting Standards Update

EHOP – Employee Home Ownership Program of the Company

EPS – Earnings per share

ESOP – Employee Stock Ownership Plan of the Company

ESPP – 1999 Employee Stock Purchase Plan of the Company

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

FHLB – Federal Home Loan Bank

FRB – Federal Reserve Bank

GAAP - Accounting principles generally accepted in the United States of America

IASB – International Accounting Standards Board

IFRS – International Financial Reporting Standards

IPO – Initial public offering

IRS – Internal Revenue Service

IT – Information technology

LIBOR – London Interbank Offered Rate

M&A – Merger and acquisition

OTTI – Other than temporary impairment

SEC – Securities and Exchange Commission

TDR – Troubled debt restructuring

UK – United Kingdom

VIE – Variable interest entity

 

3


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1.        INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

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

       March 31,    
2012
      December 31,  
2011
 

 Assets

    

 Cash and cash equivalents

     $ 850,624          $ 1,114,948     

 Available-for-sale securities

     11,527,541          10,536,046     

 Non-marketable securities

     1,021,941          1,004,440     

 

 

 Investment securities

     12,549,482          11,540,486     

 

 

 Loans, net of unearned income

     7,121,289          6,970,082     

 Allowance for loan losses

     (100,922)         (89,947)    

 

 

 Net loans

     7,020,367          6,880,135     

 

 

 Premises and equipment, net of accumulated depreciation and amortization

     59,320          56,471     

 Accrued interest receivable and other assets

     338,544          376,854     

 

 

 Total assets

     $ 20,818,337          $ 19,968,894     

 

 

 Liabilities and total equity

    

 Liabilities:

    

 Noninterest-bearing demand deposits

     $ 11,837,600          $ 11,861,888     

 Interest-bearing deposits

     4,879,282          4,847,648     

 

 

 Total deposits

     16,716,882          16,709,536     

 

 

 Short-term borrowings

     849,380          -     

 Other liabilities

     307,537          405,321     

 Long-term debt

     601,835          603,648     

 

 

 Total liabilities

     18,475,634          17,718,505     

 

 

 Commitments and contingencies (Note 11 and Note 14)

    

 SVBFG stockholders’ equity:

    

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

     -          -     

 Common stock, $0.001 par value, 150,000,000 shares authorized;
44,087,110 shares and 43,507,932 shares outstanding, respectively

     44          44     

 Additional paid-in capital

     515,614          484,216     

 Retained earnings

     1,034,523          999,733     

 Accumulated other comprehensive income

     89,309          85,399     

 

 

 Total SVBFG stockholders’ equity

     1,639,490          1,569,392     

 Noncontrolling interests

     703,213          680,997     

 

 

 Total equity

     2,342,703          2,250,389     

 

 

 Total liabilities and total equity

     $   20,818,337          $   19,968,894     

 

 

 

 

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

 

4


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

         Three months ended March 31,      

 (Dollars in thousands, except per share amounts)

       2012             2011      

 Interest income:

    

 Loans

     $       109,461          $       89,776     

 Available-for-sale securities:

    

 Taxable

     47,375          41,382     

 Non-taxable

     900          941     

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

     1,038          2,002     

 

 

 Total interest income

     158,774          134,101     

 

 

 Interest expense:

    

 Deposits

     1,481          3,105     

 Borrowings

     6,356          10,697     

 

 

 Total interest expense

     7,837          13,802     

 

 

 Net interest income

     150,937          120,299     

 Provision for (reduction of) loan losses

     14,529          (3,047)    

 

 

 Net interest income after provision for loan losses

     136,408          123,346     

 

 

 Noninterest income:

    

 Foreign exchange fees

     12,103          10,497     

 Deposit service charges

     8,096          7,117     

 Gains on investment securities, net

     7,839          51,337     

 Gains on derivative instruments, net

     5,976          551     

 Credit card fees

     5,668          3,817     

 Letters of credit and standby letters of credit income

     3,636          2,710     

 Client investment fees

     2,897          3,661     

 Other

     13,078          10,264     

 

 

 Total noninterest income

     59,293          89,954     

 

 

 Noninterest expense:

    

 Compensation and benefits

     83,737          75,632     

 Professional services

     14,607          12,987     

 Business development and travel

     7,746          5,653     

 Premises and equipment

     7,564          5,912     

 Net occupancy

     5,623          4,650     

 Correspondent bank fees

     2,688          2,163     

 FDIC assessments

     2,498          3,475     

 Reduction of provision for unfunded credit commitments

     (258)         (900)    

 Other

     7,807          7,863     

 

 

 Total noninterest expense

     132,012          117,435     

 

 

 Income before income tax expense

     63,689          95,865     

 Income tax expense

     23,756          22,770     

 

 

 Net income before noncontrolling interests

     39,933          73,095     

 Net income attributable to noncontrolling interests

     (5,143)         (40,088)    

 

 

 Net income available to common stockholders

     $ 34,790          $ 33,007     

 

 

 Earnings per common share—basic

     $ 0.79          $ 0.78     

 Earnings per common share—diluted

     0.78          0.76     

 

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

 

5


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

         Three months ended March 31,      

 (Dollars in thousands)

       2012             2011      

 Net income before noncontrolling interests

     $ 39,933          $ 73,095     

 Other comprehensive income (loss), net of tax:

    

Change in cumulative translation gains:

    

Foreign currency translation gains

     2,472          965     

Related tax expense

     (1,013)         (395)    

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

    

Unrealized holding gains (losses)

     3,269          (26,159)    

Related tax (expense) benefit

     (1,335)         10,723     

Reclassification adjustment for losses (gains) included in net income

     874          (62)    

Related tax (benefit) expense

     (357)         25     

 

 

 Other comprehensive income (loss), net of tax

     3,910          (14,903)    

 

 

 Comprehensive income

     43,843          58,192     

 Comprehensive income attributable to noncontrolling interests

     (5,143)         (40,088)    

 

 

 Comprehensive income attributable to SVBFG

     $ 38,700          $ 18,104     

 

 

 

 

 

 

 

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

 

6


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

        Common Stock     Additional
Paid-in
    Retained     Accumulated
Other
Comprehensive
    Total SVBFG
Stockholders’
    Noncontrolling        

 (Dollars in thousands)

      Shares     Amount     Capital     Earnings     Income     Equity     Interests     Total Equity  

 Balance at December 31, 2010

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

      429,627                14,433                -          14,434                 14,434    

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

                    2,476                -          2,476                 2,476     

 Net income

                           33,007         -          33,007          40,088         73,095     

 Capital calls and distributions, net

                                  -          -          19,441         19,441     

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

                                  (15,473)         (15,473)                (15,473)    

