XNAS:SIVB SVB Financial Group Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 July 31, 2012, 44,410,239 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 June 30, 2012 and December 31, 2011

     4   
    

Interim Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2012 and 2011

     5   
    

Interim Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2012 and 2011

     6   
    

Interim Consolidated Statements of Stockholders’ Equity (unaudited) for the six months ended June 30, 2012 and 2011

     7   
    

Interim Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 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

     42   

Item 3.

    

Quantitative and Qualitative Disclosures about Market Risk

     74   

Item 4.

    

Controls and Procedures

     75   
PART II - OTHER INFORMATION      76   

Item 1.

    

Legal Proceedings

     76   

Item 1A.

    

Risk Factors

     76   

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

     76   

Item 3.

    

Defaults Upon Senior Securities

     76   

Item 4.

    

Mine Safety Disclosures

     76   

Item 5.

    

Other Information

     76   

Item 6.

    

Exhibits

     76   
SIGNATURES      77   
INDEX TO EXHIBITS      78   

 

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)

       June 30,    
2012
      December 31,  
2011
 

 Assets

    

 Cash and cash equivalents

     $ 1,411,725          $ 1,114,948     

 Available-for-sale securities

     10,620,951          10,536,046     

 Non-marketable securities

     1,132,312          1,004,440     

 

 

 Investment securities

     11,753,263          11,540,486     

 

 

 Loans, net of unearned income

     7,789,752          6,970,082     

 Allowance for loan losses

     (98,166)         (89,947)    

 

 

 Net loans

     7,691,586          6,880,135     

 

 

 Premises and equipment, net of accumulated depreciation and amortization

     64,773          56,471     

 Accrued interest receivable and other assets

     368,425          376,854     

 

 

 Total assets

     $ 21,289,772          $ 19,968,894     

 

 

 Liabilities and total equity

    

 Liabilities:

    

 Noninterest-bearing demand deposits

     $ 12,842,250          $ 11,861,888     

 Interest-bearing deposits

     5,226,562          4,847,648     

 

 

 Total deposits

     18,068,812          16,709,536     

 

 

 Short-term borrowings

     5,880          -     

 Other liabilities

     312,523          405,321     

 Long-term debt

     458,232          603,648     

 

 

 Total liabilities

     18,845,447          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;
44,402,954 shares and 43,507,932 shares outstanding, respectively

     44          44     

 Additional paid-in capital

     529,113          484,216     

 Retained earnings

     1,082,126          999,733     

 Accumulated other comprehensive income

     104,077          85,399     

 

 

 Total SVBFG stockholders’ equity

     1,715,360          1,569,392     

 Noncontrolling interests

     728,965          680,997     

 

 

 Total equity

     2,444,325          2,250,389     

 

 

 Total liabilities and total equity

     $   21,289,772          $ 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 June 30,             Six months ended June 30,      

 (Dollars in thousands, except per share amounts)

      2012             2011             2012             2011      

 Interest income:

       

 Loans

    $       113,935          $       93,466          $       223,396          $       183,242     

 Available-for-sale securities:

       

 Taxable

    44,072          44,217          91,447          85,599     

 Non-taxable

    899          883          1,799          1,824     

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

    912          1,595          1,950          3,597     

 

 

 Total interest income

    159,818          140,161          318,592          274,262     

 

 

 Interest expense:

       

 Deposits

    1,614          2,559          3,095          5,664     

 Borrowings

    6,270          7,149          12,626          17,846     

 

 

 Total interest expense

    7,884          9,708          15,721          23,510     

 

 

 Net interest income

    151,934          130,453          302,871          250,752     

 Provision for (reduction of) loan losses

    7,999          134          22,528          (2,913)    

 

 

 Net interest income after provision for loan losses

    143,935          130,319          280,343          253,665     

 

 

 Noninterest income:

       

 Gains on investment securities, net

    25,809          71,680          33,648          123,017     

 Foreign exchange fees

    12,031          10,354          24,134          20,851     

 Deposit service charges

    8,369          7,838          16,465          14,955     

 Gains on derivative instruments, net

    8,713          13,651          14,689          14,202     

 Credit card fees

    6,169          4,364          11,837          8,181     

 Letters of credit and standby letters of credit income

    3,296          2,702          6,932          5,412     

 Client investment fees

    3,375          3,107          6,272          6,768     

 Other

    12,664          10,012          25,742          20,276     

 

 

 Total noninterest income

    80,426          123,708          139,719          213,662     

 

 

 Noninterest expense:

       

