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 ----------------------------------------------- % 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 ------------------------------- 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% -------------------------------------------------------- (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 -------------------------------- --------------------- 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 --------------------------------------------------------------------- SVB FINANCIAL GROUP AND SUBSIDIARIES INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except par value, share data and ratios) June 30, March 31, June 30, 2008 2008 2007 ------------------------------- ---------- ---------- ---------- Assets: Cash and due from banks $ 305,142 $ 303,973 $ 350,301 Securities purchased under agreement to resell and other short-term investment securities 325,723 372,159 655,978 Investment securities 1,787,996 1,618,542 1,593,957 Loans, net of unearned income 4,633,701 4,349,238 3,762,446 Allowance for loan losses (52,888) (49,636) (43,352) ------------------------------- ---------- ---------- ---------- Net loans 4,580,813 4,299,602 3,719,094 ------------------------------- ---------- ---------- ---------- Premises and equipment, net of accumulated depreciation and amortization 34,787 36,725 40,028 Goodwill 4,092 4,092 4,092 Accrued interest receivable and other assets 271,318 262,210 241,630 ------------------------------- ---------- ---------- ---------- Total assets $7,309,871 $6,897,303 $6,605,080 =============================== ========== ========== ========== Liabilities, Minority Interest and Stockholders' Equity: Liabilities: Deposits: Noninterest-bearing demand $2,919,205 $3,034,885 $3,132,430 Negotiable order of withdrawal (NOW) 48,032 71,440 31,389 Money market 1,131,154 1,009,226 927,995 Time 410,591 386,213 314,675 Foreign sweep 354,598 267,449 -- ------------------------------- ---------- ---------- ---------- Total deposits 4,863,580 4,769,213 4,406,489 ------------------------------- ---------- ---------- ---------- Short-term borrowings 330,000 120,000 305,000 Other liabilities 163,911 167,016 169,393 Long-term debt 975,878 893,189 838,116 ------------------------------- ---------- ---------- ---------- Total liabilities 6,333,369 5,949,418 5,718,998 ------------------------------- ---------- ---------- ---------- Minority interest in capital of consolidated affiliates 291,375 272,729 217,172 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; 32,252,367 shares, 31,879,622 shares and 34,387,390 shares outstanding, respectively 32 32 34 Additional paid-in capital -- -- 3,851 Retained earnings 698,729 678,078 690,350 Accumulated other comprehensive loss (13,634) (2,954) (25,325) ------------------------------- ---------- ---------- ---------- Total stockholders' equity 685,127 675,156 668,910 ------------------------------- ---------- ---------- ---------- Total liabilities, minority interest and stockholders' equity $7,309,871 $6,897,303 $6,605,080 =============================== ========== ========== ========== Capital Ratios: Total risk-based capital ratio 15.09% 15.54% 17.29% Tier 1 risk-based capital ratio 10.42 10.61 12.29 Tier 1 leverage ratio 10.71 11.06 12.81 Other Period-End Statistics: Tangible common equity to tangible assets ratio 9.47 9.76 10.39 Loans, net of unearned income-to-deposits ratio 95.27% 91.19% 85.38% Book value per share $ 21.24 $ 21.18 $ 19.45 Full-time equivalent employees 1,209 1,190 1,158 SVB FINANCIAL GROUP AND SUBSIDIARIES INTERIM AVERAGE BALANCES, RATES AND YIELDS (Unaudited) (Dollars in thousands) Three months ended -------------------------------------------------- June 30, 2008 March 31, 2008 ----------------------- ------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate --------------------------- -------- ----- ---------- -------- ----- Interest- earning