SVB FINANCIAL GROUP 
By SANTA CLARA, Calif., Jan. 21, 2010 /PRNewswire-FirstCall/ -- SVB Financial Group (Nasdaq: SIVB) today announced financial results for the fourth quarter and year ended December 31, 2009.
Consolidated net income available to common stockholders for the fourth quarter of 2009 was $6.0 million, or $0.16 per diluted common share, compared to $20.6 million, or $0.61 per diluted common share, for the third quarter of 2009, and a net loss applicable to common stockholders of $0.6 million, or $0.02 per diluted common share, for the fourth quarter of 2008. Consolidated net income for the fourth quarter of 2009 included a non-cash charge of $11.4 million related to our redemption of preferred stock issued under the U.S. Treasury's TARP Capital Purchase Program ("CPP"). Excluding the $11.4 million charge, net income for the fourth quarter of 2009 was $17.5 million, or $0.47 per diluted common share. (See non-GAAP reconciliation under section "Use of Non-GAAP Financial Measures" provided below).
Highlights of our fourth quarter 2009 results included:
-- We issued and sold through a public offering during the fourth quarter
of 2009 7,965,568 shares of common stock at an offering price of $38.50
per share, which resulted in net proceeds of $292.1 million.
-- On December 23, 2009, we redeemed $235 million in preferred shares, plus
accrued and unpaid dividends, under the CPP, which resulted in a
non-cash charge of $11.4 million in the fourth quarter of 2009.
-- Provision for loan losses of $17.3 million, an increase of $9.3 million
compared to the third quarter of 2009. Our provision for loan losses in
the third quarter of 2009 was inclusive of an $11.4 million recovery
from a single loan. Gross charge-offs decreased to $33.1 million for the
fourth quarter of 2009, compared to $46.6 million for the third quarter
of 2009.
-- An increase in net interest income (fully taxable equivalent basis) of
$5.3 million, primarily due to growth in average investment securities
balances of $780.7 million, or 31.0 percent, reflecting continued
investment of excess liquidity resulting from our continued growth in
deposits.
-- Growth in average deposit balances of $972.5 million, or 10.9 percent,
primarily due to the current low interest rate environment, as well as
our clients' desire to maintain short-term liquidity.
-- A decrease in average loan balances of $176.5 million, or 3.9 percent,
reflecting continued efforts by some clients to deleverage their
businesses. Although loan balances have decreased, we continue to make
new loans, adding 165 new loan clients in the fourth quarter of 2009,
resulting in $380.7 million in new funded loans.
Consolidated net income available to common stockholders for the year ended December 31, 2009 was $22.7 million, or $0.66 per diluted common share, compared to $73.6 million, or $2.16 per diluted common share, for 2008. Consolidated net income for the year ended December 31, 2009 included a non-tax deductible charge of $11.4 million related to TARP repayment in the fourth quarter of 2009 and a non-tax deductible goodwill impairment charge of $4.1 million recorded in the first quarter of 2009. Excluding these charges, net income for the year ended December 31, 2009 was $38.2 million, or $1.12 per diluted common share. (See non-GAAP reconciliation under section "Use of Non-GAAP Financial Measures" provided below).
"We are pleased to see continued improvements across our business, including higher credit quality, stronger fee income and higher interest income," said Ken Wilcox, President and CEO of SVB Financial Group. "Our strong capital and liquidity position has allowed us to continue making the right decisions for our business and for shareholders throughout this recession. In the meantime, we remain poised to take advantage of increases in market activity or interest rates, when they eventually come."
