SANTA CLARA, Calif., July 24, 2008 (PRIME NEWSWIRE) -- SVB Financial Group (Nasdaq:SIVB) today announced financial results for the second quarter ended June 30, 2008.
Consolidated net income for the second quarter of 2008 was $21.3 million, or $0.62 per diluted common share, compared to $27.9 million, or $0.81 per diluted common share, for the first quarter of 2008, and $22.9 million, or $0.61 per diluted common share, for the second 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. Additionally, we recorded an increase to stockholders' equity of $3.9 million, representing a corresponding cash receipt pursuant to a call-spread arrangement. Accordingly, this loss, as further discussed below under "Long-Term Debt," had no net impact on our total stockholders' equity for the second quarter of 2008.
On a non-GAAP basis, excluding the $3.9 million loss as described above, net income for the second quarter of 2008 was $25.2 million, compared to $27.9 million for the first quarter of 2008, and excluding the $17.2 million pre-tax goodwill impairment charge, $33.1 million for the second quarter of 2007. A complete reconciliation between non-GAAP consolidated net income and GAAP consolidated net income is provided in an attached table under the section "Use of Non-GAAP Financial Measures."
Consolidated net income for the six months ended June 30, 2008 was $49.2 million, or $1.43 per diluted common share, compared to $51.3 million, or $1.38 per diluted common share for the comparable 2007 period. On a non-GAAP basis, excluding the $3.9 million loss described above, net income for the six months ended June 30, 2008 was $53.1 million, compared to $61.5 million for the comparable 2007 period, excluding the $17.2 million pre-tax goodwill impairment charge for the second quarter of 2007.
"We are paying close attention to both opportunities and risks in the current business environment, and remain alert to any signs of issues that could adversely affect our company or our clients," said Ken Wilcox, President and CEO of SVB Financial Group.
"Nevertheless, we continue to see strong opportunities in our target markets, and our solid results in the second quarter suggest we're doing a good job of taking advantage of those opportunities to meet clients' needs. Our business model and culture of credit discipline have so far protected us from the worst of the problems facing other banks. We intend to maintain that discipline and focus moving forward, and to remain vigilant in our efforts to successfully navigate the challenges of the current economic landscape."
Second Quarter 2008 Summary
(Dollars in millions, except per share amounts and ratios)
Three months ended
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% Change from
---------------
June 30, Mar 31, June 30, Mar 31, June 30,
2008 2008 2007 2008 2007
--------------------- --------- --------- --------- ----- -----
Income Statement:
----------------
Diluted EPS $ 0.62 $ 0.81 $ 0.61 (23.5)% 1.6%
Net income 21.3 27.9 22.9 (23.7) (7.0)
Net interest income 87.9 92.1 94.6 (4.6) (7.1)
Provision for loan
losses 8.4 7.7 8.1 9.1 3.7
Noninterest income 43.9 41.6 55.7 5.5 (21.2)
Noninterest expense 87.2 83.4 97.9 4.6 (10.9)
Non-GAAP net income 25.2 27.9 33.1 (9.7) (23.9)
Non-GAAP noninterest
expense, net of
minority interest 80.9 80.7 77.4 0.2 4.5
Fully Taxable
Equivalent:
Net interest
income (1) $ 88.4 $ 92.6 $ 94.9 (4.5) (6.8)
Net interest margin 5.69% 6.36% 7.39% (10.5) (23.0)
Balance Sheet:
-------------
Average total assets $ 7,158.1 $ 6,752.0 $ 5,934.0 6.0 20.6
Average loans, net of
unearned income 4,319.9 4,112.9 3,426.7 5.0 26.1
Average interest-earning
investment securities 1,336.5 1,263.1 1,390.7 5.8 (3.9)
Average noninterest-
bearing demand
deposits 2,833.0 2,899.6 2,828.2 (2.3) 0.2
Average interest-bearing
deposits 1,815.9 1,535.4 1,022.8 18.3 77.5
Average total deposits 4,648.8 4,435.0 3,851.0 4.8 20.7
Average short-term
borrowings 206.0 234.9 415.1 (12.3) (50.4)
Average long-term debt 1,099.8 887.3 602.2 23.9 82.6
Period end total
assets $ 7,309.9 $ 6,897.3 $ 6,605.1 6.0 10.7
Period end loans, net
of unearned income 4,633.7 4,349.2 3,762.4 6.5 23.2
Period end investment
securities 1,788.0 1,618.5 1,594.0 10.5 12.2
Period end noninterest-
bearing demand
deposits 2,919.2 3,034.9 3,132.4 (3.8) (6.8)
Period end interest-
bearing deposits 1,944.4 1,734.3 1,274.1 12.1 52.6
Period end total
deposits 4,863.6 4,769.2 4,406.5 2.0 10.4
Off-Balance Sheet:
-----------------
Average total client
investment funds $21,389.3 $21,894.5 $20,040.3 (2.3) 6.7
Period end total client