 Foreign currency translation adjustments, net of tax

                                  570          570                 570     

 Stock-based compensation expense

                    4,210                -          4,210                 4,210     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance at March 31, 2011

       42,697,828        $ 43        $ 443,453        $ 860,838        $ 9,240         $ 1,313,574         $ 533,457        $ 1,847,031     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance at December 31, 2011

       43,507,932        $ 44        $ 484,216        $ 999,733        $ 85,399         $ 1,569,392         $ 680,997        $ 2,250,389     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

      505,618                17,900                -          17,900                 17,900     

 Common stock issued under ESOP

      73,560                4,345                -          4,345                 4,345     

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

                    3,819                -          3,819                 3,819     

 Net income

                           34,790         -          34,790          5,143         39,933     

 Capital calls and distributions, net

                                  -          -          17,073         17,073     

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

                                  2,451          2,451                 2,451     

 Foreign currency translation adjustments, net of tax

                                  1,459          1,459                 1,459     

 Stock-based compensation expense

                    5,334                -          5,334                 5,334     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance at March 31, 2012

       44,087,110        $ 44        $ 515,614        $ 1,034,523        $ 89,309         $ 1,639,490         $ 703,213        $ 2,342,703     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

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

 

7


Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

           Three months ended March 31,         

 (Dollars in thousands)

   2012     2011  

 Cash flows from operating activities:

    

Net income before noncontrolling interests

     $ 39,933          $ 73,095     

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

    

Provision for (reduction of) loan losses

     14,529          (3,047)    

Reduction of provision for unfunded credit commitments

     (258)         (900)    

Changes in fair values of derivatives, net

     (3,370)         (1,008)    

Gains on investment securities, net

     (7,839)         (51,337)    

Depreciation and amortization

     6,454          6,519     

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

     9,869          2,570     

Tax benefit from stock exercises

     790          310     

Amortization of share-based compensation

     5,149          4,243     

Amortization of deferred loan fees

     (15,488)         (14,246)    

Deferred income tax (benefit) expense

     (1,570)         4,309     

Changes in other assets and liabilities:

    

Accrued interest receivable and payable, net

     (6,399)         (8,596)    

Accounts receivable

     14,631          (1,099)    

Income tax payable and receivable, net

     14,013          9,890     

Prepaid FDIC assessments and amortization

     2,412          3,180     

Accrued compensation

     (66,240)         (39,760)    

Foreign exchange spot contracts, net

     (21,154)         15,609     

Other, net

     3,666          6,391     

 

 

 Net cash (used for) provided by operating activities

     (10,872)         6,123     

 

 

 Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (1,777,958)         (2,213,193)    

Proceeds from sales of available-for-sale securities

     3,219          74     

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

     777,717          601,092     

Purchases of nonmarketable securities (cost and equity method accounting)

     (9,005)         (12,868)    

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

     11,317          5,413     

Purchases of nonmarketable securities (fair value accounting)

     (29,440)         (42,448)    

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

     25,545          24,639     

Net increase in loans

     (144,957)         (123,975)    

Proceeds from recoveries of charged-off loans

     3,436          6,793     

Purchases of premises and equipment

     (8,054)         (5,611)    

 

 

 Net cash used for investing activities

     (1,148,180)         (1,760,084)    

 

 

 Cash flows from financing activities:

    

Net increase in deposits

     7,346          993,378     

Increase (decrease) in short-term borrowings

     849,380          (1,830)    

Capital contributions from noncontrolling interests, net of distributions

     17,073          19,441     

Tax benefit from stock exercises

     3,029          2,166     

Proceeds from issuance of common stock and ESPP

     17,900          14,434     

 

 

 Net cash provided by financing activities

     894,728          1,027,589     

 

 

 Net decrease in cash and cash equivalents

     (264,324)         (726,372)    

 Cash and cash equivalents at beginning of period

     1,114,948          3,076,432     

 

 

 Cash and cash equivalents at end of period

     $ 850,624          $ 2,350,060     

 

 

 Supplemental disclosures:

    

 Cash paid during the period for:

    

 Interest

     $ 12,012          $ 14,601     

 Income taxes

     6,556          4,891     

 Noncash items during the period:

    

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

     $ 2,451          $ (15,473)    

 Net change in fair value of interest rate swaps

     (1,557)         (5,525)    

 

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

 

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

SVB Financial Group 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 of all sizes and stages throughout their life cycles. In these notes to our consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.

The accompanying interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with 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 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 months ended March 31, 2012 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, 2011 (“2011 Form 10-K”).

The accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data—Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2011 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 measurements of fair value, the valuation of non-marketable securities, the valuation of equity warrant assets, the adequacy of the allowance for loan losses and reserve for unfunded credit commitments, and the recognition and measurement of income tax assets and liabilities.

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 and whether the accounting guidance requires consolidation. All significant intercompany accounts and transactions have been eliminated.

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

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

 

  1.

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

 

  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; and,

 

  3.

Qualitative and quantitative factors regarding the nature, size, and form of our involvement with 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.

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 on the status of the entities and whether facts or circumstances have changed in relation to previously evaluated voting interest entities and our involvement in VIEs which could cause the Company’s consolidation conclusion to change.

 

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Impact of Adopting ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS

In May 2011, the FASB issued a new accounting standard which requires new disclosures and clarifies existing guidance surrounding fair value measurement. This standard was issued concurrently with the IASB’s 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, and was therefore adopted effective January 1, 2012. This standard clarifies how fair value is measured and increases the disclosure requirements for fair value measurements, and does not have a material impact on our financial position, results of operations or stockholders’ equity. See Note 13 – “Fair Value of Financial Instruments” for further details.

Impact of Adopting ASU No. 2011-05, Presentation of Comprehensive Income

In June 2011, the FASB issued a new accounting standard, which requires presentation of the components of total comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of which option is chosen, reclassification adjustments for items that are reclassified from other comprehensive income to net income are required to be shown on the face of the financial statements. In December 2011, the FASB approved a proposed update, which indefinitely defers the requirements of ASU No. 2011-05 to present components of reclassifications of other comprehensive income on the face of the income statement. This new guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance is effective on a retrospective basis for the interim and annual reporting periods beginning after December 15, 2011, and was therefore adopted effective January 1, 2012. This standard only clarifies the presentation of comprehensive income and does not affect our financial position, results of operations or stockholders’ equity.

Recent Accounting Pronouncements

In December 2011, the FASB issued a new accounting standard (ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities), which requires new disclosures surrounding financial instruments and derivative instruments that are offset on the statement of financial position, or are eligible for offset subject to a master netting arrangement. This standard was issued concurrent with the IASB’s issuance of a similar standard with the objective of converged disclosure guidance. The guidance is effective on a retrospective basis for the interim and annual reporting periods beginning after January 1, 2013. 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.