 Compensation and benefits

    80,385          79,888          164,122          155,520     

 Professional services

    16,514          13,891          31,121          26,878     

 Premises and equipment

    9,419          6,440          16,983          12,352     

 Business development and travel

    7,159          5,890          14,905          11,543     

 Net occupancy

    5,378          4,546          11,001          9,196     

 Correspondent bank fees

    2,840          2,202          5,528          4,365     

 FDIC assessments

    2,731          2,163          5,229          5,638     

 Provision for unfunded credit commitments

    1,922          976          1,664          76     

 Other

    9,418          5,036          17,225          12,899     

 

 

 Total noninterest expense

    135,766          121,032          267,778          238,467     

 

 

 Income before income tax expense

    88,595          132,995          152,284          228,860     

 Income tax expense

    31,517          43,263          55,273          66,033     

 

 

 Net income before noncontrolling interests

    57,078          89,732          97,011          162,827     

 Net income attributable to noncontrolling interests

    (9,475)         (23,982)         (14,618)         (64,070)    

 

 

 Net income available to common stockholders

    $ 47,603          $ 65,750          $ 82,393          $ 98,757     

 

 

 Earnings per common share—basic

    $ 1.08          $ 1.53          $ 1.87          $ 2.31     

 Earnings per common share—diluted

    1.06          1.50          1.85          2.27     

 

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 June 30,             Six months ended June 30,      

 (Dollars in thousands)

       2012             2011             2012             2011      

 Net income before noncontrolling interests

     $ 57,078          $ 89,732          $ 97,011          $ 162,827     

 Other comprehensive income (loss), net of tax:

        

 Change in cumulative translation gains:

        

 Foreign currency translation (losses) gains

     (4,657)         926          (2,185)         1,891     

 Related tax benefit (expense)

     1,889          (379)         876          (774)    

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

        

 Unrealized holding gains

     33,766          100,836          37,035          74,677     

 Related tax expense

     (13,482)         (41,252)         (14,817)         (30,529)    

 Reclassification adjustment for gains included in net income

     (4,567)         (37,221)         (3,693)         (37,283)    

 Related tax expense

     1,819          15,227          1,462          15,252     

 

 

 Other comprehensive income, net of tax

     14,768          38,137          18,678          23,234     

 

 

 Comprehensive income

     71,846          127,869          115,689          186,061     

 Comprehensive income attributable to noncontrolling interests

     (9,475)         (23,982)         (14,618)         (64,070)    

 

 

 Comprehensive income attributable to SVBFG

     $ 62,371          $ 103,887          $ 101,071          $ 121,991     

 

 

 

 

 

 

 

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

      866,984                26,129                -          26,130                 26,130     

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

      1,024                              -          -                 -     

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

                    5,563                -          5,563                 5,563     

 Net income

                           98,757         -          98,757          64,070         162,827     

 Capital calls and distributions, net

                                  -          -          41,160         41,160     

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

                                  22,117          22,117                 22,117     

 Foreign currency translation adjustments, net of tax

                                  1,117          1,117                 1,117     

 Share-based compensation expense

                    8,859                -          8,859                 8,859     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance at June 30, 2011

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 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

      821,462                24,303                -          24,303                 24,303     

 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

                    5,323                -          5,323                 5,323     

 Net income

                           82,393         -          82,393          14,618         97,011     

 Capital calls and distributions, net

                                  -          -          33,350         33,350     

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

                                  19,987          19,987                 19,987     

 Foreign currency translation adjustments, net of tax

                                  (1,309)         (1,309)                (1,309)    

 Share-based compensation expense

                    10,926                -          10,926                 10,926     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Balance at June 30, 2012

       44,402,954        $ 44        $ 529,113        $ 1,082,126        $ 104,077         $ 1,715,360         $ 728,965        $ 2,444,325     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

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)

 

           Six months ended June 30,        

 (Dollars in thousands)

   2012     2011  

 Cash flows from operating activities:

    

Net income before noncontrolling interests

     $ 97,011          $ 162,827     

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

    

Provision for (reduction of) loan losses

     22,528          (2,913)    

Provision for unfunded credit commitments

     1,664          76     

Changes in fair values of derivatives, net

     (11,024)         (13,211)    

Gains on investment securities, net

     (33,648)         (123,017)    

Depreciation and amortization

     13,594          13,834     

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

     25,273          8,904     

Tax benefit from stock exercises

     1,143          759     

Amortization of share-based compensation

     10,977          8,949     

Amortization of deferred loan fees

     (32,881)         (28,458)    

Deferred income tax expense

     5,876          2,423     

Gain on the sale of certain assets related to our equity services management business

     (4,243)         -     

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

     -          (3,123)    

Changes in other assets and liabilities:

    

Accrued interest receivable and payable, net

     (4,444)         (8,348)    

Accounts receivable and payable, net

     22,886          78,593     

Income tax payable and receivable, net

     (15,715)         3,854     

Prepaid FDIC assessments and amortization

     5,065          5,082     

Accrued compensation

     (60,192)         (12,535)    