investment funds 21,877.9 20,966.9 20,419.3 4.3 7.1
Total unfunded credit
commitments 5,034.3 4,860.7 4,892.0 3.6 2.9
Ratios and Other
Statistics:
----------------
Return on average
assets (2) 1.2% 1.7% 1.5% (29.4) (20.0)
Return on average
stockholders'
equity (2) 12.6 16.3 13.7 (22.7) (8.0)
Non-GAAP return on
average assets (3) 1.4 1.7 2.2 (17.6) (36.4)
Non-GAAP return on
average stockholders'
equity (3) 14.9 16.3 19.7 (8.6) (24.4)
Total risk-based
capital ratio 15.09 15.54 17.29 (2.9) (12.7)
Tangible common equity
to tangible assets (4) 9.47 9.76 10.39 (3.0) (8.9)
Operating efficiency
ratio (5) 65.86 62.20 65.03 5.9 1.3
Non-GAAP operating
efficiency ratio (6) 61.52% 59.49% 54.74% 3.4 12.4
Common stock
repurchases $ 1.0 $ 44.6 $ 20.2 (97.8) (95.0)
Allowance for loan
losses as a percentage
of total gross loans 1.13% 1.13% 1.14% -- (0.9)
Gross charge-offs as
a percentage of total
gross loans (annualized) 0.78 0.57 0.66 36.8 18.2
Net charge-offs as a
percentage of total
gross loans (annualized) 0.44 0.49 0.53 (10.2) (17.0)
Period end prime rate 5.00 5.25 8.25 (4.8) (39.4)
Average SVB prime
lending rate 5.08% 6.24% 8.25% (18.6) (38.4)
Full-time equivalent
employees 1,209 1,190 1,158 1.6% 4.4%
Six months ended
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June 30,
2008 2007 % Change
---------------------------------- --------- --------- -------
Income Statement:
----------------
Diluted EPS $ 1.43 $ 1.38 3.6%
Net income 49.2 51.3 (4.1)
Net interest income 179.9 187.9 (4.3)
Provision for loan losses 16.1 7.7 109.1
Noninterest income 85.5 103.2 (17.2)
Noninterest expense 170.6 180.0 (5.2)
Non-GAAP net income 53.1 61.5 (13.7)
Non-GAAP noninterest expense,
net of minority interest 161.6 157.3 2.7
Fully Taxable Equivalent:
Net interest income (1) $ 181.0 $ 188.6 (4.0)
Net interest margin 6.01% 7.48% (19.7)
Balance Sheet:
-------------
Average total assets $ 6,955.1 $ 5,828.8 19.3
Average loans, net of unearned income 4,216.4 3,342.6 26.1
Average interest-earning investment
securities 1,299.8 1,424.7 (8.8)
Average noninterest-bearing
demand deposits 2,866.3 2,823.1 1.5
Average interest-bearing deposits 1,675.6 1,027.9 63.0
Average total deposits 4,541.9 3,851.0 17.9
Average short-term borrowings 220.5 481.6 (54.2)
Average long-term debt 993.6 483.2 105.6
Period end total assets $ 7,309.9 $ 6,605.1 10.7
Period end loans, net of
unearned income 4,633.7 3,762.4 23.2
Period end investment securities 1,788.0 1,594.0 12.2
Period end noninterest-bearing
demand deposits 2,919.2 3,132.4 (6.8)
Period end interest-bearing deposits 1,944.4 1,274.1 52.6
Period end total deposits 4,863.6 4,406.5 10.4
Off-Balance Sheet:
-----------------
Average total client
investment funds $21,641.9 $19,754.2 9.6
Period end total client
investment funds 21,877.9 20,419.3 7.1
Total unfunded credit commitments 5,034.3 4,892.0 2.9
Ratios and Other Statistics:
---------------------------
Return on average assets (2) 1.4% 1.8% (22.2)
Return on average stockholders'
equity (2) 14.5 15.7 (7.6)
Non-GAAP return on average assets (3) 1.5 2.1 (28.6)
Non-GAAP return on average
stockholders' equity (3) 15.6 18.8 (17.0)
Total risk-based capital ratio 15.09 17.29 (12.7)
Tangible common equity to
tangible assets (4) 9.47 10.39 (8.9)
Operating efficiency ratio (5) 64.02 61.71 3.7
Non-GAAP operating efficiency
ratio (6) 60.49% 58.26% 3.8
Common stock repurchases $ 45.6 $ 39.3 16.0
Allowance for loan losses as a
percentage of total gross loans 1.13% 1.14% (0.9)
Gross charge-offs as a percentage
of total gross loans (annualized) 0.66 0.57 15.8
Net charge-offs as a percentage of
total gross loans (annualized) 0.45 0.38 18.4
Period end prime rate 5.00 8.25 (39.4)
Average SVB prime lending rate 5.66% 8.25% (31.4)
Full-time equivalent employees 1,209 1,158 4.4%
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(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, $0.5 million and $0.3 million
for the quarters ended June 30, 2008, March 31, 2008 and
June 30, 2007, respectively. The tax-equivalent adjustments
were $1.1 million and $0.6 million for the six months ended
June 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) Ratios represent non-GAAP annualized consolidated net income
(excluding the $3.9 million loss related to our cash
settlement of the conversion of certain zero-coupon
convertible subordinated notes recorded in the second
quarter of 2008, and goodwill impairment charges of $17.2
million recorded in the second quarter of 2007) divided by
quarterly average assets/equity and year-to-date average
assets/equity, respectively.