 

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2. Stockholders’ Equity and EPS

EPS

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 outstanding under our equity incentive plans, our ESPP, and for certain periods, our 3.875% convertible senior notes (“3.875% Convertible Notes”). Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2012 and 2011, respectively:

 

            Three months ended March 31,           

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

  2012     2011  

 Numerator:

   

Net income available to common stockholders

    $ 34,790          $ 33,007     
 

 

 

   

 

 

 

 Denominator:

   

Weighted average common shares outstanding-basic

    43,780          42,482     

Weighted average effect of dilutive securities:

   

Stock options and ESPP

    501          707     

Restricted stock units

    179          149     

3.875% Convertible Notes (1)

    -          88     
 

 

 

   

 

 

 

 Denominator for diluted calculation

    44,460          43,426     
 

 

 

   

 

 

 

 Earnings per common share:

   

Basic

    $ 0.79          $ 0.78     
 

 

 

   

 

 

 

Diluted

    $ 0.78          $ 0.76     
 

 

 

   

 

 

 

 

(1)

Our $250 million 3.875% Convertible Notes matured on April 15, 2011.

The following table summarizes the common shares excluded from the diluted EPS calculation as they were deemed to be antidilutive for the three months ended March 31, 2012 and 2011, respectively:

 

        Three months ended March 31,      

 (Shares in thousands)

  2012     2011  

 Stock options

      121              78     

 Restricted stock units

    1          -     
 

 

 

   

 

 

 

 Total

      122              78     
 

 

 

   

 

 

 

3. Share-Based Compensation

For the three months ended March 31, 2012 and 2011, we recorded share-based compensation and related tax benefits as follows:

 

        Three months ended March 31,      

 (Dollars in thousands)

  2012     2011  

Share-based compensation expense

     $ 5,149           $ 4,243     

Income tax benefit related to share-based compensation expense

    (1,199)         (1,033)    

Unrecognized Compensation Expense

As of March 31, 2012, unrecognized share-based compensation expense was as follows:

 

 (Dollars in thousands)

    Unrecognized  
Expense
    Average
Expected
Recognition
   Period - in Years  
 

 Stock options

    $ 12,157          2.53     

 Restricted stock units

    15,064          2.64     
 

 

 

   

 Total unrecognized share-based compensation expense

    $ 27,221       
 

 

 

   

 

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Share-Based Payment Award Activity

The table below provides stock option information related to the 1997 Equity Incentive Plan and the 2006 Equity Incentive Plan for the three months ended March 31, 2012:

 

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

Money
Options
 

Outstanding at December 31, 2011

         2,439,360           $ 42.64           

Granted

     11,265           56.92           

Exercised

     (502,284)          35.89           

Forfeited

     (21,005)          45.17           

Expired

     (1,200)          44.80           
  

 

 

          

Outstanding at March 31, 2012

     1,926,136           44.46           3.91             $ 38,299,522     
  

 

 

          

Vested and expected to vest at March 31, 2012

     1,861,247           44.23           3.85           37,426,718     
  

 

 

          

Exercisable at March 31, 2012

     908,697           42.44           2.57           19,898,659     
  

 

 

          

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $64.34 as of March 31, 2012. The total intrinsic value of options exercised during the three months ended March 31, 2012 was $11.9 million, compared to $8.9 million for the comparable 2011 period.

The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the three months ended March 31, 2012:

 

         Shares         Weighted
Average
      Grant Date Fair    
Value
 

Nonvested at December 31, 2011

     499,119          $ 52.72     

Granted

     4,370          57.09     

Vested

     (5,416)         45.72     

Forfeited

     (9,770)         53.46     
  

 

 

   

Nonvested at March 31, 2012

     488,303          52.82     
  

 

 

   

4. Cash and Cash Equivalents

The following table details the cash and cash equivalents at March 31, 2012 and December 31, 2011:

 

 (Dollars in thousands)

       March 31, 2012           December 31, 2011    

 Cash and due from banks (1)

     $ 598,916          $ 852,010     

 Securities purchased under agreements to resell (2)

     161,594          175,553     

 Other short-term investment securities

     90,114          87,385     
  

 

 

   

 

 

 

 Total cash and cash equivalents

     $         850,624          $         1,114,948     
  

 

 

   

 

 

 

 

  (1)

At March 31, 2012 and December 31, 2011, $76.9 million and $100.1 million, respectively, of our cash and due from banks was deposited at the FRB and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $267.2 million and $371.5 million, respectively.

  (2)

At March 31, 2012 and December 31, 2011, securities purchased under agreements to resell were collateralized by U.S. treasury securities and U.S. agency securities with aggregate fair values of $164.8 million and $179.1 million, respectively. None of these securities received as collateral were sold or repledged as of March 31, 2012 and December 31, 2011.

 

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5. Investment Securities

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

The major components of our investment securities portfolio at March 31, 2012 and December 31, 2011 are as follows:

 

    March 31, 2012     December 31, 2011  

 (Dollars in thousands)

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

 Available-for-sale securities, at fair value:

               

U.S. treasury securities

   $ 25,189        $ 586        $ -         $ 25,775        $ 25,233        $ 731       $ -         $ 25,964    

U.S. agency debentures

    2,969,387         57,079         (1,112)         3,025,354         2,822,158         52,864         (90)         2,874,932    

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

    1,782,253         35,822         (2,982)         1,815,093         1,529,466         34,926         (106)         1,564,286    

Agency-issued collateralized mortgage obligations—fixed rate

    4,001,389         62,570         (5,374)         4,058,585         3,317,285         56,546         (71)         3,373,760    

Agency-issued collateralized mortgage obligations—variable rate

    2,273,036         1,173         (3,006)         2,271,203         2,416,158         1,554         (4,334)         2,413,378    

Agency-issued commercial mortgage-backed securities

    225,828         2,802         -          228,630         176,646         2,047         -          178,693    

Municipal bonds and notes

    92,225         7,878         -          100,103         92,241         8,257         -          100,498    

Equity securities

    2,936         731         (869)         2,798         5,554         180         (1,199)         4,535    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 11,372,243        $  168,641        $  (13,343)        $ 11,527,541        $ 10,384,741        $ 157,105        $ (5,800)        $ 10,536,046    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Non-marketable securities:

               

Non-marketable securities (fair value accounting):

               

Venture capital and private equity fund investments (1)

          620,356               611,824    

Other venture capital investments (2)

          127,951               124,121    

Other investments (3)

          1,002               987    

Non-marketable securities (equity method accounting):

