SANTA CLARA, Calif., Oct. 23, 2008 (GLOBE NEWSWIRE) -- SVB Financial Group (Nasdaq:SIVB) today announced financial results for the third quarter ended September 30, 2008.
Consolidated net income for the third quarter of 2008 was $27.0 million, or $0.80 per diluted common share, compared to $21.3 million, or $0.62 per diluted common share, for the second quarter of 2008, and $38.1 million, or $1.03 per diluted common share, for the third quarter of 2007. Consolidated net income for the second quarter of 2008 included a non-tax deductible loss of $3.9 million, related to our cash settlement of the conversion of certain zero-coupon convertible subordinated notes prior to the notes' maturity ("Coco Loss"). Additionally, in the second quarter of 2008, we recorded an increase to stockholders' equity of $3.9 million, representing a corresponding cash receipt pursuant to a call spread arrangement.
Consolidated net income for the nine months ended September 30, 2008 was $76.2 million, or $2.22 per diluted common share, compared to $89.4 million, or $2.41 per diluted common share for the comparable 2007 period. On a non-GAAP basis, excluding the $3.9 million Coco Loss, net income for the nine months ended September 30, 2008 was $80.1 million.
"We delivered another quarter of strong growth and solid credit quality, demonstrating the effectiveness of our strategy and discipline, in contrast to the continued, significant deterioration of the broader financial services market," said Ken Wilcox, President and CEO of SVB Financial Group.
"Like every company, we are living with the impact of the global economic downturn, but our focus on meeting the needs of our clients during these difficult times, and our continued credit and investment discipline are allowing us to weather the storm better than most."
Third Quarter 2008 Summary
(Dollars in millions, except per share amounts and ratios)
Three months ended
------------------------------------------------------
% Change from
------------------
Sept. 30, June 30, Sept. 30, June 30, Sept. 30,
2008 2008 2007 2008 2007
----------- ---------- ---------- ---------- ------- ---------
Income
Statement:
Diluted EPS $ 0.80 $ 0.62 $ 1.03 29.0% (22.3)%
Net income 27.0 21.3 38.1 26.8 (29.1)
Net interest
income 95.1 87.9 95.7 8.2 (0.6)
Provision
for loan
losses 13.7 8.4 3.2 63.1 328.1
Noninterest
income 41.7 43.9 65.0 (5.0) (35.8)
Noninterest
expense 80.4 87.2 83.0 (7.8) (3.1)
Non-GAAP
net
income (A) 27.0 25.2 38.1 7.1 (29.1)
Non-GAAP
noninterest
expense,
net of
minority
interest (A) 77.6 80.9 80.3 (4.1) (3.4)
Fully Taxable
Equivalent:
Net interest
income (1) $ 95.7 $ 88.4 $ 96.0 8.3% (0.3)%
Net
interest
margin 5.73% 5.69% 7.18% 0.7 (20.2)
Shares
Outstanding:
Common 32,735,732 32,252,367 33,448,121 1.5% (2.1)%
Basic
weighted
average 32,534,613 32,053,749 34,028,704 1.5 (4.4)
Diluted
weighted
average 33,778,095 34,192,459 36,869,496 (1.2) (8.4)
Balance Sheet:
Average
total
assets $ 7,548.1 $ 7,158.1 $ 6,087.3 5.4% 24.0%
Average
loans, net
of unearned
income 4,863.7 4,319.9 3,630.3 12.6 34.0
Average
interest-
earning
investment
securities 1,396.2 1,336.5 1,326.4 4.5 5.3
Average
noninterest-
bearing
demand
deposits 2,826.3 2,833.0 2,867.8 (0.2) (1.4)
Average
interest-
bearing
deposits 1,994.0 1,815.9 1,068.8 9.8 86.6
Average
total
deposits 4,820.3 4,648.8 3,936.6 3.7 22.4
Average
short-term
borrowings 544.3 206.0 205.7 164.2 164.6
Average
long-term
debt 976.8 1,099.8 847.2 (11.2) 15.3
Period-end
total
assets 8,070.9 7,309.9 6,304.1 10.4 28.0
Period-end
loans, net
of unearned
income 5,285.1 4,633.7 3,818.3 14.1 38.4
Period-end
investment
securities 1,780.0 1,788.0 1,571.6 (0.4) 13.3
Period-end
noninterest-
bearing
demand
deposits 3,231.3 2,919.2 2,892.1 10.7 11.7
Period-end
interest-
bearing
deposits 2,201.3 1,944.4 1,081.1 13.2 103.6
Period-end
total
deposits 5,432.6 4,863.6 3,973.2 11.7 36.7
Off-Balance
Sheet:
Average
total client
investment
funds $22,036.0 $ 21,389.3 $ 20,705.1 3.0 % 6.4%
Period-end
total
client
investment
funds 21,533.8 21,877.9 20,360.8 (1.6) 5.8
Total
unfunded
credit
commitments 5,619.0 5,034.3 4,469.0 11.6 25.7
Earnings
Ratios:
Return on
average
assets (2) 1.42% 1.20% 2.48% 18.3% (42.7)%
Return on
average
stockholders'
equity (2) 15.09 12.64 22.35 19.4 (32.5)
Asset Quality
Ratios:
Allowance
for loan
losses as
a percentage
of total
gross loans 1.13% 1.13% 1.15% --% (1.7)%
Gross
charge-offs
as a
percentage
of total
gross loans
(annualized) 0.52 0.78 0.43 (33.3) 20.9
Net
charge-offs
as a
percentage
of total
gross loans
(annualized) 0.47 0.44 0.24 6.8 95.8
Other Ratios:
Total
risk-based
capital
ratio 14.33% 15.10% 17.64% (5.1)% (18.8)%
Tangible
common
equity to
tangible
assets (3) 9.20 9.47 10.80 (2.9) (14.8)
Operating
efficiency
ratio (4) 58.51 65.86 51.52 (11.2) 13.6
Average
loans, net
of unearned
income-to-
deposits 100.90 92.92 92.22 8.6 9.4
Non-GAAP
Ratios: (A)
Non-GAAP
return on
average
assets (5) 1.42% 1.41% 2.48% 0.7% (42.7)%
Non-GAAP
return on
average
stockholders'
equity (5) 15.09 14.92 22.35 1.1 (32.5)
Non-GAAP
operating
efficiency
ratio (6) 56.91 61.52 54.29 (7.5) 4.8
Other
Statistics:
Common stock
repurchases $ -- $ 1.0 $ 58.0 (100.0)% (100.0)%
Period-end
prime rate 5.00% 5.00% 7.75% -- (35.5)
Average SVB
prime
lending
rate 5.00 5.08 8.19 (1.6) (38.9)
Period-end
full-time
equivalent
employees 1,237 1,209 1,141 2.3% 8.4%
Nine months ended
----------------------------------
Sept. 30, Sept. 30, %
2008 2007 Change
----------- ----------- -------
Income Statement:
Diluted EPS $ 2.22 $ 2.41 (7.9)%
Net income 76.2 89.4 (14.8)
Net interest income 275.1 283.6 (3.0)
Provision for loan losses 29.8 10.9 173.4
Noninterest income 127.2 168.2 (24.4)
Noninterest expense 251.1 263.0 (4.5)
Non-GAAP net income (A) 80.1 99.6 (19.6)
Non-GAAP noninterest expense,
net of minority interest (A) 239.1 237.6 0.6
Fully Taxable Equivalent:
Net interest income (1) $ 276.8 $ 284.6 (2.7)%
Net interest margin 5.91% 7.38% (19.9)
Shares Outstanding:
Common 32,735,732 33,448,121 (2.1)%
Basic weighted average 32,295,612 34,254,952 (5.7)
Diluted weighted average 34,255,320 37,131,653 (7.7)
Balance Sheet:
Average total assets $ 7,154.2 $ 5,915.9 20.9%
Average loans, net of unearned
income 4,433.7 3,439.5 28.9
Average interest-earning
investment securities 1,332.1 1,391.6 (4.3)
Average noninterest-bearing
demand deposits 2,852.9 2,838.2 0.5
Average interest-bearing
deposits 1,782.5 1,041.7 71.1
Average total deposits 4,635.4 3,879.9 19.5
Average short-term
borrowings 329.2 388.6 (15.3)
Average long-term debt 987.9 598.9 65.0
Period-end total assets 8,070.9 6,304.1 28.0
Period-end loans, net of
unearned income 5,285.1 3,818.3 38.4
Period-end investment
securities 1,780.0 1,571.6 13.3
Period-end noninterest-bearing
demand deposits 3,231.3 2,892.1 11.7
Period-end interest-bearing
deposits 2,201.3 1,081.1 103.6
Period-end total deposits 5,432.6 3,973.2 36.7
Off-Balance Sheet:
Average total client
investment funds $ 21,773.0 $ 20,072.2 8.5%
Period-end total client
investment funds 21,533.8 20,360.8 5.8
Total unfunded credit
commitments 5,619.0 4,469.0 25.7
Earnings Ratios:
Return on average assets (2) 1.42% 2.02% (29.7)%
Return on average stockholders'
equity (2) 14.70 17.96 (18.2)
Asset Quality Ratios:
Allowance for loan losses as
a percentage of total
gross loans 1.13% 1.15% (1.7)%
Gross charge-offs as a
percentage of total
gross loans (annualized) 0.56 0.51 9.8
Net charge-offs as a
percentage of total
gross loans (annualized) 0.42 0.33 27.3
Other Ratios:
Total risk-based capital
ratio 14.33% 17.64% (18.8)%
Tangible common equity to
tangible assets (3) 9.20 10.80 (14.8)
Operating efficiency
ratio (4) 62.14 58.09 7.0
Average loans, net of
unearned income-to-deposits 95.65 88.65 7.9
Non-GAAP Ratios: (A)
Non-GAAP return on average
assets (5) 1.49% 2.25% (33.8)%
Non-GAAP return on average
stockholders' equity (5) 15.44 20.01 (22.8)
Non-GAAP operating efficiency
ratio (6) 59.28 56.85 4.3
Other Statistics:
Common stock repurchases $ 45.6 $ 97.3 (53.1)%
Period-end prime rate 5.00% 7.75% (35.5)
Average SVB prime lending
rate 5.44 8.23 (33.9)
Period-end full-time
equivalent employees 1,237 1,141 8.4%
(A) A reconciliation of non-GAAP calculations to GAAP is provided in
he schedules attached.