(4) Tangible common equity consists of total stockholders'
equity (excluding unrealized gains and losses on
investments) less acquired intangibles and goodwill.
Tangible assets represent total assets (excluding unrealized
gains and losses on investments) less acquired intangibles
and goodwill.
(5) The operating efficiency ratio is calculated by dividing
noninterest expense by total taxable-equivalent revenue.
(6) The non-GAAP operating efficiency ratio is calculated by
dividing noninterest expense (excluding (i) the $3.9 million
loss related to our cash settlement of the conversion of
certain zero-coupon convertible subordinated notes recorded
in the second quarter of 2008, (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 $2.5 million, $2.8
million and $3.3 million for the quarters ended June 30,
2008, March 31, 2008 and June 30, 2007, respectively and
$5.2 million and $5.5 million for the six months ended June
30, 2008 and 2007, respectively) by total taxable-equivalent
revenue (excluding taxable-equivalent revenue (losses)
attributable to minority interests of $0.9 million, $(1.5)
million and $9.1 million for the quarters ended June 30,
2008, March 31, 2008 and June 30, 2007, respectively and
$(0.5) million and $21.7 million for the six months ended
June 30, 2008 and 2007, respectively).
Net Interest Income and Margin
Net interest income was $87.9 million for the second quarter of 2008, compared to $92.1 million for the first quarter of 2008 and $94.6 million for the second quarter of 2007. Net interest income, on a fully tax-equivalent basis, was $88.4 million for the second quarter of 2008, compared to $92.6 million for the first quarter of 2008 and $94.9 million for the second quarter of 2007. The decrease in net interest income, on a fully tax-equivalent basis, from the first to the second quarter of 2008, was primarily attributable to the following:
* A net decrease in interest income of $5.2 million from our loan
portfolio, largely due to decreases totaling 225 basis points in
our prime-lending rate during the first and second quarters of
2008 in response to Federal Reserve rate decreases. Our average
prime-lending rate was 5.08 percent for the second quarter of
2008, compared to 6.24 percent for the first quarter of 2008.
These decreases were partially offset by increases in interest
income related to growth in our average loan portfolio balances,
which increased interest income by $4.1 million in the second
quarter of 2008.
* A decrease in interest income of $0.4 million from our short-term
investment portfolio, primarily driven by declining short-term
market interest rates. This decrease was partially offset by
increases in interest income related to growth in average
short-term investment portfolio balances, which included net
proceeds from our issuance of $250 million of 3.875% convertible
senior notes in April 2008. A portion of these proceeds 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 $0.1 million from total
interest-bearing deposits. This increase was primarily due to
growth in the average balances of all deposit products,
particularly our Eurodollar sweep deposit product, partially
offset by a decrease in interest expense from our bonus money
market deposits, primarily driven by declining short-term market
interest rates.
* An increase in interest income of $1.0 million from our
interest-earning investment securities portfolio, primarily
related to growth in average balances of our mortgage-backed
securities and non-taxable investment securities portfolio.
* A decrease in interest expense of $0.6 million from short-term
borrowings and long-term debt, primarily due to a decrease in
interest expense from our 5.70% senior and 6.05% subordinated
notes, short-term borrowings and other long-term debt of $3.1
million, due to lower short-term London Interbank Offered Rates
(LIBOR) and lower short-term market interest rates, as well as
decreases in average balances of short-term borrowings. These
decreases were partially offset by a $2.7 million increase in
interest expense related to the issuance of $250 million in
3.875% convertible senior notes in April 2008.