               

Other investments (4)

          62,737               68,252    

Low income housing tax credit funds

          41,111               34,894    

Non-marketable securities (cost method accounting):

               

Venture capital and private equity fund investments (5)

          148,424               145,007    

Other investments

          20,360               19,355    
       

 

 

         

 

 

 

Total non-marketable securities

          1,021,941               1,004,440    
       

 

 

         

 

 

 

 Total investment securities

         $  12,549,482              $ 11,540,486    
       

 

 

         

 

 

 

 

(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 March 31, 2012 and December 31, 2011:

 

    March 31, 2012     December 31, 2011  

 (Dollars in thousands)

  Amount     Ownership %     Amount     Ownership %  

 SVB Strategic Investors Fund, LP

   $ 36,444         12.6   %     $ 39,567         12.6   % 

 SVB Strategic Investors Fund II, LP

    119,965         8.6         122,619         8.6    

 SVB Strategic Investors Fund III, LP

    216,827         5.9         218,429         5.9    

 SVB Strategic Investors Fund IV, LP

    130,139         5.0         122,076         5.0    

 Strategic Investors Fund V, LP

    11,461         0.2         8,838         0.3    

 SVB Capital Preferred Return Fund, LP

    46,783         20.0         42,580         20.0    

 SVB Capital—NT Growth Partners, LP

    50,449         33.0         43,958         33.0    

 SVB Capital Partners II, LP (i)

    1,221         5.1         2,390         5.1    

 Other private equity fund (ii)

    7,067         58.2         11,367         58.2    
 

 

 

     

 

 

   

 Total venture capital and private equity fund investments

   $  620,356          $  611,824      
 

 

 

     

 

 

   

 

  (i)

At March 31, 2012, we had a direct ownership interest of 1.3 percent and an indirect ownership interest of 3.8 percent in the fund through our ownership interest of SVB Strategic Investors Fund II, LP.

  (ii)

At March 31, 2012, we had a direct ownership interest of 41.5 percent and indirect ownership interests of 12.6 percent and 4.1 percent in the fund through our ownership interest of SVB Capital—NT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively.

 

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(2)

The following table shows the amount of other venture capital investments by the following consolidated funds and our ownership of each fund at March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  

 (Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

 Silicon Valley BancVentures, LP

    $ 17,344          10.7   %     $ 17,878          10.7   % 

 SVB Capital Partners II, LP (i)

     64,829          5.1         61,099          5.1    

 SVB India Capital Partners I, LP

     42,299          14.4         42,832          14.4    

 SVB Capital Shanghai Yangpu Venture Capital Fund

     3,479          6.8         2,312          6.8    
  

 

 

      

 

 

    

 Total other venture capital investments

    $   127,951           $   124,121       
  

 

 

      

 

 

    

 

  (i)

At March 31, 2012, we had a direct ownership interest of 1.3 percent and an indirect ownership interest of 3.8 percent in the fund through our ownership of SVB Strategic Investors Fund II, LP.

 

(3)

Other investments within non-marketable securities (fair value accounting) include our ownership in Partners for Growth, LP, a consolidated debt fund. At March 31, 2012, we had a majority ownership interest of slightly more than 50.0 percent 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 March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  

 (Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

 Gold Hill Venture Lending 03, LP (i)

    $ 9,293          9.3   %     $ 16,072          9.3   % 

 Gold Hill Capital 2008, LP (ii)

     19,705          15.5         19,328          15.5    

 Partners for Growth II, LP

     3,447          24.2         3,785          24.2    

 Other investments

     30,292          N/A         29,067          N/A    
  

 

 

      

 

 

    

 Total other investments

    $     62,737           $     68,252       
  

 

 

      

 

 

    

 

  (i)

At March 31, 2012, we had a direct ownership interest of 4.8 percent 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 percent. Our aggregate direct and indirect ownership in the fund is 9.3 percent.

  (ii)

At March 31, 2012, we had a direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent. Our aggregate direct and indirect ownership in the fund is 15.5 percent.

 

(5)

Represents investments in 326 and 329 funds (primarily venture capital funds) at March 31, 2012 and December 31, 2011, 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 March 31, 2012, we recognized OTTI losses of $0.3 million resulting from other-than-temporary declines in value for 18 of the 326 investments. The OTTI losses are included in net gains on investment securities, a component of noninterest income. We concluded that any declines in value for the remaining 308 investments were temporary and as such, no OTTI was required to be recognized. At March 31, 2012, the carrying value of these venture capital and private equity fund investments (cost method accounting) was $148.4 million, and the estimated fair value was $171.5 million.

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 March 31, 2012:

 

    March 31, 2012  
    Less than 12 months     12 months or longer     Total  

 (Dollars in thousands)

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

 U.S. agency debentures

   $ 326,485        $ (1,112)        $ -         $ -         $ 326,485        $ (1,112)    

 Residential mortgage-backed securities:

           

Agency-issued mortgage-backed securities

    359,773         (2,982)         -          -          359,773         (2,982)    

Agency-issued collateralized mortgage obligations—fixed rate

    854,316         (5,374)         -          -          854,316         (5,374)    

Agency-issued collateralized mortgage obligations—variable rate

    1,455,913         (2,961)         44,288          (45)         1,500,201         (3,006)    

 Equity securities

    1,202         (869)         -          -          1,202         (869)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total temporarily impaired securities (1)

   $ 2,997,689        $  (13,298)        $  44,288         $  (45)        $ 3,041,977        $  (13,343)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

As of March 31, 2012, we identified a total of 143 investments that were in unrealized loss positions, of which one investment totaling $44.3 million with unrealized losses of $45 thousand has been in an impaired position for a period of time greater than 12 months. As of March 31, 2012, we do not intend to sell any impaired securities prior to recovery of our adjusted cost basis, and 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 as of March 31, 2012, we deem all impairments to be temporary, and therefore changes in value for our temporarily impaired securities as of the same date are included in other comprehensive income. Market valuations and impairment analyses on assets in the available-for-sale 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, 2011:

 

    December 31, 2011  
    Less than 12 months     12 months or longer     Total  

(Dollars in thousands)

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

U.S. agency debentures

   $ 50,994        $ (90)       $      $       $ 50,994        $ (90)    

Residential mortgage-backed securities:

           

Agency-issued mortgage-backed securities

    54,588         (106)                       54,588         (106)    

Agency-issued collateralized mortgage obligations—fixed rate

    50,125         (71)                       50,125         (71)    

Agency-issued collateralized mortgage obligations—variable rate

    1,521,589         (4,334)                       1,521,589         (4,334)    

Equity securities

    3,831         (1,199)                       3,831         (1,199)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total temporarily impaired securities

   $ 1,681,127        $     (5,800)        $     -        $     -        $ 1,681,127        $     (5,800)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on debt securities classified as available-for-sale as of March 31, 2012. 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 certain 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.