(1) Interest income on non-taxable investments is presented on a fully
tax-equivalent basis using the federal statutory income tax rate
of 35.0 percent. The tax-equivalent adjustments were $0.6 million,
$0.6 million and $0.3 million for the quarters ended September 30,
2008, June 30, 2008 and September 30, 2007, respectively. The
tax-equivalent adjustments were $1.7 million and $0.9 million for
the nine months ended September 30, 2008 and 2007, respectively.
(2) Ratios represent annualized consolidated net income divided by
quarterly average assets/equity and year-to-date average
assets/equity, respectively.
(3) Tangible common equity consists of total stockholders' equity
(excluding unrealized gains and losses from our fixed income
investments) less acquired intangibles and goodwill. Tangible
assets represent total assets (excluding unrealized gains and
losses from our fixed income investments) less acquired
intangibles and goodwill.
(4) The operating efficiency ratio is calculated by dividing
noninterest expense by total taxable-equivalent income.
(5) Ratios represent non-GAAP annualized consolidated net income
(excluding the non-tax deductible $3.9 million Coco Loss recorded
in the second quarter of 2008, and goodwill impairment charges of
$10.2 million, net of tax, recorded in the second quarter of 2007)
divided by quarterly average assets/equity and year-to-date
average assets/equity, respectively.
(6) The non-GAAP operating efficiency ratio is calculated by dividing
noninterest expense (excluding (i) the non-tax deductible $3.9
million Coco Loss, (ii) goodwill impairment charges of $17.2
million recorded in the second quarter of 2007 and (iii) the
portion of noninterest expense attributable to minority interests
of $2.9 million, $2.5 million and $2.7 million for the quarters
ended September 30, 2008, June 30, 2008 and September 30, 2007,
respectively and $8.1 million and $8.2 million for the nine months
ended September 30, 2008 and 2007, respectively) by total taxable-
equivalent income (excluding taxable-equivalent income
attributable to minority interests of $1.2 million, $0.9 million
and $13.1 million for the quarters ended September 30, 2008, June
30, 2008 and September 30, 2007, respectively and $0.6 million and
$34.8 million for the nine months ended September 30, 2008 and
2007, respectively).
Net Interest Income and Margin
Net interest income was $95.1 million for the third quarter of 2008, compared to $87.9 million for the second quarter of 2008 and $95.7 million for the third quarter of 2007. Net interest income, on a fully tax-equivalent basis, was $95.7 million for the third quarter of 2008, compared to $88.4 million for the second quarter of 2008 and $96.0 million for the third quarter of 2007. The increase in net interest income, on a fully tax-equivalent basis, from the second to the third quarter of 2008, was primarily attributable to the following:
* A net increase in interest income of $9.7 million from our
loan portfolio, primarily related to growth in our average
loan portfolio balances, which increased interest income by
$10.4 million in the third quarter of 2008. Additionally, the
third quarter of 2008 had one more day compared to the second
quarter of 2008, which increased interest income by $1.0
million. These increases in interest income were partially
offset by the full quarter effect of the 25 basis points
reduction in our prime-lending rate during the second quarter
of 2008. Our average prime-lending rate was 5.00 percent for
the third quarter of 2008, compared to 5.08 percent for the
second quarter of 2008.
* An increase in interest income of $0.8 million for our
interest-earning investment securities portfolio, primarily
related to growth in average balances of our mortgage-backed
securities portfolio.
* A net decrease in interest expense of $0.6 million from our
long-term debt, primarily due to a $0.5 million decrease in
interest expense from the interest rate swap agreements
associated with our 5.70% senior and 6.05% subordinated notes,
due to lower London Interbank Offered Rates (LIBOR).
* An increase in interest expense of $1.9 million from our
short-term borrowings, primarily related to increases in
average balances. Short-term borrowings were used to partially
fund growth in our loan portfolio.
* A decrease in interest income of $1.0 million from our
short-term investment portfolio primarily related to decreases
in average balances. In the second quarter of 2008, our
average short-term investment portfolio included net proceeds
from our issuance of $250 million of 3.875% convertible senior
notes, a portion of which was subsequently used to settle the
conversion of our zero-coupon convertible subordinated notes,
which matured on June 15, 2008.
* An increase in interest expense of $0.9 million from total
interest-bearing deposits, primarily due to growth in the
average balances of our money market deposit for early stage
clients and our Eurodollar sweep deposit products.
Our net interest margin, on a fully tax-equivalent basis, was 5.73 percent for the third quarter of 2008, compared to 5.69 percent for the second quarter of 2008 and 7.18 percent for the third quarter of 2007. The increase from the second to the third quarter of 2008 was primarily due to the change in mix of interest-earning assets with a higher concentration of loans, resulting from our recent 2008 loan growth. The increase in our net interest margin was partially offset by the full quarter effect of the 25 basis points reduction in our prime-lending rate during the second quarter of 2008, which we lowered in response to a Federal Reserve rate cut, and an increase in our funding costs due to growth in interest-bearing deposits and short-term borrowings to support our loan growth.
Net interest income, on a fully tax-equivalent basis, was $276.8 million and $284.6 million for the nine months ended September 30, 2008 and 2007, respectively. Net interest margin, on a fully tax-equivalent basis, was 5.91 percent for the nine months ended September 30, 2008, compared to 7.38 percent for the comparable 2007 period.
On an average basis, for the third quarter of 2008, 73.4 percent, or $3.72 billion, of our outstanding gross loans were variable-rate loans that adjust at a prescribed measurement date upon a change in our prime-lending rate or other variable indices. This compares to 73.1 percent, or $3.23 billion, for the second quarter of 2008 and 72.6 percent, or $2.71 billion, for the third quarter of 2007.
Loans
Average loans, net of unearned income, were $4.86 billion for the third quarter of 2008, compared to $4.32 billion for the second quarter of 2008 and $3.63 billion for the third quarter of 2007. The increase in average loan balances from the second to the third quarter of 2008 came from all our client industry segments, with particularly strong growth in loans to venture capital funds for capital calls, and from hardware and software industry clients. Period-end loans, net of unearned income, were $5.29 billion at September 30, 2008, compared to $4.63 billion at June 30, 2008 and $3.82 billion at September 30, 2007.