Fourth Quarter 2009 Summary
Three months ended
------------------
(Dollars in millions,
except share data and December December
ratios) 31, September 30, 31,
--------------------- --------- ------------- ---------
2009 2009 2008
---- ---- ----
Income Statement:
Diluted earnings (loss) per
common share $0.16 $0.61 $(0.02)
Net income attributable to
SVBFG 20.7 24.2 0.1
Net income (loss) available
to common stockholders 6.0 20.6 (0.6)
Net interest income 102.1 96.8 96.4
Provision for loan losses 17.3 8.0 71.0
Noninterest income 40.7 34.3 25.7
Noninterest expense 87.9 79.8 61.8
Non-GAAP net income (loss)
available to common
stockholders (1) 17.5 20.6 (0.6)
Non-GAAP diluted earnings
(loss) per common share
(1) 0.47 0.61 (0.02)
Non-GAAP noninterest
income, net of
noncontrolling interests
(1) 34.1 29.2 34.3
Non-GAAP noninterest
expense, net of
noncontrolling interests
(1) 84.6 76.9 58.8
Fully Taxable Equivalent:
Net interest income (2) $102.7 $97.4 $97.0
Net interest margin 3.57 % 3.70 % 5.39 %
Shares Outstanding:
Common 41,338,569 33,202,387 32,917,007
Basic weighted average 36,475,992 33,176,678 32,809,705
Diluted weighted average 37,214,321 33,672,491 33,450,626
Balance Sheet:
Average total assets $12,487.1 $11,410.6 $8,209.1
Average loans, net of
unearned income 4,368.0 4,544.5 5,226.7
Average interest-earning
investment securities 3,295.3 2,514.6 1,357.5
Average noninterest-
bearing demand deposits 5,998.4 5,373.5 3,227.0
Average interest-bearing
deposits 3,884.5 3,536.9 2,446.5
Average total deposits 9,882.9 8,910.4 5,673.5
Average short-term
borrowings 49.5 42.1 232.5
Average long-term debt 868.9 912.2 968.0
Period-end total assets 12,841.4 12,538.6 10,018.3
Period-end loans, net of
unearned income 4,548.1 4,655.8 5,506.3
Period-end investment
securities 4,491.8 3,491.3 1,786.1
Period-end noninterest-
bearing demand deposits 6,299.0 6,422.9 4,420.0
Period-end interest-
bearing deposits 4,032.9 3,632.7 3,053.5
Period-end total deposits 10,331.9 10,055.6 7,473.5
Off-Balance Sheet:
Average total client
investment funds $16,101.1 $16,121.5 $21,038.0
Period-end total client
investment funds 15,597.8 16,433.8 18,579.7
Total unfunded credit
commitments 5,338.7 4,794.5 5,630.5
Earnings Ratios:
Return on average assets
(3) 0.66 % 0.84 % 0.01 %
Return on average common
SVBFG stockholders' equity
(4) 2.44 9.94 (0.31)
Asset Quality Ratios:
Allowance for loan losses
as a percentage of total
gross loans 1.58 % 1.85 % 1.93 %
Gross charge-offs as a
percentage of average
total gross loans
(annualized) 2.98 4.03 1.93
Net charge-offs as a
percentage of average
total gross loans
(annualized) 2.84 2.75 1.80
Other Ratios:
Total risk-based capital
ratio 19.94 % 19.23 % 17.58 %
Operating efficiency ratio
(5) 61.29 60.61 50.40
Period-end loans, net of
unearned income, to
deposits 44.02 46.30 73.68
Average loans, net of
unearned income, to
deposits 44.20 51.00 92.12
Non-GAAP Ratios: (1)
Tangible common equity to
tangible assets 8.78 % 6.73 % 7.64 %
Tangible common equity to
risk-weighted assets 15.05 11.43 9.31
Non-GAAP return on average
assets (6) 1.02 0.84 0.01
Non-GAAP return on average
common SVBFG stockholders'
equity (7) 7.05 9.94 (0.31)
Non-GAAP operating
efficiency ratio 61.84 60.79 44.76
Other Statistics:
Common stock repurchases $- $- $-
Period-end SVB prime
lending rate 4.00 % 4.00 % 4.00 %
Average SVB prime lending
rate 4.00 4.00 4.20
Three months ended
------------------
% Change from
-------------
(Dollars in millions, except share December
data and ratios) September 30, 31,
---------------------------------- ------------- ---------
2009 2008
---- ----
Income Statement:
Diluted earnings (loss) per common
share (73.8) % NM %
Net income attributable to SVBFG (14.5) NM
Net income (loss) available to
common stockholders (70.9) NM
Net interest income 5.5 5.9
Provision for loan losses 116.3 (75.6)
Noninterest income 18.7 58.4
Noninterest expense 10.2 42.2
Non-GAAP net income (loss)
available to common stockholders
(1) (15.0) NM
Non-GAAP diluted earnings (loss)
per common share (1) (23.0) NM
Non-GAAP noninterest income, net of
noncontrolling interests (1) 16.8 (0.6)
Non-GAAP noninterest expense, net
of noncontrolling interests (1) 10.0 43.9
Fully Taxable Equivalent:
Net interest income (2) 5.4 % 5.9 %
Net interest margin (3.5) (33.8)
Shares Outstanding:
Common 24.5 % 25.6 %
Basic weighted average 9.9 11.2
Diluted weighted average 10.5 11.3
Balance Sheet:
Average total assets 9.4 % 52.1 %