assets: --------------- Federal funds sold, securities pur- chased under agreement to resell and other short-term in- vestment securities (1) $ 597,673 $ 3,684 2.48% $ 475,112 $ 4,117 3.49% Investment securities: Taxable 1,233,490 14,586 4.76 1,173,698 13,770 4.72 Non-taxable (2) 102,989 1,659 6.48 89,360 1,442 6.49 Total loans, net of unearned income 4,319,897 84,515 7.87 4,112,865 89,759 8.78 --------------------------- -------- ----- ---------- -------- ----- Total interest- earning assets 6,254,049 104,444 6.72 5,851,035 109,088 7.50 --------------------------- -------- ----- ---------- -------- ----- Cash and due from banks 249,074 276,471 Allowance for loan losses (52,776) (48,276) Goodwill 4,092 4,092 Other assets (3) 703,651 668,697 --------------------------- ---------- Total assets $7,158,090 $6,752,019 ===================================================================== Funding sources: --------------- Interest-bearing liabilities: NOW deposits $ 51,992 $ 71 0.55% $ 37,148 $ 37 0.40% Regular money market deposits 152,707 533 1.40 136,485 425 1.25 Bonus money market deposits 900,767 2,467 1.10 873,954 3,234 1.49 Time deposits 387,981 920 0.95 343,571 766 0.90 Foreign sweep deposits 322,420 1,381 1.72 144,256 807 2.25 --------------------------- -------- ----- ---------- -------- ----- Total interest- bearing deposits 1,815,867 5,372 1.19 1,535,414 5,269 1.38 Short-term borrowings 205,983 1,104 2.16 234,945 1,811 3.10 Zero-coupon con- vertible subor- dinated notes 134,158 234 0.70 149,314 239 0.64 3.875% convertible senior notes 229,121 2,723 4.78 -- -- -- Junior subordinated debentures 53,090 540 4.09 52,969 725 5.50 Senior and sub- ordinated notes 531,086 4,874 3.69 532,376 6,854 5.18 Other long-term debt 152,386 1,152 3.04 152,636 1,604 4.23 --------------------------- -------- ----- ---------- -------- ----- Total interest- bearing liabilities 3,121,691 15,999 2.06 2,657,654 16,502 2.50 Portion of non- interest-bearing funding sources 3,132,358 3,193,381 --------------------------- ---------- Total funding sources 6,254,049 15,999 1.03 5,851,035 16,502 1.14 --------------------------- -------- ----- ---------- -------- ----- Noninterest-bearing funding sources: ------------------ Demand deposits 2,832,956 2,899,599 Other liabilities 243,316 245,506 Minority interest in capital of consolidated affiliates 282,285 261,664 Stockholders' equity 677,842 687,596 Portion used to fund interest- earning assets (3,132,358) (3,193,381) ---------- ---------- Total liabilities, minority interest and stockholders' equity $7,158,090 $6,752,019 ========== ========== Net interest income and margin $ 88,445 5.69% $ 92,586 6.36% ======== ==== ======== ===== Total deposits $4,648,823 $4,435,013 ========== ========== Average stock- holders' equity as a percentage of average assets 9.47% 10.18% ==== ===== -------------------------------- June 30, 2007 -------------------------------- 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) $ 335,248 $ 4,341 5.19% Investment securities: Taxable 1,341,339 15,782 4.72 Non-taxable (2) 49,410 857 6.96 Total loans, net of unearned income 3,426,687 89,051 10.42 ---------- ----------- ----- Total interest-earning assets 5,152,684 110,031 8.57 ---------- ----------- ----- Cash and due from banks 267,797 Allowance for loan losses (40,136) Goodwill 21,107 Other assets (3) 532,535 ---------- Total assets $5,933,987 ========== Funding sources: ---------------- Interest-bearing liabilities: NOW deposits $ 40,494 $ 40 0.40% Regular money market deposits 167,893 507 1.21 Bonus money market deposits 487,826 1,204 0.99 Time deposits 326,557 817 1.00 Foreign sweep deposits -- -- -- ---------- ----------- ----- Total interest-bearing deposits 1,022,770 2,568 1.01 Short-term borrowings 415,093 5,561 5.37 Zero-coupon convertible subordinated notes 148,792 240 0.65 3.875% convertible senior