Deposits
Average deposits were $4.82 billion for the third quarter of 2008, compared to $4.65 billion for the second quarter of 2008 and $3.94 billion for the third quarter of 2007. The increase in average deposit balances from the second to the third quarter of 2008 reflects an increase in average balances of our money market deposit product for early stage clients and our Eurodollar sweep deposit product. The average balances of our early stage money market deposit product were $560.5 million for the third quarter of 2008, compared to $425.5 million for the second quarter of 2008 and $144.9 million for the third quarter of 2007. The average balances of our Eurodollar sweep deposit product were $389.2 million for the third quarter of 2008, compared to $322.4 million for the second quarter of 2008. Period-end deposits were $5.43 billion at September 30, 2008, compared to $4.86 billion at June 30, 2008 and $3.97 billion at September 30, 2007.
Investment Securities Portfolio
Our investment securities portfolio consists of both a fixed income investment portfolio, which primarily represents interest-earning securities, and a non-marketable securities portfolio, which primarily represents investments managed by SVB Capital as part of our funds management business. Total investment securities were $1.78 billion at September 30, 2008, compared to $1.79 billion at June 30, 2008 and $1.57 billion at September 30, 2007.
Average interest-earning investment securities were $1.40 billion for the third quarter of 2008, compared to $1.34 billion for the second quarter of 2008 and $1.33 billion for the third quarter of 2007. The increase in average interest-earning investment securities from the second to the third quarter of 2008 was primarily due to purchases of mortgage-backed securities during the later half of the second quarter of 2008.
Noninterest Income
Noninterest income was $41.7 million for the third quarter of 2008, compared to $43.9 million for the second quarter of 2008 and $65.0 million for the third quarter of 2007. The decrease in noninterest income from the second to the third quarter of 2008 was primarily driven by the following factors:
-- Net losses on investment securities of $0.9 million for the
third quarter of 2008, compared to net gains of $2.0 million for
the second quarter of 2008. Net losses on investment securities
of $0.9 million for the third quarter of 2008 were comprised of
the following:
- Net unrealized losses of $5.4 million due to lower
valuations of investments within our Managed Funds of Funds
and Sponsored Debt Funds
- Realized losses of $2.0 million principally from the sale
of our marketable equity securities comprised of publicly
traded shares acquired upon exercise of equity warrant
assets
- Unrealized gains of $4.7 million in our Managed
Co-Investment Funds as a result of higher valuations of
investments, and
- Realized gains of $1.5 million in our Managed Funds of
Funds due to net gains from distributions.
Three months ended
----------------------------------------------------
September 30, June 30,
2008 2008
------------------------------------------- -------
Managed Managed
Co- Funds Sponsored
(Dollars Investment Of Debt
in thousands) Funds Funds Funds Other Total Total
--------------- ------- ------- ------- ------- ------- -------
Unrealized
gains
(losses) $ 4,669 $(3,386) $(2,004) $ -- $ (721) $(5,081)
Realized
gains
(losses) -- 1,525 364 (2,044) (155) 7,120
------- ------- ------- ------- ------- -------
Total gains
(losses) on
investment
securities,
net $ 4,669 $(1,861) $(1,640) $(2,044) $ (876) $ 2,039
======= ======= ======= ======= ======= =======
As of September 30, 2008, we held investments, either
directly or through seven of our managed investment funds,
in 433 private equity funds, 73 companies and four sponsored
debt funds.
-- A decrease in other noninterest income of $2.0 million primarily
due to net losses from revaluations of foreign currency
denominated loans of $4.7 million for the third quarter of 2008,
compared to $2.0 million for the second quarter of 2008. The net
losses of $4.7 million were primarily due to the strengthening
of the U.S. dollar in the third quarter of 2008.
-- An increase in net gains on derivative instruments of $2.1
million, primarily due to net gains from changes in the fair
value of foreign exchange forward contracts, partially offset by
lower net gains from changes in the fair value of an interest
rate swap and lower net gains from our equity warrant assets,
primarily due to lower valuations in the third quarter of 2008
compared to valuations in the second quarter of 2008. Net gains
from foreign exchange forward contracts included $4.5 million in
net gains from changes in fair value of foreign exchange forward
contracts used to offset net losses of $4.7 million from
revaluation of our foreign currency denominated loans, which are
included in other noninterest income.
-- An increase in foreign exchange fee income of $0.7 million,
primarily due to an increase in foreign exchange activity by our
clients.
Non-GAAP noninterest income, net of minority interest, was $40.7 million for the third quarter of 2008, compared to $43.1 million for the second quarter of 2008 and $52.3 million for the third quarter of 2007. Reconciliations of our non-GAAP noninterest income, non-GAAP net (losses) gains on investment securities and non-GAAP net gains on derivative instruments, all of which exclude minority interests, are provided under the section "Use of Non-GAAP Financial Measures."
Noninterest Expense
Noninterest expense was $80.4 million for the third quarter of 2008, compared to $87.2 million for the second quarter of 2008 and $83.0 million for the third quarter of 2007. The decrease in noninterest expense from the second to the third quarter of 2008 was primarily attributable to the following:
* Coco Loss of $3.9 million (non-tax deductible) recorded during
the second quarter of 2008, related to our cash settlement of
the early conversion of certain zero-coupon convertible
subordinated notes. In connection with this early conversion
settlement payment, we exercised call options pursuant to our
call-spread arrangement and received a corresponding cash
payment of $3.9 million from the counterparty. As a result, this
loss had no net impact on our total stockholders' equity for the
second quarter of 2008.
* A decrease in the provision for unfunded credit commitments of
$1.8 million. We recorded a reduction of the provision for
unfunded credit commitments of $1.0 million for the third
quarter of 2008, compared to a provision of $0.8 million for the
second quarter of 2008. The reduction of the provision for
unfunded credit commitments of $1.0 million for the third
quarter of 2008 was primarily due to lower utilization of
unfunded commitments.
Non-GAAP noninterest expense, net of minority interest, was $77.6 million for the third quarter of 2008, compared to $80.9 million excluding the $3.9 million Coco Loss, net of minority interest, for the second quarter of 2008 and $80.3 million for the third quarter of 2007. Reconciliations of our non-GAAP noninterest expense, excluding the $3.9 million Coco Loss, goodwill impairment charges, and net of minority interest, are provided under the section "Use of Non-GAAP Financial Measures."
Income Tax Expense
Our effective tax rate was 39.25 percent for the third quarter of 2008, compared to 43.66 percent for the second quarter of 2008 and 40.60 percent for the third quarter of 2007. The decrease in the tax rate from the second to the third quarter of 2008 was primarily attributable to the $3.9 million non-tax deductible Coco Loss.
Our effective tax rate for the nine months ended September 30, 2008 was 40.90 percent, compared to 40.95 percent for the comparable 2007 period. The decrease in the tax rate was primarily attributable to the tax impact of lower non-deductible share-based compensation expense and the effect of more tax-advantaged investments on our overall pre-tax income. These decreases were partially offset by an increase in the tax rate from the $3.9 million non-tax deductible Coco Loss.
Credit Quality
Three months ended Nine months ended
(Dollars ---------------------------------- ----------------------
in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
--------- ---------- ---------- ---------- ---------- ----------
Allowance
for loan
losses,
beginning
balance $ 52,888 $ 49,636 $ 43,352 $ 47,293 $ 42,747
Provision
for loan
losses 13,682 8,351 3,155 29,756 10,865
Gross loan
charge
-offs (7,000) (9,098) (4,138) (22,306) (14,754)
Loan
recov-
eries 720 3,999 1,856 5,547 5,367
---------- ---------- ---------- ---------- ----------
Allowance
for loan
losses,
ending
balance $ 60,290 $ 52,888 $ 44,225 $ 60,290 $ 44,225
--------- ========== ========== ========== ========== ==========
Provision
as a
percentage
of total
gross
loans
(annual-
ized) 1.02% 0.72% 0.33% 0.75% 0.38%
Gross
charge
-offs as
a
percentage
of total
gross
loans
(annual-
ized) 0.52 0.78 0.43 0.56 0.51
Net charge
-offs as
a
percentage
of total
gross
loans
(annual-
ized) 0.47 0.44 0.24 0.42 0.33
Allowance
for loan
losses as
a
percentage
of total
gross
loans 1.13% 1.13% 1.15% 1.13% 1.15%
Total
gross
loans $5,323,323 $4,666,989 $3,844,185 $5,323,323 $3,844,185
Our provision for loan losses increased by $5.3 million for the third quarter of 2008, compared to the second quarter of 2008, primarily due to growth in our loan portfolio and a decrease in loan recoveries of $3.3 million, partially offset by a decrease in gross loan charge-offs of $2.1 million. Gross loan charge-offs of $7.0 million and loan recoveries of $0.7 million for the third quarter of 2008 primarily came from our early-stage client loan portfolio.