Our net interest margin, on a fully tax-equivalent basis, was 5.69 percent for the second quarter of 2008, compared to 6.36 percent for the first quarter of 2008 and 7.39 percent for the second quarter of 2007. The decrease from the first to the second quarter of 2008 was primarily due to reductions in our prime-lending rate during the first and second quarters of 2008, which we lowered in response to Federal Reserve rate cuts, as well as increases in interest expense related to the issuance of $250 million of 3.875% convertible senior notes and increases in average balances of our Eurodollar sweep deposit product. Our net interest margin also decreased due to the impact of our decision to partially decrease the interest rates we offer on certain deposit products, rather than lower them in conformity with Federal Reserve rate cuts. These reductions in our net interest margin were partially offset by a decrease in interest expense from short-term borrowings and long-term debt, primarily due to lower short-term market interest rates and LIBOR rates.
Net interest income, on a fully tax-equivalent basis, was $181.0 million and $188.6 million for the six months ended June 30, 2008 and 2007, respectively. Net interest margin, on a fully tax-equivalent basis, was 6.01 percent for the six months ended June 30, 2008, compared to 7.48 percent for the comparable 2007 period.
As of June 30, 2008, 74.3 percent, or $3.46 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 71.7 percent, or $3.14 billion, as of March 31, 2008 and 71.6 percent, or $2.71 billion, as of June 30, 2007.
Loan Growth
Average loans, net of unearned income, were $4.32 billion for the second quarter of 2008, compared to $4.11 billion for the first quarter of 2008 and $3.43 billion for the second quarter of 2007. The increase in average loan balances from the first to the second quarter of 2008 came primarily from loans to software, hardware and life science industry clients, and loans to individual clients of SVB Private Client Services. Period end loans, net of unearned income, were $4.63 billion at June 30, 2008, compared to $4.35 billion at March 31, 2008 and $3.76 billion at June 30, 2007.
Deposit Growth
Average deposits were $4.65 billion for the second quarter of 2008, compared to $4.44 billion for the first quarter of 2008 and $3.85 billion for the second quarter of 2007. The increase in average deposit balances from the first to the second quarter of 2008 reflects an increase in average balances of our Eurodollar sweep deposit product and our money market deposit product for early stage clients. The average balances of our Eurodollar sweep deposit product were $322.4 million for the second quarter of 2008, compared to $144.3 million for the first quarter of 2008. The average balances of our early stage money market deposit product were $425.5 million for the second quarter of 2008, compared to $406.4 million for the first quarter of 2008. Period-end deposits were $4.86 billion at June 30, 2008, compared to $4.77 billion at March 31, 2008 and $4.41 billion at June 30, 2007.
Investment Securities
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 its funds management business. Total investment securities were $1.79 billion at June 30, 2008, compared to $1.62 billion at March 31, 2008 and $1.59 billion at June 30, 2007. The increase in investment securities from the first quarter to the second quarter of 2008 was primarily due to increases in the balances of our mortgage-backed securities and non-taxable investment securities, which is included as a part of our fixed income investment portfolio, and increases in balances of our non-marketable securities, primarily from investments during the second quarter of 2008 in our managed investment funds at SVB Capital. We did not hold any common or preferred stock in government-sponsored enterprises for any of the periods presented in this release.
Average interest-earning investment securities were $1.34 billion for the second quarter of 2008, compared to $1.26 billion for the first quarter of 2008 and $1.39 billion for the second quarter of 2007. The increase in average interest-earning investment securities from the first to the second quarter of 2008 was primarily due to purchases of investments in mortgage-backed securities and non-taxable investment securities.
Long-Term Debt
3.875% Convertible Senior Notes
In April 2008, we issued $250 million of 3.875% convertible senior notes due in April 2011. The notes are initially convertible, subject to certain conditions, into cash up to the principal amount of notes and, with respect to any excess conversion value, into shares of our common stock or cash or a combination, at our option. The notes have an initial conversion rate of 18.8525 shares of common stock per $1,000 principal amount of notes, which represents an initial effective conversion price of $53.04 per share. We used $20.6 million of the net proceeds of this note offering to cover the net cost of entering into a convertible note hedge and a warrant agreement. These hedge and warrant transactions are separate contracts entered into with the counterparties, are not part of the terms of the notes and will not affect the rights of the holders of the notes. With respect to us only, they are intended to reduce potential equity dilution upon conversion of the notes by effectively increasing the economic conversion price of the notes to $64.43 per share of common stock. Additionally, we used $141.9 million of the net proceeds to settle the conversion of our zero-coupon convertible subordinated notes, which matured in June 2008. All of the remaining net proceeds will be used for general corporate purposes.