 

    March 31, 2012  
    Total     One Year
or Less
    After One
Year to
Five Years
    After Five
Years 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

  $ 25,775        2.39  %    $ -        -  %    $ 25,775        2.39  %    $ -        -  %    $ -        -  % 

U.S. agency debentures

    3,025,354        1.63        37,921        2.93        2,810,559        1.55        176,874        2.57        -        -   

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    1,815,093        2.45        -        -        -        -        1,673,005        2.26        142,088        3.30   

Agency-issued collateralized mortgage obligations - fixed rate

    4,058,585        2.22        -        -        -        -        -        -        4,058,585        2.22   

Agency-issued collateralized mortgage obligations - variable rate

    2,271,203        0.70        -        -        -        -        -        -        2,271,203        0.70   

Agency-issued commercial mortgage-backed securities

    228,630        2.09        -        -        -        -        -        -        228,630        2.09   

Municipal bonds and notes

    100,103        6.00        929        5.02        12,158        5.51        53,134        5.98        33,882        6.23   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 11,524,743        1.83      $ 38,850        2.98      $ 2,848,492        1.57      $ 1,903,013        2.39      $ 6,734,388        1.75   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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Table of Contents

The following table presents the components of gains and losses (realized and unrealized) on investment securities for the three months ended March 31, 2012 and 2011:

 

         Three months ended March 31,      

 (Dollars in thousands)

   2012      2011  

 Gross gains on investment securities:

     

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

    $ 21          $ 63     

Marketable securities (fair value accounting)

     316           442     

Non-marketable securities (fair value accounting):

     

Venture capital and private equity fund investments

     26,110           45,499     

Other venture capital investments

     1,777           4,948     

Other investments

     21           20     

Non-marketable securities (equity method accounting):

     

Other investments

     1,422           3,384     

Non-marketable securities (cost method accounting):

     

Venture capital and private equity fund investments

     407           255     

Other investments

     42           173     
  

 

 

    

 

 

 

 Total gross gains on investment securities

     30,116           54,784     
  

 

 

    

 

 

 

 Gross losses on investment securities:

     

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

     (895)          (1)    

Marketable securities (fair value accounting)

     -           (808)    

Non-marketable securities (fair value accounting):

     

Venture capital and private equity fund investments

     (13,915)          (2,056)    

Other venture capital investments

     (6,663)          (244)    

Non-marketable securities (equity method accounting):

     

Other investments

     (376)          (199)    

Non-marketable securities (cost method accounting):

     

Venture capital and private equity fund investments

     (363)          (139)    

Other investments

     (65)          -     
  

 

 

    

 

 

 

 Total gross losses on investment securities

     (22,277)          (3,447)    
  

 

 

    

 

 

 

 Gains on investment securities, net

    $ 7,839          $ 51,337    
  

 

 

    

 

 

 

 Gains attributable to noncontrolling interests, including carried interest

    $ 7,338          $ 43,385    
  

 

 

    

 

 

 

 

(1)

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

 

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Table of Contents

6. Loans and Allowance for Loan Losses

We serve a variety of commercial clients in the technology, life science, venture capital/private equity and premium wine industries. Our technology clients generally tend to be in the industries of hardware (semiconductors, communications and electronics), software and related services, and clean technology. Because of the diverse nature of clean technology products and services, for our loan-related reporting purposes, cleantech-related loans are reported under our hardware, software, life science and other commercial loan categories, as applicable. 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 through SVB Private Bank primarily to venture capital/private equity professionals 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 real estate secured loans to eligible employees through our 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 $59.5 million and $60.2 million at March 31, 2012 and December 31, 2011, respectively, is presented in the following table:

 

 (Dollars in thousands)

       March 31, 2012              December 31, 2011      

 Commercial loans:

     

Software

    $ 2,511,989         $ 2,492,849    

Hardware

     1,054,510          952,303    

Venture capital/private equity

     1,123,847          1,117,419    

Life science

     863,961          863,737    

Premium wine (1)

     120,113          130,245    

Other

     349,316          342,147    
  

 

 

    

 

 

 

 Commercial loans

     6,023,736          5,898,700    
  

 

 

    

 

 

 

 Real estate secured loans:

     

Premium wine (1)

     360,315          345,988    

Consumer loans (2)

     542,471          534,001    
  

 

 

    

 

 

 

 Real estate secured loans

     902,786          879,989    
  

 

 

    

 

 

 

 Construction loans

     29,970          30,256    

 Consumer loans

     164,797          161,137    
  

 

 

    

 

 

 

 Total loans, net of unearned income (3)

    $         7,121,289         $         6,970,082    
  

 

 

    

 

 

 

 

(1)

Included in our premium wine portfolio are gross construction loans of $136.4 million and $110.8 million at March 31, 2012 and December 31, 2011, respectively.

(2)

Consumer loans secured by real estate at March 31, 2012 and December 31, 2011 were comprised of the following:

 

 (Dollars in thousands)

       March 31, 2012              December 31, 2011      

 Loans for personal residence

    $ 354,321         $ 350,359    

 Loans to eligible employees

     101,574          99,704    

 Home equity lines of credit

     86,576          83,938    
  

 

 

    

 

 

 

 Consumer loans secured by real estate

    $         542,471         $         534,001    
  

 

 

    

 

 

 

 

(3)

Included within our total loan portfolio are credit card loans of $56.0 million and $49.7 million at March 31, 2012 and December 31, 2011, respectively.

 

17


Table of Contents

Credit Quality

The composition of loans, net of unearned income, broken out by portfolio segment and class of financing receivable as of March 31, 2012 and December 31, 2011, is as follows:

 

 (Dollars in thousands)

   March 31,
2012
     December 31, 
2011
 

 Commercial loans:

    

Software

     $ 2,511,989          $ 2,492,849     

Hardware

     1,054,510          952,303     

Venture capital/private equity

     1,123,847          1,117,419     

Life science

     863,961          863,737     

Premium wine

     480,428          476,233     

Other

     379,286          372,403     
  

 

 

   

 

 

 

 Total commercial loans

     6,414,021          6,274,944     
  

 

 

   

 

 

 

 Consumer loans:

    

Real estate secured loans

     542,471          534,001     

Other consumer loans

     164,797          161,137     
  

 

 

   

 

 

 

 Total consumer loans

     707,268          695,138     
  

 

 

   

 

 

 

 Total loans, net of unearned income

     $     7,121,289          $ 6,970,082     
  

 