Minority Interest in Consolidated Affiliates
Minority interest in net losses of consolidated affiliates was $1.7 million for the third quarter of 2008, compared to a net loss of $1.5 million for the second quarter of 2008 and net income of $10.5 million for the third quarter of 2007. Minority interest in net losses of consolidated affiliates of $1.7 million for the third quarter of 2008 was primarily attributable to the following:
* Noninterest expense of $2.9 million, principally related to
management fees paid by our managed funds to the general
partners at SVB Capital for funds management.
* Net investment losses and carried interest of $1.9 million from
our funds of funds and net investment losses and carried
interest of $1.1 million from our sponsored debt funds.
* Net investment gains from our managed co-investment funds of
$4.1 million.
Minority interest in capital of consolidated affiliates increased by $33.6 million for the third quarter of 2008, compared to the second quarter of 2008, due to equity transactions, which included paid capital calls of $39.2 million made to our consolidated affiliates, partially offset by $3.9 million in distributions to the minority interest holders.
Capital
We did not repurchase any shares of our common stock during the third quarter of 2008. This compares to repurchases of 25,000 shares for $1.0 million during the second quarter of 2008 and 1,140,700 shares for $58.0 million during the third quarter of 2007. We repurchased 1,004,628 shares of our common stock during the nine months ended September 30, 2008 at an aggregate cost of $45.6 million, compared to 1,926,693 shares for the nine months ended September 30, 2007 at an aggregate cost of $97.3 million. On July 24, 2008, our Board of Directors approved a stock repurchase program authorizing us to purchase up to $150 million of our common stock, which expires on December 31, 2009. At September 30, 2008, $150 million of repurchases remain authorized under our stock repurchase program.
Weighted-average diluted common shares outstanding decreased by 414,364 shares from the second to the third quarter of 2008, primarily due to the maturity of our zero-coupon convertible subordinated notes issued in June 2008. This decrease was partially offset by an increase in stock option exercises during the third quarter of 2008 and the dilutive impact from our $250 million of 3.875% convertible senior notes in April 2008 as the average market price of our common stock was higher than the conversion price for the third quarter of 2008.
Additional paid-in-capital increased by $23.8 million from the second to the third quarter of 2008, primarily due to higher stock option exercises.
Outlook for the Year Ending December 31, 2008
Our outlook for the year ending December 31, 2008 is provided below on a GAAP basis, unless otherwise noted. We have provided our current outlook for the expected results of our significant forecasted activities. However, we do not provide our outlook for selected items where the timing and financial impact is particularly uncertain, or for certain potential unusual or one-time items. The outlook observations presented below are, by their nature, forward-looking statements and are subject to substantial risks and uncertainties which are discussed below under the caption "Forward-Looking Statements."
For the year ending December 31, 2008, compared to our 2007 results, we currently expect the following outlook:
Current outlook Change in outlook
compared to 2007 compared to outlook
results (as of reported as of
October 23, 2008) July 24, 2008
---------------------------------------------------------------------
increase at a
percentage rate in the outlook increased from
Average loan balance mid thirties range high twenties range
---------------------------------------------------------------------
Average deposit
balance (majority
of growth from increase at a
interest-bearing percentage rate in the outlook increased
deposits) low twenties range from high teens range
---------------------------------------------------------------------
We expect our net outlook changed to
interest margin to include federal reserve
range from 5.60% to rate cuts through the
Net interest margin 5.80% for 2008 date of this release
---------------------------------------------------------------------
Fees for deposit
services, letters
of credit and increase at a
foreign exchange, percentage rate in the outlook increased from
in aggregate low thirties range mid twenties range
---------------------------------------------------------------------
increase at a
Client investment percentage rate in the no change from
fees mid single digit range previous outlook
---------------------------------------------------------------------
Allowance for loan
losses as a
percentage of no change from
gross loans remain flat previous outlook
---------------------------------------------------------------------
Noninterest expense*
(excluding expenses
related to minority
interest, Coco Loss,
and goodwill
impairincrease at a
percentage rate in increase at a
the low single percentage rate in the outlook decreased from
digit range single digit range mid single digit range
---------------------------------------------------------------------
* non-GAAP
Forward-Looking Statements
This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts, such as forecasts of our future financial results and condition, expectations for our operations and business, and our underlying assumptions of such forecasts and expectations. In this release, particularly in the section "Outlook for the Year Ending December 31, 2008" above, we make forward-looking statements discussing management's expectations about economic conditions, opportunities in the market, and our financial and credit performance and financial results (and the components of such results) for the year 2008.
Although management believes that the expectations reflected in our forward-looking statements are reasonable and has based these expectations on our beliefs and assumptions, such expectations are not guarantees and may prove to be incorrect. Actual results could differ significantly. Factors that may cause the outlook for the year 2008 and other forward-looking statements herein to change include, among others, the following: (i) accounting changes, as required by U.S. generally accepted accounting principles, (ii) changes in the state of the economy or the markets in which we conduct business or are served by us, (iii) changes in credit quality of our loan portfolio, (iv) changes in interest rates or market levels or factors affecting them, (v) changes in the performance or equity valuations of companies in which we have invested or hold derivative instruments or equity warrant assets, and (vi) variations from our expectations as to factors impacting our cost structure. For additional information about these factors, please refer to our public reports filed with the U.S. Securities and Exchange Commission, including our most recently-filed quarterly or annual report. The forward-looking statements included in this release are made only as of the date of this release. We do not intend, and undertake no obligation, to update these forward-looking statements.
Earnings Conference Call
On October 23, 2008, we will host a conference call at 2:00 p.m. (Pacific Time) to discuss the financial results for the third quarter ended September 30, 2008. The conference call can be accessed by dialing (866) 916-4782 or (706) 902-0678, and referencing the conference ID "68187663." A live webcast of the audio portion of the call can be accessed on the Investor Relations section of our website at www.svb.com. A replay of the conference call will be available beginning at approximately 6:00 p.m. (Pacific Time) on Thursday, October 23, 2008, through midnight on Thursday, November 6, 2008, by dialing (800) 642-1687 or (706) 645-9291 and referencing conference ID number "68187663." A replay of the audio webcast will also be available on www.svb.com for 12 months beginning Thursday, October 23, 2008.
About SVB Financial Group
For 25 years, SVB Financial Group and its subsidiaries, including Silicon Valley Bank, have been dedicated to helping entrepreneurs succeed. SVB Financial Group is a financial holding company that serves companies in the technology, life science, venture capital/private equity and premium wine industries. Offering diversified financial services through Silicon Valley Bank, SVB Analytics, SVB Capital, SVB Global and SVB Private Client Services, SVB Financial Group provides clients with commercial, investment, international and private banking services. The Company also offers funds management, broker-dealer services, asset management and a wide range of financial services for companies of all sizes and stages, as well as the added value of its knowledge and networks worldwide. Headquartered in Santa Clara, California, SVB Financial Group operates through 27 offices in the U.S. and five internationally in China, India, Israel and the United Kingdom. More information on the Company can be found at www.svb.com.
Banking services are provided by Silicon Valley Bank, the California bank subsidiary and commercial banking operation of SVB Financial Group, and a member of the FDIC and the Federal Reserve. SVB Private Client Services is a division of Silicon Valley Bank. SVB Financial Group is also a member of the Federal Reserve.