Zero-Coupon Convertible Subordinated Notes
Our zero-coupon convertible subordinated notes, previously issued with an original aggregate total principal amount of $150 million, matured on June 15, 2008. As of the maturity date, convertible notes for the original aggregate total principal amount of $141.9 million were outstanding and had not yet been converted. Based on the conversion terms of these notes, on June 23, 2008, we made an aggregate conversion settlement payment in cash and in shares of our common stock. The total value of both cash and shares as calculated based on the terms of the notes and as of the payment date was $212.8 million. Of the $212.8 million, we paid $141.9 million in cash, representing the portion of the conversion payment as the total principal amount of the notes converted. We also issued 1,406,034 shares of our common stock, valued at $70.9 million as calculated based on the terms of the notes, representing the portion of the conversion premium value that exceeded the total principal amount of the notes. In connection with this conversion settlement payment, we exercised call options pursuant to a call-spread arrangement with a certain counterparty, under which the counterparty delivered to us 1,406,043 shares of our common stock, valued at $70.9 million. Accordingly, there was no net impact on our total stockholders' equity for the second quarter of 2008 with respect to settling the conversion premium value.
During the second quarter of 2008, prior to the maturity date of these notes, we received a conversion notice to convert notes in the total principal amount of $7.8 million. Consistent with prior early conversions, we elected to settle the conversion fully in cash and paid a total of $11.6 million in cash, which included $3.9 million representing the conversion premium value of the converted notes. Accordingly, we recorded a non-tax deductible loss of $3.9 million as noninterest expense. In connection with this earlier 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. Accordingly, we recorded an increase in stockholders' equity of $3.9 million, representing such payment received, which was reflected as additional paid-in capital. As a result, the $3.9 million in noninterest expense we recorded due to this earlier conversion settlement had no net impact on our total stockholders' equity.
Noninterest Income
Noninterest income was $43.9 million for the second quarter of 2008, compared to $41.6 million for the first quarter of 2008 and $55.7 million for the second quarter of 2007. The increase in noninterest income from the first to the second quarter of 2008 was driven by the following factors:
* Net gains on investment securities of $2.0 million for the second
quarter of 2008, compared to net losses of $6.1 million for the
first quarter of 2008. The increase of $8.1 million was primarily
due to $1.6 million of valuation gains recognized in the second
quarter of 2008 related to investments within our sponsored debt
funds, compared to $7.8 million of valuation losses recognized in
the first quarter of 2008. Net gains on investment securities of
$2.0 million in the second quarter of 2008 were mainly
attributable to gains and losses from the following investment
activity:
-- Net gains from one of our managed co-investment funds
of $2.4 million, primarily due to net realized gains
from certain investments arising from merger and
acquisition activities.
-- Net gains from our sponsored debt funds of $2.2
million, which included $1.5 million of net gains
mainly attributable to increases in the share prices of
certain investments and higher valuations related to
investments within our sponsored debt funds, $0.4
million of net gains from the sale of certain
investments within the funds and $0.3 million of net
gains from distributions.
-- Net losses from our managed funds of funds of $1.7
million, which included $5.0 million in net losses from
decreases in valuations, partially offset by $3.3
million of net gains primarily from distributions.
-- Net losses of $0.5 million from the sale of certain
equity securities, which are publicly-traded shares
acquired upon exercise of equity warrant assets.
As of June 30, 2008, we held investments, either directly or through
six of our managed investment funds, in 421 private equity funds, 65
companies and three sponsored debt funds.
* An increase in net gains on derivative instruments of $1.8
million, primarily due to net gains from changes in the fair
value of foreign exchange forward contracts, and net gains from
changes in the fair value of an interest rate swap, partially
offset by lower net gains on exercises of equity warrant assets.
Net gains from foreign exchange forward contracts included $0.6
million in net gains from changes in fair value of foreign
exchange forward contracts, used to offset net losses of $2.0
million from revaluation of our foreign currency denominated
loans, which are included in other noninterest income.
* A decrease in other noninterest income of $4.4 million, primarily
due to net losses from revaluations of foreign currency
denominated loans of $2.0 million for the second quarter of 2008,
compared to net gains of $3.9 million for the first quarter of
2008. The net losses of $2.0 million were primarily due to the
strengthening of the U.S. dollar in the second quarter of 2008.
* A decrease in corporate finance fees of $3.6 million, due to the
completion of all remaining client transactions at SVB Alliant in
the first quarter of 2008.
Non-GAAP noninterest income, net of minority interest, was $43.1 million for the second quarter of 2008, compared to $43.3 million for the first quarter of 2008 and $46.9 million for the second quarter of 2007. Reconciliations of our non-GAAP noninterest income, non-GAAP net 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 $87.2 million for the second quarter of 2008, compared to $83.4 million for the first quarter of 2008 and $97.9 million for the second quarter of 2007. The increase in noninterest expense from the first to the second quarter of 2008 was primarily attributable to the following:
* An increase in other noninterest expense of $5.0 million,
primarily due to a $3.9 million non-tax deductible loss recorded
during the second quarter of 2008, related to our cash settlement
of the early conversion of certain zero-coupon convertible
subordinated notes.