 

   

 

 

 

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of March 31, 2012 and December 31, 2011:

 

 (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
 

 March 31, 2012:

             

 Commercial loans:

             

Software

     $ 750        $ 121        $       $ 871        $ 2,533,923        $   

Hardware

      4,549                       4,556         1,033,955           

Venture capital/private equity

      2,843                       2,843         1,131,788           

Life science

      13,717         171                13,888         858,318           

Premium wine

                                  479,039           

Other

      5,958                       5,965         372,773           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial loans

      27,817         306                28,123         6,409,796           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Consumer loans:

             

Real estate secured loans

                                  539,398           

Other consumer loans

                                  161,765           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total consumer loans

                                  701,163           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans excluding impaired loans

      27,817         306                28,123         7,110,959           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Impaired loans

      36         138         6,637         6,811         34,886           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans

     $ 27,853        $ 444        $ 6,637        $ 34,934        $ 7,145,845        $   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 December 31, 2011:

             

 Commercial loans:

             

Software

     $ 415        $ 1,006        $       $ 1,421        $ 2,515,327        $   

Hardware

      1,951         45                1,996         954,690           

Venture capital/private equity

      45                       45         1,128,475           

Life science

      398         78                476         871,626           

Premium wine

             174                175         475,406           

Other

      15                       15         370,539           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial loans

      2,825         1,303                4,128         6,316,063           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Consumer loans:

             

Real estate secured loans

                                  515,534           

Other consumer loans

      590                       590         157,389           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total consumer loans

      590                       590         672,923           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans excluding impaired loans

      3,415         1,303                4,718         6,988,986           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Impaired loans

      1,350         1,794         6,613         9,757         26,860           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans

     $ 4,765        $ 3,097        $ 6,613        $ 14,475        $   7,015,846        $   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by portfolio segment and class of financing receivable as of March 31, 2012 and December 31, 2011:

 

Total carrying value Total carrying value Total carrying value Total carrying value

 (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    
 

March 31, 2012:

             

Commercial loans:

             

Software

       $ 1,445           $ 123           $ 1,568           $ 2,821     

Hardware

       25,583           648           26,231           29,063     

Life science

       -           138           138           139     

Premium wine

       2,505           1,264           3,769           3,935     

Other

       2,415           1,591           4,006           7,734     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

       31,948           3,764           35,712           43,692     
    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

             

Real estate secured loans

       2,674           330           3,004           7,476     

Other consumer loans

       2,981           -           2,981           3,109     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

       5,655           330           5,985           10,585     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ 37,603           $ 4,094           $ 41,697           $ 54,277     
    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

             

Commercial loans:

             

Software

       $ 1,142           $ -           $ 1,142           $ 1,540     

Hardware

       4,754           429           5,183           8,843     

Life science

       -           311           311           523     

Premium wine

       -           3,212           3,212           3,341     

Other

       4,303           1,050           5,353           9,104     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

       10,199           5,002           15,201           23,351     
    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

             

Real estate secured loans

       -           18,283           18,283           22,410     

Other consumer loans

       3,133           -           3,133           3,197     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

       3,133           18,283           21,416           25,607     
    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ 13,332           $ 23,285           $ 36,617           $ 48,958     
    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during the three months ended March 31, 2012 and 2011:

 

           Three months ended March 31,      

 (Dollars in thousands)

     2012      2011  

Average impaired loans:

       

Commercial loans:

       

Software

       $ 1,536           $ 2,775     

Hardware

       12,262           4,526     

Life science

       146           2,498     

Premium wine

       3,383           3,684     

Other

       4,644           2,167     
    

 

 

    

 

 

 

Total commercial loans

       21,971           15,650     
    

 

 

    

 

 

 

Consumer loans:

       

Real estate secured loans

       12,847           20,125     

Other consumer loans

       3,019           -     
    

 

 

    

 

 

 

Total consumer loans

       15,866           20,125     
    

 

 

    

 

 

 

Total average impaired loans

       $ 37,837           $ 35,775     
    

 

 

    

 

 

 

 

19


Table of Contents

The following tables summarize the activity relating to our allowance for loan losses for the three months ended March 31, 2012 and 2011, broken out by portfolio segment:

 

 Three months ended March 31, 2012  (dollars in thousands)

   Beginning
Balance
December 31,
2011
     Charge-offs      Recoveries      Provision for
(Reduction of)
     Ending Balance
March 31,
2012
 

 Commercial loans:

              

Software

     $ 38,263          $ (859)          $ 2,759          $ (4,738)          $ 35,425    

Hardware

     16,810          (3,848)          105          17,281           30,348    

Venture capital/private equity

     7,319          -                   (105)          7,214    

Life science

     10,243          (113)          221          (59)          10,292    

Premium wine

     3,914          -           78          (254)          3,738    

Other

     5,817          (2,170)          44          1,111           4,802    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

     82,366          (6,990)          3,207          13,236           91,819    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans

     7,581          -           229          1,293           9,103    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total allowance for loan losses

     $ 89,947          $ (6,990)          $ 3,436          $ 14,529           $ 100,922    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Three months ended March 31, 2011  (dollars in thousands)

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

 Commercial loans:

              

Software

     $ 29,288          $ (1,104)          $ 5,281          $ (2,986)          $ 30,479    

Hardware

     14,688          (15)          280          887           15,840    

Venture capital/private equity

     8,241          -                   (809)          7,432    

Life science

     9,077          (3,191)          623          1,588           8,097    

Premium wine

     5,492          -           140          (1,128)          4,504    

Other

     5,318          (12)          70          1,057           6,433    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

     72,104          (4,322)          6,394          (1,391)          72,785    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans

     10,523          -           399          (1,656)          9,266    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total allowance for loan losses

     $ 82,627          $ (4,322)          $ 6,793          $ (3,047)          $ 82,051    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of March 31, 2012 and December 31, 2011, broken out by portfolio segment:

 

    March 31, 2012         December 31, 2011  

 (Dollars in thousands)

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

 Commercial loans:

         

Software

    $ 682          $ 34,743               $ 526          $ 37,737     

Hardware

    15,120          15,228            1,261          15,549     

Venture capital/private equity

    -          7,214            -          7,319     

Life science

    -          10,292            -          10,243     

Premium wine

    543          3,195            -          3,914     

Other

    486          4,316            1,180          4,637     
 

 

 

   

 

 

     

 

 

   

 

 

 

 Total commercial loans

    16,831          74,988            2,967          79,399     
 

 

 

   

 

 

     

 

 

   

 

 

 

 Consumer loans

    1,538          7,565            740          6,841     
 

 

 

   

 

 

     

 

 

   

 