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Three months ended Nine months ended
thousands, -------------------------------- ---------------------
except share Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
data) 2008 2008 2007 2008 2007
------------- ---------- ---------- ---------- ---------- ----------
Interest
income:
Loans $ 94,256 $ 84,515 $ 93,243 $ 268,530 $ 267,526
Investment
securities:
Taxable 15,321 14,586 14,915 43,677 46,990
Non-taxable 1,106 1,078 528 3,121 1,692
Federal funds
sold,
securities
purchased
under
agreement
to resell
and other
short-term
investment
securities 2,712 3,684 4,485 10,513 12,660
---------------------------------------------------------------------
Total interest
income 113,395 103,863 113,171 325,841 328,868
---------------------------------------------------------------------
Interest
expense:
Deposits 6,267 5,372 3,572 16,908 8,328
Borrowings 11,999 10,627 13,891 33,859 36,892
---------------------------------------------------------------------
Total interest
expense 18,266 15,999 17,463 50,767 45,220
---------------------------------------------------------------------
Net interest
income 95,129 87,864 95,708 275,074 283,648
Provision for
loan losses 13,682 8,351 3,155 29,756 10,865
---------------------------------------------------------------------
Net interest
income after
provision for
loan losses 81,447 79,513 92,553 245,318 272,783
---------------------------------------------------------------------
Noninterest
income:
Client
investment
fees 13,636 13,648 13,127 41,006 37,813
Foreign
exchange
fees 8,641 7,961 6,714 24,446 17,778
Deposit
service
charges 6,129 6,056 3,933 18,076 10,711
Gains on
derivative
instruments,
net 6,472 4,408 8,790 13,479 15,514
Letter of
credit and
standby
letter of
credit income 3,050 3,142 2,671 9,138 8,363
Corporate
finance fees -- -- 5,166 3,640 11,568
(Losses)
gains on
investment
securities,
net (876) 2,039 14,719 (4,949) 40,611
Other 4,695 6,683 9,914 22,413 25,837
---------------------------------------------------------------------
Total
noninterest
income 41,747 43,937 65,034 127,249 168,195
---------------------------------------------------------------------
Noninterest
expense:
Compensation
and benefits
(1) 49,598 50,059 56,460 153,438 161,777
Professional
services 9,623 9,132 7,847 27,556 23,673
Premises and
equipment 5,781 5,455 4,567 16,424 14,820
Net occupancy 4,135 4,342 5,149 12,825 16,238
Business
development
and travel 3,389 3,764 2,429 10,575 8,747
Correspondent
bank fees 1,689 1,816 1,511 5,011 4,371
Telephone 1,373 1,345 1,178 3,870 4,034
Loss from
cash settle-
ment of
conversion
premium of
zero-coupon
convertible
subordinated
notes -- 3,858 -- 3,858 --
Data process-
ing services 1,082 1,116 1,054 3,275 2,940
(Reduction of)
provision
for unfunded
credit commit-
ments (990) 800 (973) (355) (2,778)
Impairment
of goodwill -- -- -- -- 17,204
Other 4,751 5,502 3,737 14,580 11,966
---------------------------------------------------------------------
Total non-
interest
expense 80,431 87,189 82,959 251,057 262,992
---------------------------------------------------------------------
Income before
minority
interest in
net loss
(income) of
consolidated
affiliates and
income tax
expense 42,763 36,261 74,628 121,510 177,986
Minority
interest in
net loss
(income) of
consolidated
affiliates 1,693 1,534 (10,458) 7,445 (26,639)
---------------------------------------------------------------------
Income before
income tax
expense 44,456 37,795 64,170 128,955 151,347
Income tax
expense 17,448 16,500 26,054 52,749 61,975
---------------------------------------------------------------------
Net income $ 27,008 $ 21,295 $ 38,116 $ 76,206 $ 89,372
=====================================================================
Earnings per
common share
-- basic $ 0.83 $ 0.66 $ 1.12 $ 2.36 $ 2.61
Earnings per
common share
-- diluted $ 0.80 $ 0.62 $ 1.03 $ 2.22 $ 2.41
Weighted
average shares
outstanding
-- basic 32,534,613 32,053,749 34,028,704 32,295,612 34,254,952
Weighted
average shares
outstanding
-- diluted 33,778,095 34,192,459 36,869,496 34,255,320 37,131,653
(1) Compensation and benefits included share-based payments of $3.5
million, $3.9 million and $3.8 million for the quarters ended
September 30, 2008, June 30, 2008 and September 30, 2007,
respectively, and $10.9 million and $12.0 million for the nine
months ended September 30, 2008 and 2007, respectively.
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except
par value, share data and Sept. 30, June 30, Sept. 30,
ratios) 2008 2008 2007
----------------------------- ---------- ---------- ----------
Assets:
Cash and due from banks $ 373,510 $ 305,142 $ 356,742
Securities purchased under
agreement to resell and
other short-term investment
securities 379,088 325,723 302,377
Investment securities 1,779,978 1,787,996 1,571,619
Loans, net of unearned income 5,285,101 4,633,701 3,818,268
Allowance for loan losses (60,290) (52,888) (44,225)
--------------------------------------------------------------------
Net loans 5,224,811 4,580,813 3,774,043
--------------------------------------------------------------------
Premises and equipment, net
of accumulated depreciation
and amortization 32,344 34,787 39,016
Goodwill 4,092 4,092 4,092
Accrued interest receivable
and other assets 277,122 271,318 256,199
--------------------------------------------------------------------
Total assets $8,070,945 $7,309,871 $6,304,088
====================================================================
Liabilities, Minority Interest
and Stockholders' Equity:
Liabilities:
Deposits:
Noninterest-bearing
demand $3,231,281 $2,919,205 $2,892,102
Negotiable order of
withdrawal (NOW) 57,231 48,032 23,099
Money market 1,334,393 1,131,154 723,369
Time 387,236 410,591 334,670
Sweep 422,468 354,598 --
--------------------------------------------------------------------
Total deposits 5,432,609 4,863,580 3,973,240
--------------------------------------------------------------------
Short-term borrowings 425,000 330,000 370,000
Other liabilities 175,740 163,911 196,713
Long-term debt 981,946 975,878 855,370
--------------------------------------------------------------------
Total liabilities 7,015,295 6,333,369 5,395,323
--------------------------------------------------------------------
Minority interest in capital
of consolidated affiliates 324,998 291,375 236,131
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; 32,735,732
shares, 32,252,367 shares
and 33,448,121 shares
outstanding, respectively 33 32 33
Additional paid-in capital 23,816 -- --
Retained earnings 725,737 698,729 687,350
Accumulated other
comprehensive loss (18,934) (13,634) (14,749)
--------------------------------------------------------------------
Total stockholders' equity 730,652 685,127 672,634
--------------------------------------------------------------------
Total liabilities, minority
interest and stockholders'
equity $8,070,945 $7,309,871 $6,304,088
====================================================================
Capital Ratios:
Total risk-based capital ratio 14.33% 15.10% 17.64%
Tier 1 risk-based capital ratio 10.00 10.43 12.38
Tier 1 leverage ratio 10.85 10.72 12.40
Other Period-End Statistics:
Tangible common equity to
tangible assets ratio 9.20 9.47 10.80
Loans, net of unearned
income-to-deposits ratio 97.28% 95.27% 96.10%
Book value per share $ 22.32 $ 21.24 $ 20.11
Full-time equivalent employees 1,237 1,209 1,141
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM AVERAGE BALANCES, RATES AND YIELDS
(Unaudited)
Three months ended
------------------------------------------------------
September 30, 2008 June 30, 2008
-------------------------- --------------------------
Interest Interest
(Dollars in Average Income/ Yield/ Average Income/ Yield/
thousands) Balance Expense Rate Balance Expense Rate
----------- ---------- -------- ------ ---------- -------- ------
Interest-
earning
assets:
---------
Federal
funds sold,
securities
purchased
under
agreement to
resell and
other short-
term invest-
ment secur-
ities(1) $ 383,009 $ 2,712 2.82% $ 597,673 $ 3,684 2.48%
Investment
securities:
Taxable 1,288,039 15,321 4.73 1,233,490 14,586 4.76
Non-
taxable(2) 108,115 1,701 6.26 102,989 1,659 6.48
Total loans,
net of
unearned
income 4,863,706 94,256 7.71 4,319,897 84,515 7.87
--------------------------------------------------------------------
Total interest-
earning
assets 6,642,869 113,990 6.82 6,254,049 104,444 6.72
--------------------------------------------------------------------
Cash and due
from banks 243,621 249,074
Allowance for
loan losses (55,998) (52,776)
Goodwill 4,092 4,092
Other
assets(3) 713,487 703,651
--------------------------------------------------------------------
Total assets $7,548,071 $7,158,090
====================================================================
Funding
sources:
---------
Interest-
bearing
liabilities:
NOW
deposits $ 42,538 $ 53 0.50% $ 51,992 $ 71 0.55%
Regular
money
market
deposits 139,210 530 1.51 152,707 533 1.40
Bonus money
market
deposits 1,027,018 3,089 1.20 900,767 2,467 1.10
Time
deposits 395,970 898 0.90 387,981 920 0.95
Sweep
deposits 389,231 1,697 1.73 322,420 1,381 1.72
--------------------------------------------------------------------
Total interest-
bearing
deposits 1,993,967 6,267 1.25 1,815,867 5,372 1.19
Short-term
borrowings 544,301 3,042 2.22 205,983 1,104 2.16
Zero-coupon
convertible
subordinated
notes -- -- -- 134,158 234 0.70
3.875%
convertible
senior notes 250,000 2,972 4.73 229,121 2,723 4.78
Junior
subordinated
debentures 52,502 514 3.89 53,090 540 4.09
Senior and
subordinated
notes 522,302 4,381 3.34 531,086 4,874 3.69
Other long-
term debt 151,998 1,090 2.85 152,386 1,152 3.04
--------------------------------------------------------------------
Total interest-
bearing
liabilities 3,515,070 18,266 2.07 3,121,691 15,999 2.06
Portion of
noninterest-
bearing fund-
ing sources 3,127,799 3,132,358
--------------------------------------------------------------------