* An increase in the provision for unfunded credit commitments of
$1.0 million. We recorded a provision for unfunded credit
commitments of $0.8 million for the second quarter of 2008,
compared to a (reduction of) provision of $(0.2) million for the
first quarter of 2008. The provision of $0.8 million for the
second quarter of 2008 was primarily due to the growth in our
portfolio of unfunded credit commitments compared to the first
quarter of 2008. Total unfunded credit commitments were $5.03
billion at June 30, 2008, compared to $4.86 billion at March 31,
2008 and $4.89 billion at June 30, 2007.
* A decrease in compensation and benefits expense of $3.7 million,
primarily attributable to the following:
-- A decrease of $1.8 million due to higher 401(k)
employer contributions in the first quarter of 2008
related to annual incentive compensation payouts for
2007.
-- A decrease of $1.0 million in salaries and wages
expense, primarily attributable to higher expenses
incurred in the first quarter of 2008 due to seasonal
and other accruals of vacation benefits and decreases
in non-routine compensation, such as one-time bonuses,
partially offset by an increase in salaries and wages
of $1.4 million primarily attributable to an increase
in the number of average full-time equivalent ("FTE")
employees and higher employee salaries and wages. The
average number of FTEs increased by 27 to 1,201 FTEs
for the second quarter of 2008, compared to an average
of 1,174 FTEs for the first quarter of 2008.
-- A decrease of $0.4 million in employer payroll taxes,
primarily attributable to higher employer payroll taxes
paid during the first quarter of 2008 as maximum
taxation levels were reached for certain employees.
Non-GAAP noninterest expense, excluding the $3.9 million loss as described above, net of minority interest, was $80.9 million for the second quarter of 2008, compared to $80.7 million for the first quarter of 2008 and, excluding the $17.2 million pre-tax goodwill impairment, net of minority interest, $84.5 million for the second quarter of 2007. Reconciliations of our non-GAAP noninterest expense, excluding the $3.9 million 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 43.66 percent for the second quarter of 2008, compared to 40.26 percent for the first quarter of 2008 and 40.48 percent for the second quarter of 2007. The increase in the tax rate from the first to the second quarter of 2008 was primarily attributable to the $3.9 million non-tax deductible loss related to our cash settlement of the early conversion of certain of our zero-coupon convertible subordinated notes.
Our effective tax rate for the six months ended June 30, 2008 was 41.78 percent, compared to 41.20 percent for the same period a year ago. The increase in the tax rate was primarily attributable to the $3.9 million non-tax deductible loss related to our zero-coupon convertible subordinated notes, partially offset by 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.
Credit Quality
Three months ended Six months ended
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June 30, March 31, June 30, June 30, June 30,
2008 2008 2007 2008 2007
---------- ---------- ---------- ---------- ----------
Allowance for (Dollars in thousands)
loan losses,
beginning
balance $ 49,636 $ 47,293 $ 40,256 $ 47,293 $ 42,747
Provision for
loan losses 8,351 7,723 8,117 16,074 7,710
Gross loan
charge-offs (9,098) (6,208) (6,265) (15,306) (10,615)
Loan recoveries 3,999 828 1,244 4,827 3,510
---------- ---------- ---------- ---------- ----------
Allowance for
loan losses,
ending
balance $ 52,888 $ 49,636 $ 43,352 $ 52,888 $ 43,352
========== ========== ========== ========== ==========
Provision as a
percentage of
total gross
loans
(annualized) 0.72% 0.71% 0.86% 0.69% 0.41%
Gross charge-offs
as a percentage
of total gross
loans
(annualized) 0.78 0.57 0.66 0.66 0.57
Net charge-offs
as a percentage
of total gross
loans
(annualized) 0.44 0.49 0.53 0.45 0.38
Allowance for
loan losses as
a percentage
of total gross
loans 1.13% 1.13% 1.14% 1.13% 1.14%
Total gross
loans $4,666,989 $4,377,498 $3,787,911 $4,666,989 $3,787,911
Our provision for loan losses increased by $0.6 million for the second quarter of 2008, compared to the first quarter of 2008, primarily due to an increase in gross loan charge-offs of $2.9 million and growth in our loan portfolio, partially offset by an increase in loan recoveries of $3.2 million. Gross loan charge-offs of $9.1 million for the second quarter of 2008 were primarily related to gross charge-offs from our early-stage client portfolio, as well as from one loan transaction from a mid-stage technology client. Loan recoveries of $4.0 million for the second quarter of 2008 primarily came from our early-stage client portfolio.