Foreign exchange spot contracts, net

     (43,405)         65,536     

Other, net

     (6,567)         12,574     

 

 

 Net cash (used for) provided by operating activities

     (6,102)         171,806     

 

 

 Cash flows from investing activities:

    

Purchases of available-for-sale securities

     (1,778,451)         (4,334,481)    

Proceeds from sales of available-for-sale securities

     325,608          1,414,096     

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

     1,380,865          1,322,555     

Purchases of nonmarketable securities (cost and equity method accounting)

     (101,506)         (28,355)    

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

     23,267          13,888     

Purchases of nonmarketable securities (fair value accounting)

     (63,017)         (82,574)    

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

     59,711          45,855     

Net increase in loans

     (817,601)         (449,114)    

Proceeds from recoveries of charged-off loans

     6,811          11,056     

Purchases of premises and equipment

     (20,016)         (12,843)    

Proceeds from the sale of certain assets related to our equity services management business

     2,870          -     

 

 

 Net cash used for investing activities

     (981,459)         (2,099,917)    

 

 

 Cash flows from financing activities:

    

Net increase in deposits

     1,359,276          1,941,533     

Increase (decrease) in short-term borrowings

     5,880          (37,245)    

Principal payments of other long term debt

     (1,222)         -     

Capital contributions from noncontrolling interests, net of distributions

     33,350          41,160     

Tax benefit from stock exercises

     4,180          4,804     

Proceeds from issuance of common stock and ESPP

     24,303          26,130     

Principal payments of 5.70% Senior Notes

     (141,429)         -     

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

     -          (346,443)    

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

     -          36,959     

Payments for settlement of 3.875% Convertible Notes

     -          (250,000)    

 

 

 Net cash provided by financing activities

     1,284,338          1,416,898     

 

 

 Net increase (decrease) in cash and cash equivalents

     296,777          (511,213)    

 Cash and cash equivalents at beginning of period

     1,114,948          3,076,432     

 

 

 Cash and cash equivalents at end of period

     $ 1,411,725          $ 2,565,219     

 

 

 Supplemental disclosures:

    

 Cash paid during the period for:

    

 Interest

     $ 15,913          $ 25,625     

 Income taxes

     58,992          53,336     

 Noncash items during the period:

    

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

     $ 19,987          $ 22,117     

 

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

 

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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 unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with 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 and six months ended June 30, 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 we have a controlling financial interest or VIEs in which we are the primary beneficiary are consolidated into our financial statements.

 

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We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide. We are variable interest holders in certain partnerships for which we are the primary beneficiary. We perform on-going reassessments 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 our consolidation conclusion to change.

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 clarified 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 was 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 clarified how fair value is measured and increased the disclosure requirements for fair value measurements, and did 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 did 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 was 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 clarified the presentation of comprehensive income and did 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.

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 prior 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 and six months ended June 30, 2012 and 2011:

 

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

 (Dollars and shares in thousands,

 except per share amounts)

  2012     2011     2012     2011  

 Numerator:

       

Net income available to common stockholders

    $ 47,603          $ 65,750          $ 82,393          $ 98,757     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Denominator:

       

Weighted average common shares outstanding-basic

    44,207          42,924          43,994          42,704     

Weighted average effect of dilutive securities:

       

Stock options and ESPP

    385          654          426          678     

Restricted stock units

    120          101          153          100     

3.875% Convertible Notes (1)

    -          61          -          77     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Denominator for diluted calculation

    44,712          43,740          44,573          43,559     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Earnings per common share:

       

Basic

    $ 1.08          $ 1.53          $ 1.87          $ 2.31     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    $ 1.06          $ 1.50          $ 1.85          $ 2.27     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

 

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The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation as they were deemed to be antidilutive for the three and six months ended June 30, 2012 and 2011:

 

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

 (Shares in thousands)

  2012      2011      2012      2011  

 Stock options

    683           582           574           574     

 Restricted stock units

    189           158           94           99     
 

 

 

    

 

 

    

 

 

    

 

 

 

 Total

    872           740           668           673     
 

 

 

    

 

 

    

 

 

    

 

 

 

3. Share-Based Compensation

For the three and six months ended June 30, 2012 and 2011, we recorded share-based compensation and related tax benefits as follows:

 

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

 (Dollars in thousands)

   2012      2011      2012      2011  

Share-based compensation expense

      $ 5,828            $ 4,706            $ 10,977             $ 8,949     

Income tax benefit related to share-based compensation expense

     (1,489)          (1,243)          (2,688)          (2,276)    

Unrecognized Compensation Expense

As of June 30, 2012, unrecognized share-based compensation expense was as follows:

 

 (Dollars in thousands)