notes -- -- -- Junior subordinated debentures 51,173 874 6.85 Senior and subordinated notes 249,608 3,845 6.18 Other long-term debt 152,669 2,067 5.43 ---------- ----------- ----- Total interest-bearing liabilities 2,040,105 15,155 2.98 Portion of noninterest-bearing funding sources 3,112,579 ---------- Total funding sources 5,152,684 15,155 1.18 ---------- ----------- ----- Noninterest-bearing funding sources: --------------------------- Demand deposits 2,828,240 Other liabilities 193,279 Minority interest in capital of consolidated affiliates 200,815 Stockholders' equity 671,548 Portion used to fund interest- earning assets (3,112,579) ---------- Total liabilities, minority interest and stockholders' equity $5,933,987 ========== Net interest income and margin $ 94,876 7.39% ========== ===== Total deposits $3,851,010 ========== Average stockholders' equity as a percentage of average assets 11.32% ===== ---------------------------- (1) Includes average interest-bearing deposits in other financial institutions of $99.2 million, $82.9 million and $50.9 million for the quarters ended June 30, 2008, March 31, 2008 and June 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, $0.5 million and $0.3 million for the quarters ended June 30, 2008, March 31, 2008, and June 30, 2007, respectively. (3) Average investment securities of $373.3 million, $345.2 million and $237.7 million for the quarters ended June 30, 2008, March 31, 2008 and June 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) (Dollars in thousands) Six months ended June 30, ---------------------------------------------------- 2008 2007 ------------------------- ------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ---------- -------- ----- ---------- -------- ----- Interest-earning assets: ----------------- Federal funds sold, securities pur- chased under agreement to resell and other short-term investment securities (1) $ 536,392 $ 7,801 2.92% $ 314,526 $ 8,175 5.24% Investment securities: Taxable 1,203,594 28,356 4.74 1,372,996 32,075 4.71 Non-taxable (2) 96,175 3,101 6.48 51,702 1,791 6.99 Total loans, net of unearned income 4,216,381 174,274 8.31 3,342,564 174,283 10.51 ---------- -------- ----- ---------- -------- ----- Total interest- earning assets 6,052,542 213,532 7.09 5,081,788 216,324 8.58 ---------- -------- ----- ---------- -------- ----- Cash and due from banks 262,773 272,386 Allowance for loan losses (50,526) (41,864) Goodwill 4,092 21,201 Other assets (3) 686,174 495,302 ---------- ---------- Total assets $6,955,055 $5,828,813 ========== ========== Funding sources: ---------------- Interest-bearing liabilities: NOW deposits $ 44,570 $ 108 0.49% $ 38,893 $ 76 0.39% Regular money market deposits 144,596 957 1.33 167,933 901 1.08 Bonus money market deposits 887,361 5,702 1.29 501,419 2,265 0.91 Time deposits 365,776 1,686 0.93 319,640 1,514 0.96 Foreign sweep deposits 233,338 2,188 1.89 -- -- -- ---------- -------- ----- ---------- -------- ----- Total interest- bearing deposits 1,675,641 10,641 1.28 1,027,885 4,756 0.93 Short-term borrowings 220,464 2,915 2.66 481,592 12,855 5.38 Zero-coupon con- vertible sub- ordinated notes 141,736 473 0.67 148,676 478 0.65 3.875% convertible senior notes 114,560 2,723 4.78 -- -- -- Junior subor- dinated debentures 53,030 1,265 4.80 51,165 1,710 6.74 Senior and sub- ordinated notes 531,731 11,728 4.44 130,716 3,845 5.93 Other long-term debt 152,511 2,756 3.63 152,669 4,113 5.43 ---------- -------- ----- ---------- -------- ----- Total interest- bearing liabilities 2,889,673 32,501 2.26 1,992,703 27,757 2.81 Portion of non- interest- bearing funding sources 3,162,869 3,089,085 ---------- -------- ----- ---------- -------- ----- Total funding sources 6,052,542 32,501 1.08 5,081,788 27,757 1.10 ---------- -------- ----- ---------- -------- ----- Noninterest- bearing funding sources: ----------------- Demand deposits 2,866,278 