Minority Interest in Consolidated Affiliates
Minority interest in net losses of consolidated affiliates was $1.5 million for the second quarter of 2008, compared to a net loss of $4.2 million for the first quarter of 2008 and net income of $5.8 million for the second quarter of 2007. Minority interest in net loss of consolidated affiliates of $1.5 million for the second quarter of 2008 was primarily from noninterest expense of $2.5 million, primarily related to management fees paid by our managed funds to the general partners at SVB Capital for funds management and $2.5 million in net investment losses and carried interest from our funds of funds. These net losses were partially offset by $2.2 million in net investment gains from our managed co-investment funds and $0.7 million in net investment gains and carried interest from our sponsored debt funds.
Minority interest in capital of consolidated affiliates increased by $18.6 million for the second quarter of 2008, compared to the first quarter of 2008, due to equity transactions, which included paid capital calls of $20.4 million made by our consolidated affiliates, partially offset by $1.0 million in distributions to the minority interest holders, and $0.7 million of carried interest, primarily from one of our managed funds of funds.
Capital
We repurchased 25,000 shares of our common stock during the second quarter of 2008, at an aggregate cost of $1.0 million, compared to 979,628 shares or $44.6 million during the first quarter of 2008 and 388,493 shares or $20.2 million during the second quarter of 2007. We repurchased 1,004,628 shares of our common stock during the six months ended June 30, 2008 at an aggregate cost of $45.6 million. On July 24, 2008, our Board of Directors approved a new stock repurchase program that authorizes us to purchase up to $150 million of our common stock. This program expires on December 31, 2009 and replaces all prior share repurchase programs.
Weighted-average diluted common shares outstanding decreased by 390,109 shares from the first to the second quarter of 2008, primarily due to the full quarter effect of our share repurchase activity during the first quarter of 2008. This decrease was partially offset by higher stock option exercises and the impact from vesting of restricted stock awards during the second quarter of 2008.
In relation to the maturity of our zero-coupon convertible subordinated notes, effective June 15, 2008 going forward, the number of shares issuable upon conversion of these notes was excluded from our diluted common share count. Because the notes matured towards the end of the second quarter of 2008, this exclusion had a nominal impact on our diluted EPS for the second quarter of 2008. Additionally, the issuance of the $250 million of 3.875% convertible senior notes in April 2008 did not impact our weighted average diluted common shares for the second quarter of 2008 as their conversion price was higher than the average market price of our common stock for the second quarter of 2008.
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 com- Change in outlook com-
pared to 2008 results pared to outook repor-
(as of July 24, 2008) ted as of April 24,
2008
---------------------- ---------------------- ----------------------
Average loan balance increase at a percent- outlook increased from
age rate in the high low twenties range
twenties range
---------------------- ---------------------- ----------------------
Average deposit bal- increase at a percent- outlook increased from
ance (majority of age rate in the high low double digit range
growth from interest- teens range
bearing deposits)
---------------------- ---------------------- ----------------------
Net interest margin decline based on ex- no change from
pected federal reserve previous outlook
rate cuts and from
actual decreases in
late 2007 and early
2008
---------------------- ---------------------- ----------------------
Fees for deposit ser- increase at a percent- no change from
vices, letters of age rate in the mid previous outlook
credit and foreign ex- twenties range
change, in aggregate
---------------------- ---------------------- ----------------------
Client investment fees increase at a percent- outlook decreased from
age rate in the mid high single digit
single digit range range
---------------------- ---------------------- ----------------------
Allowance for loan remain flat no change from
losses as a percentage previous outlook
of gross loans
---------------------- ---------------------- ----------------------
Noninterest expense* increase at a percent- no change from
(excluding expenses age rate in the mid previous outlook
related to minority single digit range
interest, loss from
cash settlement of our
zero-coupon conver-
tible subordinated
notes during the se-
cond quarter of 2008,
and goodwill impair-
ment)
---------------------- ---------------------- ----------------------