    Unrecognized  
Expense
    Average
Expected
Recognition
  Period - in Years  
 

 Stock options

    $ 19,129          3.00     

 Restricted stock units

    29,706          2.99     
 

 

 

   

 Total unrecognized share-based compensation expense

    $ 48,835       
 

 

 

   

 

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Share-Based Payment Award Activity

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

     387,793           64.02           

Exercised

     (576,461)          36.26           

Forfeited

     (36,629)          45.86           

Expired

     (4,568)          42.50           
  

 

 

          

Outstanding at June 30, 2012

     2,209,495           48.00           4.26             $ 26,284,468     
  

 

 

          

Vested and expected to vest at June 30, 2012

     2,106,562           47.53           4.17           25,861,593     
  

 

 

          

Exercisable at June 30, 2012

     1,159,056           43.06           2.93           18,281,444     
  

 

 

          

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $58.72 as of June 30, 2012. The total intrinsic value of options exercised during the three and six months ended June 30, 2012 was $1.8 million and $13.7 million, respectively, compared to $6.9 million and $15.8 million for the comparable 2011 periods.

The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the six months ended June 30, 2012:

 

         Shares         Weighted
Average
    Grant Date Fair    
Value
 

Nonvested at December 31, 2011

     499,119          $ 52.72     

Granted

     309,840          63.89     

Vested

     (140,550)         51.46     

Forfeited

     (18,574)         54.73     
  

 

 

   

Nonvested at June 30, 2012

     649,835          58.27     
  

 

 

   

4. Cash and Cash Equivalents

The following table details our cash and cash equivalents at June 30, 2012 and December 31, 2011:

 

 (Dollars in thousands)

       June 30, 2012           December 31, 2011    

 Cash and due from banks (1)

     $ 1,224,552          $ 852,010     

 Securities purchased under agreements to resell (2)

     100,787          175,553     

 Other short-term investment securities

     86,386          87,385     
  

 

 

   

 

 

 

 Total cash and cash equivalents

     $         1,411,725          $         1,114,948     
  

 

 

   

 

 

 

 

  (1)

At June 30, 2012 and December 31, 2011, $662.4 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 $265.8 million and $371.5 million, respectively.

  (2)

At June 30, 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 $102.8 million and $179.1 million, respectively. None of these securities received as collateral were sold or repledged as of June 30, 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 June 30, 2012 and December 31, 2011 are as follows:

 

    June 30, 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

   $ 25,146        $ 453        $ -         $ 25,599        $ 25,233        $ 731        $ -         $ 25,964    

U.S. agency debentures

    2,571,796         68,328         -          2,640,124         2,822,158         52,864         (90)         2,874,932    

Residential mortgage-backed securities:

               

Agency-issued mortgage-backed securities

    1,668,523         45,276         -          1,713,799         1,529,466         34,926         (106)         1,564,286    

Agency-issued collateralized mortgage obligations—fixed rate

    3,751,327         54,283         (1,399)         3,804,211         3,317,285         56,546         (71)         3,373,760    

Agency-issued collateralized mortgage obligations—variable rate

    2,103,451         5,081         (83)         2,108,449         2,416,158         1,554         (4,334)         2,413,378    

Agency-issued commercial mortgage-backed securities

    223,200         4,880         -          228,080         176,646         2,047         -          178,693    

Municipal bonds and notes

    91,659         8,035         -          99,694         92,241         8,257         -          100,498    

Equity securities

    1,352         26         (383)         995         5,554         180         (1,199)         4,535    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 10,436,454        $  186,362        $  (1,865)        $ 10,620,951        $ 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)

          639,596               611,824    

Other venture capital investments (2)

          120,111               124,121    

Other investments (3)

                       987    

Non-marketable securities (equity method accounting):

               

Other investments (4)

          138,993               68,252    

Low income housing tax credit funds

          58,698               34,894    

Non-marketable securities (cost method accounting):

               

Venture capital and private equity fund investments (5)

          153,618               145,007    

Other investments

          21,296               19,355    
       

 

 

         

 

 

 

Total non-marketable securities

          1,132,312               1,004,440    
       

 

 

         

 

 

 

 Total investment securities

         $  11,753,263              $ 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 June 30, 2012 and December 31, 2011:

 

    June 30, 2012     December 31, 2011  

 (Dollars in thousands)

  Amount     Ownership %     Amount     Ownership %  

 SVB Strategic Investors Fund, LP

   $ 36,694         12.6   %     $ 39,567         12.6   % 

 SVB Strategic Investors Fund II, LP

    109,343         8.6         122,619         8.6    

 SVB Strategic Investors Fund III, LP

    213,405         5.9         218,429         5.9    

 SVB Strategic Investors Fund IV, LP

    146,477         5.0         122,076         5.0    

 Strategic Investors Fund V, LP

    18,134         0.2         8,838         0.3    

 SVB Capital Preferred Return Fund, LP

    50,573         20.0         42,580         20.0    

 SVB Capital—NT Growth Partners, LP

    57,588         33.0         43,958         33.0    

 SVB Capital Partners II, LP (i)