 

 

 Total allowance for loan losses

    $ 18,369          $ 82,553            $ 3,707          $ 86,240     
 

 

 

   

 

 

     

 

 

   

 

 

 

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

 

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cash secured. Loans risk-rated 5 through 7 are performing loans, however, we consider them as demonstrating higher risk which requires more frequent review of the individual exposures; these 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. (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2011 Form 10-K); these loans are deemed “impaired”. 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 March 31, 2012 and December 31, 2011:

 

 (Dollars in thousands)

  Pass       Performing  
   (Criticized)  
      Impaired       Total  

 March 31, 2012:

       

 Commercial loans:

       

 Software

    $ 2,304,838          $ 229,956          $ 1,568          $ 2,536,362     

 Hardware

    931,590          106,921          26,231          1,064,742     

 Venture capital/private equity

    1,128,482          6,149          -          1,134,631     

 Life science

    737,956          134,250          138          872,344     

 Premium wine

    460,232          18,807          3,769          482,808     

 Other

    328,452          50,286          4,006          382,744     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial loans

    5,891,550          546,369          35,712          6,473,631     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Consumer loans:

       

 Real estate secured loans

    515,071          24,327          3,004          542,402     

 Other consumer loans

    155,879          5,886          2,981          164,746     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total consumer loans

    670,950          30,213          5,985          707,148     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans

    $ 6,562,500          $ 576,582          $ 41,697          $ 7,180,779     
 

 

 

   

 

 

   

 

 

   

 

 

 

 December 31, 2011:

       

 Commercial loans:

       

 Software

    $ 2,290,497          $ 226,251          $ 1,142          $ 2,517,890     

 Hardware

    839,230          117,456          5,183          961,869     

 Venture capital/private equity

    1,120,373          8,147          -          1,128,520     

 Life science

    748,129          123,973          311          872,413     

 Premium wine

    434,309          41,272          3,212          478,793     

 Other

    353,434          17,120          5,353          375,907     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial loans

    5,785,972          534,219          15,201          6,335,392     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Consumer loans:

       

 Real estate secured loans

    497,060          18,474          18,283          533,817     

 Other consumer loans

    151,101          6,878          3,133          161,112     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total consumer loans

    648,161          25,352          21,416          694,929     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans

    $   6,434,133          $     559,571          $     36,617          $ 7,030,321     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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TDRs

As of March 31, 2012 we had TDRs of $16.0 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. Substantially all of these 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 may not be in doubt. There were unfunded commitments available for funding of $1.6 million to the clients associated with these TDRs as of March 31, 2012. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at March 31, 2012 and December 31, 2011:

 

 (Dollars in thousands)

          March 31, 2012          December 31, 2011   

 Loans modified in TDRs:

     

 Commercial loans:

     

Software

      $ 1,568          $ 1,142     

Hardware

      2,972          5,183     

Premium wine

      2,310          1,949     

Other

      3,466          4,934     
   

 

 

   

 

 

 

 Total commercial loans

      10,316          13,208     
   

 

 

   

 

 

 

 Consumer loans:

     

Real estate secured loans

      2,673          17,934     

Other consumer loans

      2,981          3,133     
   

 

 

   

 

 

 

 Total consumer loans

      5,654          21,067     
   

 

 

   

 

 

 

 Total

      $ 15,970          $ 34,275     
   

 

 

   

 

 

 

During the three months ended March 31, 2012 new TDRs were primarily modified through payment deferrals granted to our clients, however one new TDR totaling $0.6 million was modified through forgiveness of principal. During the three months ended March 31, 2011 all new TDRs were modified through payment deferrals granted to our clients, however no principal or interest was forgiven. The following table summarizes the recorded investment in loans modified in TDRs, broken out by portfolio segment and class of financing receivable, for modifications made during the three months ended March 31, 2012 and 2011.

 

            Three months ended March 31,      

 (Dollars in thousands)

              2012                     2011          

 Loans modified in TDRs during the period:

     

 Commercial loans:

     

Software

      $ 600          $ 651     

Hardware

      -          3,237     

Premium wine

      405          -     

Other

      2,416          -     
   

 

 

   

 

 

 

 Total commercial loans (1)

      3,421          3,888     
   

 

 

   

 

 

 

 Consumer loans:

     

Real estate secured loans

      249          -     

Other consumer loans

      36          -     
   

 

 

   

 

 

 

 Total consumer loans

      285          -     
   

 

 

   

 

 

 

 Total loans modified in TDR’s during the period

      $ 3,706          $ 3,888     
   

 

 

   

 

 

 

 

 

(1)

During the three months ended March 31, 2012, we had partial charge-offs of $0.8 million on loans classified as TDRs. There were no partial charge-offs on loans classified as TDRs during the three months ended March 31, 2011.

The related allowance for loan losses for the majority of our TDRs is determined on an individual basis by comparing the carrying value of the loan to the present value of the estimated future cash flows, discounted at the pre-modification contractual interest rate. For certain TDRs, the related allowance for loan losses is determined based on the fair value of the collateral if the loan is collateral dependent.

 

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The following table summarizes the recorded investment in loans modified in TDRs within the previous 12 months that subsequently defaulted during the three months ended March 31, 2012 and 2011, broken out by portfolio segment and class of financing receivable:

 

            Three months ended March 31,     

 (Dollars in thousands)

       2012     2011  

 TDRs modified within the previous 12 months that defaulted during the period:

      

 Commercial loans:

      

Software

       $ 600          $ -     

Life science

       -          241     

Premium wine

       -          206     
    

 

 

   

 

 

 

 Total commercial loans

       600          447     
    

 

 

   

 

 

 

 Consumer loans:

      

Real estate secured loans

       249          -     

Other consumer loans

       36          -     
    

 

 

   

 

 

 

 Total consumer loans

       285          -     
    

 

 

   

 

 

 

 Total TDRs modified within the previous 12 months that defaulted in the period

       $ 885          $ 447     
    

 

 

   

 

 

 

Charge-offs and defaults on previously restructured loans are evaluated to determine the impact to the allowance for loan losses, if any. The evaluation of these defaults may impact the assumptions used in calculating the reserve on other TDRs and impaired loans as well as management’s overall outlook of macroeconomic factors that affect the reserve on the loan portfolio as a whole. After evaluating the charge-offs and defaults experienced on our TDRs we determined that no change to our reserving methodology was necessary to determine the allowance for loan losses as of March 31, 2012.