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 July 24, 2008, we will host a conference call at 2:00 p.m. (Pacific Time) to discuss the financial results for the second quarter ended June 30, 2008. The conference call can be accessed by dialing (866) 916-4782 or (706) 902-0678, and referencing the conference ID "55892277." 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, July 24, 2008, through midnight on Friday, August 8, 2008, by dialing (800) 642-1687 or (706) 645-9291 and referencing conference ID number "55892277." A replay of the audio webcast will also be available on www.svb.com for 12 months beginning Thursday, July 24, 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, 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 transactions, asset management and a full range of services for private equity companies, as well as the added value of its knowledge and networks worldwide. Headquartered in Santa Clara, Calif., SVB Financial Group operates through 27 offices in the U.S. and five internationally in China, India, Israel and 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 thousands, except share data)
Three months ended Six months ended
-------------------------------- ---------------------
June 30, March 31, June 30, June 30, June 30,
2008 2008 2007 2008 2007
------------------------- ---------- ---------- ---------- ----------
Interest income:
Loans $ 84,515 $ 89,759 $ 89,051 $ 174,274 $ 174,283
Investment
securities:
Taxable 14,586 13,770 15,782 28,356 32,075
Non-taxable 1,078 937 557 2,015 1,164
Federal funds
sold, securi-
ties purchased
under agree-
ment to resell
and other
short-term
investment
securities 3,684 4,117 4,341 7,801 8,175
------------------------- ---------- ---------- ---------- ----------
Total interest
income 103,863 108,583 109,731 212,446 215,697
------------------------- ---------- ---------- ---------- ----------
Interest expense:
Deposits 5,372 5,269 2,568 10,641 4,756
Borrowings 10,627 11,233 12,587 21,860 23,001
------------------------- ---------- ---------- ---------- ----------
Total interest
expense 15,999 16,502 15,155 32,501 27,757
------------------------- ---------- ---------- ---------- ----------
Net interest
income 87,864 92,081 94,576 179,945 187,940
Provision for
loan losses 8,351 7,723 8,117 16,074 7,710
------------------------- ---------- ---------- ---------- ----------
Net interest
income after
provision for
loan losses 79,513 84,358 86,459 163,871 180,230
------------------------- ---------- ---------- ---------- ----------
Noninterest income:
Client investment
fees 13,648 13,722 12,652 27,370 24,686
Foreign exchange
fees 7,961 7,844 5,805 15,805 11,064
Deposit service
charges 6,056 5,891 3,567 11,947 6,778
Gains on deriva-
tive instruments,
net 4,408 2,599 4,751 7,007 6,724
Letter of credit
and standby
letter of
credit income 3,142 2,946 2,761 6,088 5,692
Corporate fi-
nance fees -- 3,640 3,487 3,640 6,402
Gains (losses)
on investment
securities, net 2,039 (6,112) 13,641 (4,073) 25,892
Other 6,683 11,035 9,036 17,718 15,923
------------------------- ---------- ---------- ---------- ----------
Total noninte-
rest income 43,937 41,565 55,700 85,502 103,161
------------------------- ---------- ---------- ---------- ----------
Noninterest
expense:
Compensation
and bene-
fits (1) 50,059 53,781 51,957 103,840 105,317
Professional
services 9,132 8,801 6,676 17,933 15,826
Premises and
equipment 5,455 5,188 5,111 10,643 10,253
Net occupancy 4,342 4,348 6,285 8,690 11,089
Business de-
velopment and
travel 3,764 3,422 3,403 7,186 6,318
Correspondent
bank fees 1,816 1,506 1,311 3,322 2,860
Telephone 1,345 1,152 1,423 2,497 2,856
Data processing
services 1,116 1,077 858 2,193 1,886
Provision for
(reduction of)
unfunded credit
commitments 800 (165) (696) 635 (1,805)
Impairment of
goodwill -- -- 17,204 -- 17,204
Other 9,360 4,327 4,384 13,687 8,229
------------------------- ---------- ---------- ---------- ----------
Total noninte-
rest expense 87,189 83,437 97,916 170,626 180,033
------------------------- ---------- ---------- ---------- ----------
Income before
minority inte-
rest in net loss
(income) of
consolidated
affiliates and
income tax
expense 36,261 42,486 44,243 78,747 103,358
Minority interest
in net loss
(income) of con-
solidated
affiliates 1,534 4,218 (5,825) 5,752 (16,181)
------------------------- ---------- ---------- ---------- ----------
Income before
income tax
expense 37,795 46,704 38,418 84,499 87,177
Income tax
expense 16,500 18,801 15,553 35,301 35,921
------------------------- ---------- ---------- ---------- ----------
Net income $ 21,295 $ 27,903 $ 22,865 $ 49,198 $ 51,256
========================= ========== ========== ========== ==========
Earnings per
common share
-- basic $ 0.66 $ 0.86 $ 0.67 $ 1.53 $ 1.49
Earnings per
common share
-- diluted $ 0.62 $ 0.81 $ 0.61 $ 1.43 $ 1.38
Weighted average
shares out-
standing
-- basic 32,053,749 32,279,892 34,318,539 32,166,820 34,367,705
Weighted average
shares out-
standing
-- diluted 34,192,459 34,582,568 37,407,765 34,347,128 37,214,590
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