    863         5.1         2,390         5.1    

 Other private equity fund (ii)

    6,519         58.2         11,367         58.2    
 

 

 

     

 

 

   

 Total venture capital and private equity fund investments

   $  639,596          $  611,824      
 

 

 

     

 

 

   

 

  (i)

At June 30, 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 June 30, 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 June 30, 2012 and December 31, 2011:

 

     June 30, 2012     December 31, 2011  

 (Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

 Silicon Valley BancVentures, LP

    $ 16,739          10.7   %     $ 17,878          10.7   % 

 SVB Capital Partners II, LP (i)

     59,256          5.1         61,099          5.1    

 SVB India Capital Partners I, LP

     40,668          14.4         42,832          14.4    

 SVB Capital Shanghai Yangpu Venture Capital Fund

     3,448          6.8         2,312          6.8    
  

 

 

      

 

 

    

 Total other venture capital investments

    $   120,111           $   124,121       
  

 

 

      

 

 

    

 

  (i)

At June 30, 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 June 30, 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 June 30, 2012 and December 31, 2011:

 

     June 30, 2012     December 31, 2011  

 (Dollars in thousands)

   Amount      Ownership %     Amount      Ownership %  

 Gold Hill Venture Lending 03, LP (i)

    $ 6,238          9.3   %     $ 16,072          9.3   % 

 Gold Hill Capital 2008, LP (ii)

     19,553          15.5         19,328          15.5    

 Partners for Growth II, LP

     3,551          24.2         3,785          24.2    

 China Joint Venture investment (iii)

     79,524          50.0                   

 Other investments

     30,127          N/A         29,067          N/A    
  

 

 

      

 

 

    

 Total other investments

    $     138,993           $     68,252       
  

 

 

      

 

 

    

 

  (i)

At June 30, 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 June 30, 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.

  (iii)

On May 3, 2012, we contributed $79.7 million to SPD Silicon Valley Bank Co., Ltd., our joint venture bank in China.

 

(5)

Represents investments in 326 and 329 funds (primarily venture capital funds) at June 30, 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 June 30, 2012, we recognized OTTI losses of $0.2 million resulting from other-than-temporary declines in value for 12 of the 326 investments. For the six months ended June 30, 2012, we recognized OTTI losses of $0.5 million resulting from other-than-temporary declines in value for 30 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 296 investments were temporary and as such, no OTTI was required to be recognized. At June 30, 2012, the carrying value of these venture capital and private equity fund investments (cost method accounting) was $153.6 million, and the estimated fair value was $185.3 million.

 

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The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months, or 12 months or longer as of June 30, 2012:

 

    June 30, 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
 

 Residential mortgage-backed securities:

           

Agency-issued collateralized mortgage obligations—fixed rate

   $ 425,171        $ (1,399)        $ -         $ -         $ 425,171        $ (1,399)    

Agency-issued collateralized mortgage obligations—variable rate

    182,847         (74)         43,153          (9)         226,000         (83)    

 Equity securities

    162         (178)         243          (205)         405         (383)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total temporarily impaired securities (1)

   $ 608,180        $  (1,651)        $  43,396         $  (214)        $ 651,576        $  (1,865)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

As of June 30, 2012, we identified a total of 33 investments that were in unrealized loss positions, of which five investments totaling $43.4 million with unrealized losses of $0.2 million has been in an impaired position for a period of time greater than 12 months. As of June 30, 2012, we do not intend to sell any impaired debt 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 securities prior to recovery of our adjusted cost basis. Based on our analysis as of June 30, 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 June 30, 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.

 

    June 30, 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

  $ 25,599        2.39  %    $ 25,599        2.39  %    $ -        -  %    $ -        -  %    $ -        -  % 

U.S. agency debentures

    2,640,124        1.61        35,097        2.13        2,474,409        1.53        130,618        3.07        -        -   

Residential mortgage-backed securities:

                   

Agency-issued mortgage-backed securities

    1,713,799        2.35        -        -        -        -        1,583,036        2.27        130,763        3.28   

Agency-issued collateralized mortgage obligations - fixed rate

    3,804,211        2.21        -        -        -        -        -        -        3,804,211        2.21   

Agency-issued collateralized mortgage obligations - variable rate

    2,108,449        0.70        -        -        -        -        -        -        2,108,449        0.70   

Agency-issued commercial mortgage-backed securities

    228,080        2.09        -        -        -        -        -        -        228,080        2.09   

Municipal bonds and notes

    99,694        6.00        941        5.20        15,195        5.55        50,166        6.00        33,392        6.24   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total