2,823,128 Other liabilities 244,411 167,592 Minority interest in capital of consolidated affiliates 271,975 186,130 Stockholders' equity 682,718 659,260 Portion used to fund interest- earning assets (3,162,869) (3,089,085) ---------- ---------- Total liabilities, minority interest and stockholders' equity $6,955,055 $5,828,813 ========== Net interest income and margin $181,031 6.01% $188,567 7.48% ======== ===== ======== ===== Total deposits $4,541,919 $3,851,013 ========== ========== Average stock- holders' equity as a percentage of average assets 9.82% 11.31% ===== ===== ---------------------------- (1) Includes average interest-bearing deposits in other financial institutions of $91.0 million and $46.4 million for the six months ended June 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 $1.1 million and $0.6 million for the six months ended June 30, 2008 and 2007, respectively. (3) Average investment securities of $359.3 million and $224.4 million for the six months ended June 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 --------------- June 30, Mar 31, June 30, Mar 31, June 30, 2008 2008 2007 2008 2007 ------ ------ ------ ----- ----- Gains (losses) on (Dollars in thousands) foreign exchange forward contracts, net: Gains on client foreign exchange forward contracts, net (1) $ 478 $ 728 $ 391 (34.3)% 22.3% Gains (losses) on internal foreign exchange forward contracts, net (2) 624 (3,091) (812) (120.2) (176.8) ------ ------ ------ ----- ----- Total gains (losses) on foreign exchange forward contracts, net 1,102 (2,363) (421) (146.6) (361.8) Change in fair value of interest rate swap (3) 879 (493) 598 (278.3) 47.0 Gains on covered call options, net (4) 377 -- -- 100.0 100.0 Equity warrant assets: Gains on exercise, net 676 4,516 883 (85.0) (23.4) Change in fair value (5): Cancellations and expirations (488) (457) (720) 6.8 (32.2) Other changes in fair value 1,862 1,396 4,411 33.4 (57.8) ------ ------ ------ ----- ----- Total net gains on equity warrant assets (6) 2,050 5,455 4,574 (62.4) (55.2) ------ ------ ------ ----- ----- Total gains on derivative instruments, net $4,408 $2,599 $4,751 69.6% (7.2)% ====== ====== ====== ===== ===== Six months ended --------------------------- June 30, June 30, % 2008 2007 Change ------- ------- ----- Gains (losses) on foreign exchange forward contracts, net: Gains on client foreign exchange forward contracts, net (1) $ 1,206 $ 906 33.1% Gains (losses) on internal foreign exchange forward contracts, net (2) (2,467) (435) 467.1 ------- ------- ----- Total gains (losses) on foreign exchange forward contracts, net (1,261) 471 (367.7) Change in fair value of interest rate swap (3) 386 257 50.2 Gains on covered call options, net (4) 377 -- 100.0 Equity warrant assets: Gains on exercise, net 5,192 3,866 34.3 Change in fair value (5): Cancellations and expirations (945) (1,467) (35.6) Other changes in fair value 3,258 3,597 (9.4) ------- ------- ----- Total net gains on equity warrant assets (6) 7,505 5,996 25.2% ------- ------- ----- Total gains on derivative instruments, net $ 7,007 $ 6,724 4.2% ======= ======= ===== ---------------------------- (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 by one of our sponsored debt funds. (5) At June 30, 2008, we held warrants in 1,217 companies, compared to 1,188 companies at March 31, 2008 and 1,202 companies at June 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 (Dollars in thousands) Three months ended Six months ended ---------------------------- ------------------ June 30, March 31, June 30, June 30, 2008 2008 2007 2008 2007 -------------- ------- ------ ------- ------ -------- Net interest income (1) $ (106) $ (257) $ (268) $ (363) $ (688) Noninterest income (1) (1,528) 975 (7,310) (553) (18,566) Noninterest expense (1) 2,457 2,759 3,269 5,216 5,524 Carried interest (2) 711 741 (1,516) 1,452 (2,451) ------- ------ ------- ------ -------- Total minority interest in net loss (income) of consolidated affiliates $ 1,534 $4,218 $(5,825) $5,752 $(16,181) ======= ====== ======= ====== ======== ---------------------------- (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 one of our managed funds of funds. Reconciliation of Basic and Diluted Weighted Average Shares Outstanding (Shares in thousands) Three months ended Six months ended ------------------------ ---------------- June 30, Mar 31, June 30, June 30, 2008 2008 2007 2008 2007 ---------------------------- ------ ------ ------ ------ ------ Weighted average shares outstanding-basic 32,054 32,280 34,319 32,167 34,368 Effect of dilutive securities: Stock options 968 1,012 1,364 984 1,344 Restricted stock awards and units 87 73 91 38 48 Zero-coupon convertible subordinated notes (1) 1,083 1,218 1,575 1,158 1,455 Warrants asssociated with zero-coupon convertible subordinated notes (2) -- -- 59 -- -- 3.875% convertible senior notes (2) -- -- -- -- -- Warrants asssociated with 3.875% convertible senior notes (2) -- -- -- -- -- ------ ------ ------ ------ ------ Total effect of dilutive securities 2,138 2,303 3,089 2,180 2,847 ------ ------ ------ ------ ------ Weighted average shares outstanding-diluted 34,192 34,583 37,408 34,347 37,215 ====== ====== ====== ====== ====== ---------------------------- (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 are 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 $64.425. Credit Quality Period end balances at -------------------------------------- (Dollars in thousands) June 30, March 31, June 30, 2008 2008 2007 ------------------------------ ---------- ---------- ---------- Nonperforming loans and assets: ------------------------------ Nonperforming loans: Loans Past Due 90 Days or More $ 1,151 $ -- $ 1,365 Nonaccrual Loans 8,497 7,606 10,882 ---------- ---------- ---------- Total nonperforming loans 9,648 7,606 12,247 Other real estate owned 1,612 1,794 -- ---------- ---------- ---------- Total nonperforming assets $ 11,260 $ 9,400 $ 12,247 ========== ========== ========== Nonperforming loans as a percentage of total gross loans 0.21% 0.17% 0.32% Nonperforming assets as a percentage of total assets 0.15% 0.14% 0.19% Allowance for loan losses $ 52,888 $ 49,636 $ 43,352 As a percentage of total gross loans 1.13% 1.13% 1.14% As a percentage of nonperforming loans 548.18% 652.59% 353.98% Reserve for unfunded credit commitments (1) $ 14,081 $ 13,281 $ 12,848 Total gross loans 4,666,989 4,377,498 3,787,911 Total unfunded credit commitments $5,034,283 $4,860,671 $4,891,963 ---------------------------- (1) The "Reserve for Unfunded Credit Commitments" is included as a component of "Other Liabilities." Average Client Investment Funds (1) Three months ended Six months ended --------------------------- ----------------- (Dollars in June 30, March 31, June 30, June 30, millions) 2008 2008 2007 2008 2007 ------------------ ------- ------- ------- ------- ------- Client directed investment assets $12,734 $12,774 $12,234 $12,754 $12,060 Client investment assets under management 6,006 6,375 5,476 6,190 5,333 Sweep money market funds 2,649 2,746 2,330 2,698 2,361 ------- ------- ------- ------- ------- Total average client investment funds $21,389 $21,895 $20,040 $21,642 $19,754 ======= ======= ======= ======= ======= ---------------------------- (1) Client Investment Funds invested through SVB Financial Group are maintained at third party financial institutions.