Total funding
sources 6,642,869 18,266 1.09 6,254,049 15,999 1.03
--------------------------------------------------------------------
Noninterest-
bearing fund-
ing sources:
--------------
Demand
deposits 2,826,289 2,832,956
Other
liabilities 194,426 243,316
Minority
interest in
capital of
consolidated
affiliates 300,305 282,285
Stockholders'
equity 711,981 677,842
Portion used
to fund
interest-
earning
assets (3,127,799) (3,132,358)
--------------------------------------------------------------------
Total liabili-
ties, minority
interest and
stockholders'
equity $7,548,071 $7,158,090
====================================================================
Net interest
income and
margin $ 95,724 5.73% $ 88,445 5.69%
======== ===== ======== =====
Total
deposits $4,820,256 $4,648,823
========== ==========
Average stock-
holders'
equity as a
percentage of
average assets 9.43% 9.47%
===== =====
--------------------------
September 30, 2007
--------------------------
Interest
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
---------------------------------------- ---------- -------- ------
Interest-earning assets:
Federal funds sold, securities purchased
under agreement to resell and other
short-term investment securities(1) $ 350,833 $ 4,485 5.07%
Investment securities:
Taxable 1,277,910 14,915 4.63
Non-taxable(2) 48,486 813 6.65
Total loans, net of unearned income 3,630,279 93,243 10.19
--------------------------------------------------------------------
Total interest-earning assets 5,307,508 113,456 8.48
--------------------------------------------------------------------
Cash and due from banks 283,711
Allowance for loan losses (45,174)
Goodwill 4,092
Other assets(3) 537,179
--------------------------------------------------------------------
Total assets $6,087,316
====================================================================
Funding sources:
Interest-bearing liabilities:
NOW deposits $ 30,647 $ 31 0.40%
Regular money market deposits 149,580 513 1.36
Bonus money market deposits 567,345 2,283 1.60
Time deposits 321,243 745 0.92
Sweep deposits -- -- --
--------------------------------------------------------------------
Total interest-bearing deposits 1,068,815 3,572 1.33
Short-term borrowings 205,715 2,701 5.21
Zero-coupon convertible subordinated
notes 149,011 232 0.62
3.875% convertible senior notes -- -- --
Junior subordinated debentures 49,798 853 6.80
Senior and subordinated notes 495,771 7,992 6.40
Other long-term debt 152,669 2,113 5.49
--------------------------------------------------------------------
Total interest-bearing liabilities 2,121,779 17,463 3.27
Portion of noninterest-bearing funding
sources 3,185,729
--------------------------------------------------------------------
Total funding sources 5,307,508 17,463 1.30
--------------------------------------------------------------------
Noninterest-bearing funding sources:
Demand deposits 2,867,812
Other liabilities 193,955
Minority interest in capital of
consolidated affiliates 227,072
Stockholders' equity 676,698
Portion used to fund interest-earning
assets (3,185,729)
--------------------------------------------------------------------
Total liabilities, minority interest
and stockholders' equity $6,087,316
====================================================================
Net interest income and margin $ 95,993 7.18%
======== =====
Total deposits $3,936,627
==========
Average stockholders' equity as a
percentage of average assets 11.12%
=====
(1) Includes average interest-bearing deposits in other financial
institutions of $90.0 million, $99.2 million and $59.4 million
for the quarters ended September 30, 2008, June 30, 2008 and
September 30, 2007, respectively.
(2) Interest income on non-taxable investments is presented on a fully
tax-equivalent basis using the federal statutory income tax rate
of 35.0 percent. The tax equivalent adjustments were $0.6 million,
$0.6 million and $0.3 million for the quarters ended September 30,
2008, June 30, 2008 and September 30, 2007, respectively.
(3) Average investment securities of $388.2 million, $373.3 million and
$250.3 million for the quarters ended September 30, 2008, June 30,
2008 and September 30, 2007, respectively, were classified as other
assets as they were noninterest-earning assets. These investments
primarily consisted of non-marketable securities.
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM AVERAGE BALANCES, RATES AND YIELDS
(Unaudited)
Nine months ended September 30,
----------------------------------
2008
----------------------------------
(Dollars in thousands)
Average Income/ Yield/
Balance Expense Rate
---------------------------- ---------- ---------- ----------
Interest-earning assets:
Federal funds sold,
securities purchased under
agreement to resell and
other short-term investment
securities (1) $ 484,892 $ 10,513 2.90%
Investment securities:
Taxable 1,231,948 43,677 4.74
Non-taxable (2) 100,184 4,801 6.40
Total loans, net of
unearned income 4,433,731 268,530 8.09
-----------------------------------------------------------------
Total interest-earning
assets 6,250,755 327,521 7.00
-----------------------------------------------------------------
Cash and due from banks 256,343
Allowance for loan losses (52,363)
Goodwill 4,092
Other assets (3) 695,343
-----------------------------------------------------------------
Total assets $7,154,170
=================================================================
Funding sources:
Interest-bearing
liabilities:
NOW deposits $ 43,888 $ 161 0.49%
Regular money market
deposits 142,787 1,487 1.39
Bonus money market
deposits 934,253 8,791 1.26
Time deposits 375,914 2,584 0.92
Sweep deposits 285,681 3,885 1.82
-----------------------------------------------------------------
Total interest-bearing
deposits 1,782,523 16,908 1.27
Short-term borrowings 329,198 5,957 2.42
Zero-coupon convertible
subordinated notes 94,146 473 0.67
3.875% convertible
senior notes 160,036 5,695 4.75
Junior subordinated
debentures 52,853 1,779 4.50
Senior and subordinated
notes 528,565 16,109 4.07
Other long-term debt 152,339 3,846 3.37
-----------------------------------------------------------------
Total interest-bearing
liabilities 3,099,660 50,767 2.19
Portion of noninterest-
bearing funding sources 3,151,095
-----------------------------------------------------------------
Total funding sources 6,250,755 50,767 1.09
-----------------------------------------------------------------
Noninterest-bearing
funding sources:
Demand deposits 2,852,851
Other liabilities 227,628
Minority interest in
capital of consolidated
affiliates 281,487
Stockholders' equity 692,544
Portion used to fund
interest-earning assets (3,151,095)
-----------------------------------------------------------------
Total liabilities, minority
interest and stockholders'
equity $7,154,170
=================================================================
Net interest income and
margin $ 276,754 5.91%
========== ==========
Total deposits $4,635,374
==========
Average stockholders'
equity as a percentage of
average assets 9.68%
=============================== ==========
Nine months ended September 30,
----------------------------------
2007
----------------------------------
(Dollars in thousands) Interest Interest
Average Income/ Yield/
Balance Expense Rate
---------------------------- ---------- ---------- ----------
Interest-earning assets:
Federal funds sold,
securities purchased under
agreement to resell and
other short-term investment
securities (1) $ 326,761 $ 12,660 5.18%
Investment securities:
Taxable 1,340,953 46,990 4.69
Non-taxable (2) 50,618 2,603 6.88
Total loans, net of
unearned income 3,439,524 267,526 10.40
-----------------------------------------------------------------
Total interest-earning
assets 5,157,856 329,779 8.55
-----------------------------------------------------------------
Cash and due from banks 276,202
Allowance for loan losses (42,979)
Goodwill 15,435
Other assets (3) 509,414
-----------------------------------------------------------------
Total assets $5,915,928
=================================================================
Funding sources:
Interest-bearing
liabilities:
NOW deposits $ 36,114 $ 107 0.40%
Regular money market
deposits 161,748 1,414 1.17
Bonus money market
deposits 523,636 4,548 1.16
Time deposits 320,180 2,259 0.94
Sweep deposits -- -- --
Total interest-bearing
deposits 1,041,678 8,328 1.07
Short-term borrowings 388,622 15,556 5.35
Zero-coupon convertible
subordinated notes 148,789 709 0.64
3.875% convertible
senior notes -- -- --
-----------------------------------------------------------------
Junior subordinated
debentures 50,704 2,563 6.76
Senior and subordinated
notes 246,775 11,837 6.41
Other long-term debt 152,669 6,227 5.45
-----------------------------------------------------------------
Total interest-bearing
liabilities 2,029,237 45,220 2.98
Portion of noninterest-
bearing funding sources 3,128,619
-----------------------------------------------------------------
Total funding sources 5,157,856 45,220 1.17
-----------------------------------------------------------------
Noninterest-bearing
funding sources:
Demand deposits 2,838,187
Other liabilities 183,440
Minority interest in
capital of consolidated
affiliates 199,927
Stockholders' equity 665,137
Portion used to fund
interest-earning assets (3,128,619)
-----------------------------------------------------------------
Total liabilities, minority
interest and stockholders'
equity $5,915,928
=================================================================
Net interest income and
margin $ 284,559 7.38%
========== ==========
Total deposits $3,879,865
==========
Average stockholders'
equity as a percentage of
average assets 11.24%
=============================== ==========
(1) Includes average interest-bearing deposits in other financial
institutions of $90.7 million and $50.8 million for the nine months
ended September 30, 2008 and 2007, respectively.