7. Short-Term Borrowings and Long-Term Debt

The following table represents outstanding short-term borrowings and long-term debt at March 31, 2012 and December 31, 2011:

 

                      Carrying Value  

 (Dollars in thousands)

     

Maturity

       Principal value at 
March 31, 2012
       March 31,   
2012
     December 31, 
2011
 

 Short-term borrowings:

           

Short-term FHLB advances

    April 2, 2012       $ 530,000          $ 530,000          $ -     

Federal funds purchased

    April 2, 2012       315,000          315,000          -     

Other short-term borrowings

    (1)       4,380          4,380          -     
         

 

 

   

 

 

 

 Total short-term borrowings

            $ 849,380          $ -     
         

 

 

   

 

 

 

 Long-term debt:

           

5.375% Senior Notes

      September 15, 2020         $ 350,000          $ 347,842          $ 347,793     

5.70% Senior Notes (2)

    June 1, 2012       141,429          142,485          143,969     

6.05% Subordinated Notes (3)

    June 1, 2017       45,964          54,629          55,075     

7.0% Junior Subordinated Debentures

    October 15, 2033       50,000          55,328          55,372     

Other long-term debt

    (4)       1,551          1,551          1,439     
         

 

 

   

 

 

 

 Total long-term debt

            $ 601,835          $ 603,648     
         

 

 

   

 

 

 

 

(1)

Represents cash collateral received from counterparties for our interest rate swap agreements related to our 6.05% Subordinated Notes.

(2)

At March 31, 2012 and December 31, 2011, included in the carrying value of our 5.70% Senior Notes were $1.1 million and $2.6 million, respectively, related to the fair value of the interest rate swap associated with the notes.

(3)

At both March 31, 2012 and December 31, 2011, included in the carrying value of our 6.05% Subordinated Notes were $8.8 million 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 $6.4 million and $10.7 million for the three months ended March 31, 2012 and 2011, 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 March 31, 2012 was 0.16 percent.

 

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3.875% Convertible Notes

Our $250 million 3.875% Convertible Notes matured on April 15, 2011. The effective interest rate for our 3.875% Convertible Notes for the three months ended March 31, 2011 was 5.78 percent, and interest expense was $3.6 million.

Available Lines of Credit

We have certain facilities in place to enable us to access short-term borrowings on a secured (using available-for-sale securities as collateral) and an unsecured basis. These include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of March 31, 2012, we borrowed $315.0 million against our uncommitted federal funds lines. We also pledge securities to the FHLB of San Francisco and the discount window at the FRB. The market value of collateral pledged to the FHLB of San Francisco (comprised entirely of U.S. agency debentures) at March 31, 2012 totaled $1.6 billion, of which $1.0 billion was unused and available to support additional borrowings. The market value of collateral pledged at the discount window of the FRB at March 31, 2012 totaled $100.1 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, 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 private, venture-backed companies in the technology and life science industries.

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 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 as a reduction in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swaps was calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Increases from changes in fair value were included in other assets and decreases from changes in fair value were included in other liabilities.

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

Currency Exchange Risk

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

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”). We value our equity warrant assets using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. We make valuation adjustments for estimated remaining life and marketability for warrants issued by private companies. Equity warrant assets are recorded at fair value in other assets, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

 

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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 mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. Consistent with the clarification guidance included in ASU 2011-04, we made an accounting policy decision effective January 1, 2012 to use the exception in the guidance with respect to measuring counterparty credit risk for derivative instruments, which allows us to continue to measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.

The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at March 31, 2012 and December 31, 2011 were as follows:

 

                March 31, 2012     December 31, 2011  

 (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         $ 9,884         $ 4,380          $ 5,504          $ 187,393          $ 11,441          $ -          $ 11,441     
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

 Derivatives not designated as hedging instruments:

                     

 Currency exchange risks:

                     

Foreign exchange forwards

    Other assets       16,427         72          -          72          68,518          514          -          514     

Foreign exchange forwards

    Other liabilities       77,245         (1,383)         -          (1,383)         6,822          (199)         -          (199)    
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net exposure

            (1,311)         -          (1,311)           315          -          315     
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

 Other derivative instruments:

                     

Equity warrant assets

    Other assets       148,329         71,404          -          71,404          144,586          66,953          -          66,953     
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Other derivatives:

                     

Foreign exchange forwards

    Other assets       404,409         10,680          -          10,680          387,714          17,541          -          17,541     

Foreign exchange forwards

    Other liabilities       376,368         (9,029)         -          (9,029)         366,835          (16,346)         -          (16,346)    

Foreign currency options

    Other assets       133,367         842          -          842          75,600          271          -          271     

Foreign currency options

    Other liabilities       133,367         (842)         -          (842)         75,600          (271)         -          (271)    

Loan conversion options

    Other assets       7,539         1,409          -          1,409          14,063          923          -          923     

Client interest rate derivatives

    Other assets       39,291         63          -          63          39,713          50          -          50     

Client interest rate derivatives

    Other liabilities       39,291         (65)         -          (65)         39,713          (52)         -          (52)    
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Net exposure

            3,058          -          3,058            2,116          -          2,116     
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

 Net

            $   83,035          $   4,380          $   78,655            $   80,825          $ -          $   80,825     
         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

 

(1)

Cash collateral received from counterparties for our interest rate swap agreements is recorded as a component of “short-term borrowings” on our consolidated balance sheets.

(2)

Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of March 31, 2012 remain at investment grade or higher and there were no material changes in their credit ratings for the three months ended March 31, 2012.

A summary of our derivative activity and the related impact on our consolidated statements of income for the three months ended March 31, 2012 and 2011 is as follows:

 

           Three months ended March 31,     

 (Dollars in thousands)

 

   Statement of income location   

          2012                     2011          

 Derivatives designated as hedging instruments:

     

 Interest rate risks:

     

Net cash benefit associated with interest rate swaps

  Interest expense—borrowings    $ 2,229        $ 6,173     

Changes in fair value of interest rate swaps

  Net gain on derivative instruments     389          -     
   

 

 

   

 

 

 

Net gains associated with interest rate risk derivatives

     $ 2,618        $ 6,173     
   

 

 

   

 

 

 

 Derivatives not designated as hedging instruments:

     

 Currency exchange risks:

     

Gains on revaluations of foreign currency loans, net

  Other noninterest income    $ 1,659        $ 2,689     

   Losses on internal foreign exchange forward contracts, net

  Net gains on derivative instruments     (2,051)         (2,568)    
   

 

 

   

 

 

 

Net (losses) gains associated with currency risk

     $ (392)       $ 121     
   

 

 

   

 

 

 

 Other derivative instruments:

     

Gains on equity warrant assets

  Net gains on derivative instruments    $ 6,935        $ 3,996     
   

 

 

   

 

 

 

Gains on client foreign exchange forward contracts, net

  Net gains on derivative instruments    $ 1,065     </