  $ 10,619,956        1.82      $ 61,637        2.28      $ 2,489,604        1.55      $ 1,763,820        2.44      $ 6,304,895        1.74   
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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The following table presents the components of gains and losses (realized and unrealized) on investment securities for the three and six months ended June 30, 2012 and 2011:

 

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

 (Dollars in thousands)

   2012      2011      2012      2011  

 Gross gains on investment securities:

           

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

    $ 5,322          $ 37,314          $ 5,343          $ 37,377     

Marketable securities (fair value accounting)

     3,303           -           3,619           442     

Non-marketable securities (fair value accounting):

           

Venture capital and private equity fund investments

     33,288           37,205           59,398           82,704     

Other venture capital investments

     1,556           2,071           3,333           7,019     

Other investments

     -           -           21           20     

Non-marketable securities (equity method accounting):

           

Other investments

     5,389           3,132           6,811           6,516     

Non-marketable securities (cost method accounting):

           

Venture capital and private equity fund investments

     538           801           945           1,056     

Other investments

     264           2,256           306           2,429     
  

 

 

    

 

 

    

 

 

    

 

 

 

 Total gross gains on investment securities

     49,660           82,779           79,776           137,563     
  

 

 

    

 

 

    

 

 

    

 

 

 

 Gross losses on investment securities:

           

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

     (755)          (93)          (1,650)          (94)    

Marketable securities (fair value accounting)

     (754)          (3,307)          (754)          (4,115)    

Non-marketable securities (fair value accounting):

           

Venture capital and private equity fund investments

     (18,618)          (4,845)          (32,533)          (6,901)    

Other venture capital investments

     (3,219)          (1,420)          (9,882)          (1,664)    

Non-marketable securities (equity method accounting):

           

Other investments

     (327)          (1,110)          (703)          (1,309)    

Non-marketable securities (cost method accounting):

           

Venture capital and private equity fund investments

     (177)          (293)          (540)          (432)    

Other investments

     (1)          (31)          (66)          (31)    
  

 

 

    

 

 

    

 

 

    

 

 

 

 Total gross losses on investment securities

     (23,851)          (11,099)          (46,128)          (14,546)    
  

 

 

    

 

 

    

 

 

    

 

 

 

 Gains on investment securities, net

    $ 25,809          $ 71,680          $ 33,648          $ 123,017     
  

 

 

    

 

 

    

 

 

    

 

 

 

 Gains attributable to noncontrolling interests, including carried interest

    $ 14,502          $ 26,437          $ 21,840          $ 69,822     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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. 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 $67.7 million and $60.2 million at June 30, 2012 and December 31, 2011, respectively, is presented in the following table:

 

 (Dollars in thousands)

       June 30, 2012              December 31, 2011      

 Commercial loans:

     

Software

    $ 2,752,500         $ 2,492,849    

Hardware

     1,086,973          952,303    

Venture capital/private equity

     1,403,801          1,117,419    

Life science

     917,723          863,737    

Premium wine (1)

     120,043          130,245    

Other

     371,195          342,147    
  

 

 

    

 

 

 

 Commercial loans

     6,652,235          5,898,700    
  

 

 

    

 

 

 

 Real estate secured loans:

     

Premium wine (1)

     373,658          345,988    

Consumer loans (2)

     554,266          534,001    
  

 

 

    

 

 

 

 Real estate secured loans

     927,924          879,989    
  

 

 

    

 

 

 

 Construction loans

     33,063          30,256    

 Consumer loans

     176,530          161,137    
  

 

 

    

 

 

 

 Total loans, net of unearned income (3)

    $         7,789,752         $         6,970,082    
  

 

 

    

 

 

 

 

(1)

Included in our premium wine portfolio are gross construction loans of $147.9 million and $110.8 million at June 30, 2012 and December 31, 2011, respectively.

(2)

Consumer loans secured by real estate at June 30, 2012 and December 31, 2011 were comprised of the following:

 

 (Dollars in thousands)

       June 30, 2012              December 31, 2011      

 Loans for personal residence

    $ 369,780         $ 350,359    

 Loans to eligible employees

     103,824          99,704    

 Home equity lines of credit

     80,662          83,938    
  

 

 

    

 

 

 

 Consumer loans secured by real estate

    $         554,266         $         534,001    
  

 

 

    

 

 

 

 

(3)

Included within our total loan portfolio are credit card loans of $58.3 million and $49.7 million at June 30, 2012 and December 31, 2011, respectively.