(2) Interest income on non-taxable investments is presented on a fully
tax-equivalent basis using the federal statutory income tax rate
of 35.0 percent. The tax equivalent adjustments were $1.7 million
and $0.9 million for the nine months ended September 30, 2008 and
2007, respectively.
(3) Average investment securities of $369.0 million and $233.2 million
for the nine months ended September 30, 2008 and 2007, respectively,
were classified as other assets as they were noninterest-earning
assets. These investments primarily consisted of non-marketable
securities.
Gains on Derivative Instruments, Net
Three months ended
------------------------------------------
% Change
-------------
Sept. June Sept. June Sept.
30, 30, 30, 30, 30,
(Dollars in thousands) 2008 2008 2007 2008 2007
------------------------- ------- ------- ------- ----- -----
Gains (losses) on foreign
exchange forward
contracts, net:
Gains on client foreign
exchange forward
contracts, net (1) $ 561 $ 478 $ 360 17.4% 55.8%
Gains (losses) on
internal foreign
exchange forward
contracts, net (2) 4,452 624 (450) 613.5 --
------- ------- ------- ----- -----
Total gains (losses) on
foreign exchange forward
contracts, net 5,013 1,102 (90) 354.9 --
Change in fair value of
interest rate swap (3) (10) 879 (338) (101.1) (97.0)
Gains on covered call
options, net (4) 24 377 -- (93.6) --
Equity warrant assets:
Gains on exercise, net 1,130 676 7,689 67.2 (85.3)
Change in fair value (5):
Cancellations and
expirations (950) (488) (514) 94.7 84.8
Other changes in
fair value 1,265 1,862 2,043 (32.1) (38.1)
------- ------- ------- ----- -----
Total net gains on
equity warrant
assets (6) 1,445 2,050 9,218 (29.5) (84.3)
------- ------- ------- ----- -----
Total gains on derivative
instruments, net $ 6,472 $ 4,408 $ 8,790 46.8% (26.4)%
======= ======= ======= ===== =====
Nine months ended
-------------------------------
Sept. Sept.
30, 30, %
(Dollars in thousands) 2008 2007 Change
------------------------- ------- ------- -----
Gains (losses) on foreign
exchange forward
contracts, net:
Gains on client foreign
exchange forward
contracts, net (1) $ 1,767 $ 1,265 39.7%
Gains (losses) on
internal foreign
exchange forward
contracts, net (2) 1,985 (884) (324.5)
------- ------- -----
Total gains (losses) on
foreign exchange forward
contracts, net 3,752 381 884.8
Change in fair value of
interest rate swap (3) 376 (81) (564.2)
Gains on covered call
options, net (4) 402 -- --
Equity warrant assets:
Gains on exercise, net 6,321 11,555 (45.3)
Change in fair value (5):
Cancellations and
expirations (1,895) (1,981) (4.3)
Other changes in
fair value 4,523 5,640 (19.8)
------- ------- -----
Total net gains on
equity warrant
assets (6) 8,949 15,214 (41.2)
------- ------- -----
Total gains on derivative
instruments, net $13,479 $15,514 (13.1)%
======= ======= =====
(1) Represents the net gains for foreign exchange forward contracts
executed on behalf of clients.
(2) Represents the change in the fair value of foreign exchange
forward contracts to economically reduce our foreign exchange
exposure risk related to certain foreign currency denominated
loans. Revaluations of foreign currency denominated loans are
recorded on the line item "Other" as part of noninterest income, a
component of consolidated net income.
(3) Represents the change in the fair value hedge of the hedging
relationship from the interest rate swap agreement related to our
junior subordinated debentures.
(4) Represents net gains on covered call options held by one of our
sponsored debt funds.
(5) At September 30, 2008, we held warrants in 1,258 companies,
compared to 1,217 companies at June 30, 2008 and 1,206 companies at
September 30, 2007.
(6) Includes net gains on equity warrant assets held by consolidated
investment affiliates. Relevant amounts attributable to minority
interests are reflected in the interim consolidated statements
of income under the caption "Minority Interest in Net Loss (Income)
of Consolidated Affiliates".
Minority Interest in Net Loss (Income) of Consolidated Affiliates
Three months ended Nine months ended
------------------------------ -------------------
(Dollars in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
------------- -------- -------- -------- -------- --------
Net interest
income (1) $ (129) $ (106) $ (357) $ (492) $ (1,045)
Noninterest
income (1) (1,393) (1,528) (12,429) (1,946) (30,995)
Noninterest
expense (1) 2,864 2,457 2,665 8,080 8,189
Carried
interest (2) 351 711 (337) 1,803 (2,788)
-------- -------- -------- -------- --------
Total minority
interest in
net loss
(income) of
consolidated
affiliates $ 1,693 $ 1,534 $(10,458) $ 7,445 $(26,639)
======== ======== ======== ======== ========
(1) Represents minority interest share in net interest income,
noninterest income, and noninterest expense of consolidated
affiliates.
(2) Represents the preferred allocation of income earned primarily by
the general partners managing one of our sponsored debt funds and
two of our managed funds of funds.
Reconciliation of Basic and Diluted Weighted Average Shares Outstanding
Three months ended Nine months ended
------------------------------ -------------------
(Shares in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
------------- -------- -------- -------- -------- --------
Weighted
average
shares
outstanding-
basic 32,535 32,054 34,029 32,296 34,255
Effect of
dilutive
securities:
Stock
options 994 968 1,233 998 1,310
Restricted
stock
awards and
units 106 87 63 93 83
Zero-coupon
convertible
subordinated
notes (1) -- 1,083 1,540 868 1,484
Warrants
asssociated
with
zero-coupon
convertible
subordinated
notes (1) -- -- 4 -- --
convertible
senior
notes (2) 143 -- -- -- --
Warrants
asssociated
with 3.875%
convertible
senior
notes (2) -- -- -- -- --
------ ------ ------ ------ ------
Total effect
of dilutive
securities 1,243 2,138 2,840 1,959 2,877
------ ------ ------ ------ ------
Weighted
average
shares
outstanding-
diluted 33,778 34,192 36,869 34,255 37,132
====== ====== ====== ====== ======
(1) The dilutive effect of our convertible subordinated notes was
calculated using the treasury stock method based on our average
share price and is dilutive at an average share price of $33.6277.
The associated warrants were dilutive beginning at an average share
price of $51.34. These notes and the associated warrants matured on
June 15, 2008.
(2) The dilutive effect of our convertible senior notes is calculated
using the treasury stock method based on our average share price
and is dilutive at an average share price of $53.04. The associated
warrants are dilutive beginning at an average share price of $64.43.