Average client investment funds decreased by $505.2 million to $21.4 billion for the second quarter of 2008, compared to $21.9 billion for the first quarter of 2008, primarily due to no venture-backed initial public offerings. The decrease was also attributable to client funds being directed to on-balance sheet deposit products. Period end total client investment funds were $21.9 billion at June 30, 2008, compared to $21.0 billion at March 31, 2008 and $20.4 billion at June 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 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 - We included in our GAAP net income for the second quarter of 2008 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. * Certain goodwill impairment charges - We included in our GAAP net income during the second quarter of 2007 a non-cash pre-tax charge of $17.2 million due to impairment of goodwill. The impairment resulted from our annual evaluation of goodwill associated with our investment banking subsidiary, SVB Alliant, and changes in our outlook at that time for the subsidiary's future financial performance.
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) (Dollars in thousands except share amounts) Three months ended Six months ended -------------------------------- --------------------- June 30, March 31, June 30, June 30, 2008 2008 2007 2008 2007 ---------- ---------- ---------- ---------- ---------- Net Income $ 21,295 $ 27,903 $ 22,865 $ 49,198 $ 51,256 Impact of loss from conver- sion of certain zero- coupon convertible subordinated notes (1) 3,858 -- -- 3,858 -- Impact of impair- ment of goodwill on income before income taxes (2) -- -- 17,204 -- 17,204 Impact of impair- ment of goodwill on income tax benefit (3) -- -- (7,010) -- (7,010) ---------- ---------- ---------- ---------- ---------- Non-GAAP Net Income $ 25,153 $ 27,903 $ 33,059 $ 53,056 $ 61,450 ========== ========== ========== ========== ========== Weighted aver- age diluted shares out- standing 34,192,459 34,582,568 37,407,765 34,347,128 37,214,590 ---------------------------- (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. Three months ended Six months ended ------------------------------ --------------------- June 30, March 31, June 30, June 30, 2008 2008 2007 2008 2007 -------- -------- -------- ---------- ---------- (Dollars in thousands) Non-GAAP non- interest income, net of minority interest ---------------- GAAP noninterest income $ 43,937 $ 41,565 $ 55,700 $ 85,502 $103,161 Less: (income) losses attribu- table to minor- ity interests, including carried inte- rest (817) 1,716 (8,826) 899 (21,017) -------- -------- -------- -------- -------- Non-GAAP non- interest income, net of minority interest $43,120 $43,281 $ 46,874 $ 86,401 $ 82,144 ======= ======= ======== ======== ======== Non-GAAP net gains (losses) on investment securities, net of minority interest ---------------- GAAP net gains (losses) on investment securities $ 2,039 $(6,112) $ 13,641 $ (4,073) $ 25,892 Less: (income) losses attribu- table to minor- ity interests, including carried inte- rest (452) 1,899 (8,654) 1,447 (19,476) ------- ------- -------- -------- -------- Non-GAAP net gains (losses) on investment securities, net of minority interest $ 1,587 $(4,213) $ 4,987 $ (2,626) $ 6,416 ======= ======= ======== ======== ======== Non-GAAP net gains on derivative instruments, net of minority interest ---------------- GAAP net gains on derivative instruments $ 4,408 $ 2,599 $ 4,751 $ 7,007 $ 6,724 Less: (income) losses attribu- table to minority inte- rests (171) 46 323 (125) (267) ------- ------- -------- -------- -------- Non-GAAP net gains on derivative instruments, net of minority interest $ 4,237 $ 2,645 $ 5,074 $ 6,882 $ 6,457 ======= ======= ======== ======== ======== Non-GAAP non- interest expense, net of minority interest ----------------- GAAP noninte- rest expense $87,189 $83,437 $ 97,916 $170,626 $180,033 Less: amounts attributable to minority interests (2,457) (2,759) (3,269) (5,216) (5,524) Less: loss from conversion of convertible subordinated notes (3,858) -- -- (3,858) -- Less: impact of impairment of goodwill -- -- (17,204) -- (17,204) ------- ------- -------- -------- -------- Non-GAAP non- interest expense, net of minority interest $80,874 $80,678 $ 77,443 $161,552 $157,305 ======= ======= ======== ======== ========