 

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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 June 30, 2012 and December 31, 2011, is as follows:

 

 (Dollars in thousands)

   June 30,
2012
     December 31, 
2011
 

 Commercial loans:

    

Software

     $ 2,752,500          $ 2,492,849     

Hardware

     1,086,973          952,303     

Venture capital/private equity

     1,403,801          1,117,419     

Life science

     917,723          863,737     

Premium wine

     493,701          476,233     

Other

     404,258          372,403     
  

 

 

   

 

 

 

 Total commercial loans

     7,058,956          6,274,944     
  

 

 

   

 

 

 

 Consumer loans:

    

Real estate secured loans

     554,266          534,001     

Other consumer loans

     176,530          161,137     
  

 

 

   

 

 

 

 Total consumer loans

     730,796          695,138     
  

 

 

   

 

 

 

 Total loans, net of unearned income

     $     7,789,752          $ 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 June 30, 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
 

 June 30, 2012:

             

 Commercial loans:

             

Software

     $ 3,541        $ 66        $ 25        $ 3,632        $ 2,773,398        $ 25    

Hardware

      32                       32         1,083,630           

Venture capital/private equity

      75,349                       75,349         1,342,366           

Life science

      35         124                159         926,735           

Premium wine

                                  493,107           

Other

      73                       73         405,037           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial loans

      79,030         190         25         79,245         7,024,273         25    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Consumer loans:

             

Real estate secured loans

                                  551,539           

Other consumer loans

      21         5,896                5,917         169,423           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total consumer loans

      21         5,896                5,917         720,962           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans excluding impaired loans

      79,051         6,086         25         85,162         7,745,235         25    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Impaired loans

      16         1,411         3,724         5,151         21,920           
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans

     $ 79,067        $ 7,497        $ 3,749        $ 90,313        $ 7,767,155        $ 25    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 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 June 30, 2012 and December 31, 2011:

 

(Dollars in thousands)

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

June 30, 2012:

           

Commercial loans:

           

Software

     $ 2,558           $ 418           $ 2,976           $ 4,749     

Hardware

     13,074           1,099           14,173           17,616     

Life Science

     -           -           -           -     

Premium wine

     -           3,123           3,123           3,325     

Other

     1,905           1,051           2,956           6,824     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     17,537           5,691           23,228           32,514     
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

     122           2,432           2,554           7,460     

Other consumer loans

     1,289           -           1,289           1,406     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,411           2,432           3,843           8,866     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 18,948           $ 8,123           $ 27,071           $ 41,380     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and six months ended June 30, 2012 and 2011:

 

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

 (Dollars in thousands)

   2012      2011      2012      2011  

Average impaired loans:

           

Commercial loans:

           

Software

     $ 1,896           $ 2,620           $ 1,716           $ 2,697     

Hardware

     21,468           6,662           16,865           5,594     

Life science

     88           1,170           117           1,834     

Premium wine

     3,527           1,396           3,455           2,540     

Other

     3,506           3,588           4,075           2,878     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     30,485           15,436           26,228           15,543     
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans:

           

Real estate secured loans

     2,645           19,557           7,746           19,841     

Other consumer loans

     2,170           -           2,595           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     4,815           19,557           10,341           19,841     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total average impaired loans

     $ 35,300           $ 34,993           $ 36,569           $ 35,384     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following tables summarize the activity relating to our allowance for loan losses for the three and six months ended June 30, 2012 and 2011, broken out by portfolio segment:

 

 Three months ended June 30, 2012

 (dollars in thousands)

   Beginning
Balance
March 31,
2012
     Charge-offs      Recoveries      Provision for
(Reduction  of)
     Ending Balance
June 30,
2012
 

 Commercial loans:

              

Software

     $ 35,425          $ (2,118)          $ 1,329          $ 3,345           $ 37,981    

Hardware

     30,348          (10,413)          329          2,368           22,632    

Venture capital/private equity

     7,214          -                   2,438           9,652    

Life science

     10,292          (122)          92          1,398           11,660    

Premium wine

     3,738          (584)          187          55           3,396    

Other

     4,802          (286)          1,107          (681)          4,942    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

     91,819          (13,523)          3,044          8,923           90,263    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans

     9,103          (607)          331          (924)          7,903    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total allowance for loan losses

     $ 100,922          $ (14,130)          $ 3,375          $ 7,999           $ 98,166    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Six months ended June 30, 2012

 (dollars in thousands)

   Beginning
Balance
December 31,
2011
     Charge-offs      Recoveries      Provision for
(Reduction of)
     Ending Balance
June 30,
2012
 

 Commercial loans:

              

Software

     $ 38,263          $ (2,977)          $ 4,088          $ (1,393)          $ 37,981    

Hardware

     16,810          (14,261)          434          19,649           22,632    

Venture capital/private equity

     7,319          -                   2,333           9,652    

Life science

     10,243          (235)          313          1,339           11,660    

Premium wine

     3,914          (584)          265          (199)          3,396    

Other

     5,817          (2,456)          1,151          430           4,942    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