Credit Quality
Period end balances at
----------------------------------
Sept. 30, June 30, Sept. 30,
(Dollars in thousands) 2008 2008 2007
-------------------------------- ---------- ---------- ----------
Nonperforming loans and assets:
Nonperforming loans:
Loans past due 90 days or more $ 247 $ 1,151 $-
Nonaccrual loans 9,140 8,497 9,891
---------- ---------- ----------
Total nonperforming loans 9,387 9,648 9,891
Other real estate owned 1,385 1,612 --
---------- ---------- ----------
Total nonperforming assets $ 10,772 $ 11,260 $ 9,891
========== ========== ==========
Nonperforming loans as a
percentage of total gross loans 0.18% 0.21% 0.26%
Nonperforming assets as a
percentage of total assets 0.13% 0.15% 0.16%
Allowance for loan losses $ 60,290 $ 52,888 $ 44,225
As a percentage of total
gross loans 1.13% 1.13% 1.15%
As a percentage of
nonperforming loans 642.27% 548.18% 447.12%
Reserve for unfunded credit
commitments (1) $ 13,091 $ 14,081 $ 11,875
Total gross loans $5,323,323 $4,666,989 $3,844,185
Total unfunded credit commitments $5,619,021 $5,034,283 $4,468,992
---------------------------------
(1) The "Reserve for Unfunded Credit Commitments" is included as a
component of "Other Liabilities".
Average Client Investment Funds (1)
Three months ended Nine months ended
------------------------------- --------------------
(Dollars in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
millions) 2008 2008 2007 2008 2007
------------- --------- --------- --------- --------- ---------
Client
directed
investment
assets $ 12,948 $ 12,734 $ 12,557 $ 12,819 $ 12,226
Client
investment
assets under
management 6,406 6,006 5,734 6,262 5,467
Sweep money
market funds 2,682 2,649 2,414 2,692 2,379
--------- --------- --------- --------- ---------
Total average
client
investment
funds $ 22,036 $ 21,389 $ 20,705 $ 21,773 $ 20,072
========= ========= ========= ========= =========
(1) Client Investment Funds invested through SVB Financial Group are
maintained at third party financial institutions.
Average client investment funds increased by $647.0 million to $22.0 billion for the third quarter of 2008, compared to $21.4 billion for the second quarter of 2008, primarily from our private equity and life science clients. Period-end total client investment funds were $21.5 billion at September 30, 2008, compared to $21.9 billion at June 30, 2008 and $20.4 billion at September 30, 2007.
Use of Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we use certain non-GAAP measures (non-GAAP net income, non-GAAP noninterest income, non-GAAP net (losses) gains on investment securities, non-GAAP net gains on derivative instruments and non-GAAP noninterest expense) of financial performance. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP.
Generally, a non-GAAP financial measure is a numerical measure of a company's performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.
In particular, in this press release, we use certain non-GAAP measures which exclude from our GAAP net income in certain periods:
* Income and expense that are attributable to minority interests - As part of our funds management business, we recognize the entire income or loss from funds where we own significantly less than 100%. We are required under GAAP to consolidate 100% of the results of the funds that we are deemed to control. Similarly, we are required under GAAP to consolidate the results of eProsper, of which we own 65%. The relevant amounts attributable to investors other than us are reflected under "Minority Interest in Net Loss (Income) of Consolidated Affiliates." Our net income as reported in that section includes only the portion of income or loss that is attributable to our ownership interest. * Certain non-tax deductible noninterest expense related to the conversion settlement of certain zero-coupon convertible notes - included in our GAAP net income for the second quarter of 2008 is a non-tax deductible noninterest expense related to the conversion premium value of certain of our zero-coupon convertible notes that were converted prior to their maturity. In connection with these early conversion settlements, we exercised call options pursuant to our call-spread arrangement and received a corresponding cash payment which was reflected in stockholders' equity as additional paid-in capital. As a result, the noninterest expense reflected in net income in these periods had no net impact on our total stockholders' equity.
We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding amounts attributable to minority interests, where indicated, or certain items that do not occur in every reporting period of our core business, operating results or future outlook. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, net income, or other financial measures prepared in accordance with GAAP. In the financial table below, we have provided a reconciliation of the most comparable GAAP financial measures to the non-GAAP financial measures used in this press release.
SVB FINANCIAL GROUP AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP NET INCOME
(Unaudited)
Three months ended Nine months ended
(Dollars in ------------------------------- --------------------
thousands
except share Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
amounts) 2008 2008 2007 2008 2007
------------- --------- --------- --------- --------- ---------
Net income $ 27,008 $ 21,295 $ 38,116 $ 76,206 $ 89,372
Impact of
loss from
conversion
of certain
zero-coupon
convertible
subordinated
notes (1) -- 3,858 -- 3,858 --
Impact of
impairment
of goodwill
on income
before
income
taxes (2) -- -- -- -- 17,204
Impact of
impairment
of goodwill
on income
tax
benefit (3) -- -- -- -- (7,010)
--------- --------- --------- --------- ---------
Non-GAAP net
income $ 27,008 $ 25,153 $ 38,116 $ 80,064 $ 99,566
========= ========= ========= ========= =========
Weighted
average
diluted
shares
outstanding 33,778,095 34,192,459 36,869,496 34,255,320 37,131,653
(1) Represents the portion of the conversion payment that exceeded the
principal amount related to a conversion of $7.8 million of our
zero-coupon convertible subordinated notes, which we settled in
cash in the second quarter of 2008. This non-tax deductible loss
did not have any impact on our tax provision.
(2) Goodwill impairment charge for SVB Alliant recognized in the second
quarter of 2007.
(3) Tax benefit recognized in the second quarter of 2007 from goodwill
impairment at SVB Alliant tax rate.
Non-GAAP
noninterest
income, net Three months ended Nine months ended
of minority ------------------------------- --------------------
interest
(Dollars in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
------------- --------- --------- --------- --------- ---------
GAAP
noninterest
income $ 41,747 $ 43,937 $ 65,034 $ 127,249 $ 168,195
Less: income
attributable
to minority
interests,
including
carried
interest (1,042) (817) (12,766) (143) (33,783)
--------- --------- --------- --------- ---------
Non-GAAP
noninterest
income, net
of minority
interest $ 40,705 $ 43,120 $ 52,268 $ 127,106 $ 134,412
========= ========= ========= ========= =========
Non-GAAP net
(losses)
gains on
investment
securities,
net of Three months ended Nine months ended
minority ------------------------------- --------------------
interest
(Dollars in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
------------- --------- --------- --------- --------- ---------
GAAP net
(losses)
gains on
investment
securities $ (876) $ 2,039 $ 14,719 $ (4,949) $ 40,611
Less: income
attributable
to minority
interests,
including
carried
interest (1,220) (452) (11,885) 227 (31,502)
--------- --------- --------- --------- ---------
Non-GAAP net
(losses)
gains on
investment
securities,
net of
minority
interest $ (2,096) $ 1,587 $ 2,834 $ (4,722) $ 9,109
========= ========= ========= ========= =========
Non-GAAP net
gains on
derivative
instruments,
net of Three months ended Nine months ended
minority ------------------------------- --------------------
interest
(Dollars in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
------------- --------- --------- --------- --------- ---------
GAAP net
gains on
derivative
instruments $ 6,472 $ 4,408 $ 8,790 $ 13,479 $ 15,514
Less: income
attributable
to minority
interests (121) (171) (760) (246) (1,027)
--------- --------- --------- --------- ---------
Non-GAAP net
gains on
derivative
instruments,
net of
minority
interest $ 6,351 $ 4,237 $ 8,030 $ 13,233 $ 14,487
========= ========= ========= ========= =========
Non-GAAP
noninterest
expense, net Three months ended Nine months ended
of minority ------------------------------- --------------------
interest
(Dollars in Sept. 30, June 30, Sept. 30, Sept. 30, Sept. 30,
thousands) 2008 2008 2007 2008 2007
------------- --------- --------- --------- --------- ---------
GAAP
noninterest
expense $ 80,431 $ 87,189 $ 82,959 $ 251,057 $ 262,992
Less: amounts
attributable
to minority
interests (2,864) (2,457) (2,665) (8,080) (8,189)
Less: loss
from
conversion
of
convertible
subordinated
notes -- (3,858) -- (3,858) --
Less: impact
of impairment
of goodwill -- -- -- -- (17,204)
--------- --------- --------- --------- ---------
Non-GAAP
noninterest
expense, net
of minority
interest $ 77,567 $ 80,874 $ 80,294 $ 239,119 $ 237,599
========= ========= ========= ========= =========