     82,366          (20,513)          6,251          22,159           90,263    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans

     7,581          (607)          560          369           7,903    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total allowance for loan losses

     $ 89,947          $ (21,120)          $ 6,811          $ 22,528           $ 98,166    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Three months ended June 30, 2011

 (dollars in thousands)

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

 Commercial loans:

              

Software

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

Hardware

     15,840          -           32          170           16,042    

Venture capital/private equity

     7,432          -                   875           8,307    

Life science

     8,097          (471)          505          (906)          7,225    

Premium wine

     4,504          (449)          590          (636)          4,009    

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans

     9,266          -           160          (596)          8,830    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total allowance for loan losses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Six months ended June 30, 2011

 (dollars in thousands)

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

 Commercial loans:

              

Software

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

Hardware

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

Venture capital/private equity

     8,241          -                   66           8,307    

Life science

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

Premium wine

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

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans

     10,523          -           559          (2,252)          8,830    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 Total allowance for loan losses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2012 and December 31, 2011, broken out by portfolio segment:

 

    June 30, 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

    $ 845          $ 37,136               $ 526          $ 37,737     

Hardware

    4,225          18,407            1,261          15,549     

Venture capital/private equity

    -          9,652            -          7,319     

Life science

    -          11,660            -          10,243     

Premium wine

    -          3,396            -          3,914     

Other

    47          4,895            1,180          4,637     
 

 

 

   

 

 

     

 

 

   

 

 

 

 Total commercial loans

    5,117          85,146            2,967          79,399     
 

 

 

   

 

 

     

 

 

   

 

 

 

 Consumer loans

    548          7,355            740          6,841     
 

 

 

   

 

 

     

 

 

   

 

 

 

 Total allowance for loan losses

    $ 5,665          $ 92,501            $ 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 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 June 30, 2012 and December 31, 2011:

 

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Table of Contents

 (Dollars in thousands)

  Pass       Performing  
  (Criticized)  
      Impaired       Total  

 June 30, 2012:

       

 Commercial loans:

       

Software

    $ 2,573,437           $ 203,593           $ 2,976           $ 2,780,006     

Hardware

    951,026          132,636          14,173          1,097,835     

Venture capital/private equity

    1,417,715          -          -          1,417,715     

Life science

    820,392          106,502          -          926,894     

Premium wine

    481,162          11,945          3,123          496,230     

Other

    376,158          28,952          2,956          408,066     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total commercial loans

    6,619,890          483,628          23,228          7,126,746     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Consumer loans:

       

Real estate secured loans

    530,017          21,522          2,554          554,093     

Other consumer loans

    163,390          11,950          1,289          176,629     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total consumer loans

    693,407          33,472          3,843          730,722     
 

 

 

   

 

 

   

 

 

   

 

 

 

 Total gross loans

    $ 7,313,297          $ 517,100          $ 27,071          $ 7,857,468     
 

 

 

   

 

 

   

 

 

   

 

 

 

 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     
 

 

 

   

 

 

   

 

 

   

 

 

 

TDRs

As of June 30, 2012 we had TDRs of $25.5 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were unfunded commitments available for funding of $1.1 million to the clients associated with these TDRs as of June 30, 2012. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at June 30, 2012 and December 31, 2011:

 

 (Dollars in thousands)

      June 30, 2012             December 31, 2011      

 Loans modified in TDRs:

   

 Commercial loans:

   

 Software

    $ 769          $ 1,142     

 Hardware

    15,272          5,183     

 Premium wine

    2,135          1,949     

 Other

    3,491          4,934     
 

 

 

   

 

 

 

 Total commercial loans

    21,667          13,208     
 

 

 

   

 

 

 

 Consumer loans:

   

 Real estate secured loans

    2,522          17,934     

 Other consumer loans

    1,289          3,133     
 

 

 

   

 

 

 

 Total consumer loans

    3,811          21,067     
 

 

 

   

 

 

 

 Total

    $ 25,478          $ 34,275     
 

 

 

   

 

 

 

 

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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 and six months ended June 30, 2012 and 2011:

 

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

 (Dollars in thousands)

       2012      2011      2012      2011  

 Loans modified in TDRs during the period:

             

 Commercial loans:

             

Software

       $ -           $ 605           $ 100           $ 605     

Hardware

       12,747           3,321           13,198           3,321     

Premium wine

       -           -           275           -     

Other

       535           -           2,440           -     
    

 

 

    

 

 

    

 

 

    

 

 

 

 Total commercial loans

       13,282           3,926           16,013           3,926     
    

 

 

    

 

 

    

 

 

    

 

 

 

 Consumer loans:

             

Real estate secured loans

       289           -           411           -     
    

 

 

    

 

 

    

 

 

    

 

 

 

 Total consumer loans