Average loans, net of unearned
income (3.9) (16.4)
Average interest-earning investment
securities 31.0 142.7
Average noninterest-bearing demand
deposits 11.6 85.9
Average interest-bearing deposits 9.8 58.8
Average total deposits 10.9 74.2
Average short-term borrowings 17.6 (78.7)
Average long-term debt (4.7) (10.2)
Period-end total assets 2.4 28.2
Period-end loans, net of unearned
income (2.3) (17.4)
Period-end investment securities 28.7 151.5
Period-end noninterest-bearing
demand deposits (1.9) 42.5
Period-end interest-bearing deposits 11.0 32.1
Period-end total deposits 2.7 38.2
Off-Balance Sheet:
Average total client investment
funds (0.1) % (23.5) %
Period-end total client investment
funds (5.1) (16.0)
Total unfunded credit commitments 11.4 (5.2)
Earnings Ratios:
Return on average assets (3) (21.4) % NM %
Return on average common SVBFG
stockholders' equity (4) (75.5) NM
Asset Quality Ratios:
Allowance for loan losses as a
percentage of total gross loans (14.6) % (18.1) %
Gross charge-offs as a percentage
of average total gross loans
(annualized) (26.1) 54.4
Net charge-offs as a percentage of
average total gross loans
(annualized) 3.3 57.8
Other Ratios:
Total risk-based capital ratio 3.7 % 13.4 %
Operating efficiency ratio (5) 1.1 21.6
Period-end loans, net of unearned
income, to deposits (4.9) (40.3)
Average loans, net of unearned
income, to deposits (13.3) (52.0)
Non-GAAP Ratios: (1)
Tangible common equity to tangible
assets 30.5 % 14.9 %
Tangible common equity to risk-
weighted assets 31.7 61.7
Non-GAAP return on average assets
(6) 21.4 NM
Non-GAAP return on average common
SVBFG stockholders' equity (7) (29.1) NM
Non-GAAP operating efficiency ratio 1.7 38.2
Other Statistics:
Common stock repurchases - % - %
Period-end SVB prime lending rate - -
Average SVB prime lending rate - (4.8)
Year ended
----------
(Dollars in millions, except share December December
data and ratios) 31, 31, %
---------------------------------- --------- --------- ---
2009 2008 Change
---- ---- ------
Income Statement:
Diluted earnings (loss) per common (69.4)
share $0.66 $2.16 %
Net income attributable to SVBFG 48.0 74.3 (35.4)
Net income (loss) available to
common stockholders 22.7 73.6 (69.2)
Net interest income 382.2 368.6 3.7
Provision for loan losses 90.2 100.7 (10.4)
Noninterest income 97.7 152.4 (35.9)
Noninterest expense 343.9 312.9 9.9
Non-GAAP net income (loss)
available to common stockholders
(1) 38.2 77.4 (50.6)
Non-GAAP diluted earnings (loss)
per common share (1) 1.12 2.28 (50.9)
Non-GAAP noninterest income, net
of noncontrolling interests (1) 122.6 160.9 (23.8)
Non-GAAP noninterest expense, net
of noncontrolling interests (1) 327.3 297.9 9.9
Fully Taxable Equivalent:
Net interest income (2) $384.4 $370.9 3.6 %
Net interest margin 3.73 % 5.72 % (34.8)
Shares Outstanding:
25.6
Common 41,338,569 32,917,007 %
Basic weighted average 33,900,956 32,425,307 4.6
Diluted weighted average 34,182,771 34,014,581 0.5
Balance Sheet:
52.7
Average total assets $11,326.3 $7,418.3 %
Average loans, net of unearned
income 4,699.7 4,633.0 1.4
Average interest-earning
investment securities 2,282.3 1,338.5 70.5
Average noninterest-bearing demand
deposits 5,289.3 2,946.9 79.5
Average interest-bearing deposits 3,504.8 1,949.4 79.8
Average total deposits 8,794.1 4,896.3 79.6
Average short-term borrowings 46.1 304.9 (84.9)
Average long-term debt 923.9 980.7 (5.8)
Period-end total assets 12,841.4 10,018.3 28.2
Period-end loans, net of unearned
income 4,548.1 5,506.3 (17.4)
Period-end investment securities 4,491.8 1,786.1 151.5
Period-end noninterest-bearing
demand deposits 6,299.0 4,420.0 42.5
Period-end interest-bearing
deposits 4,032.9 3,053.5 32.1
Period-end total deposits 10,331.9 7,473.5 38.2
Off-Balance Sheet:
Average total client investment (23.1)
funds $16,593.6 $21,590.0 %
Period-end total client investment
funds 15,597.8 18,579.7 (16.0)
Total unfunded credit commitments 5,338.7 5,630.5 (5.2)
Earnings Ratios:
(58.0)
Return on average assets (3) 0.42 % 1.00 % %
Return on average common SVBFG
stockholders' equity (4) 2.68 10.38 (74.2)
Asset Quality Ratios:
Allowance for loan losses as a (18.1)
percentage of total gross loans 1.58 % 1.93 % %
Gross charge-offs as a percentage
of average total gross loans
(annualized) 3.03 1.02 197.1
Net charge-offs as a percentage of
average total gross loans
(annualized) 2.64 0.87 NM
Other Ratios:
13.4
Total risk-based capital ratio 19.94 % 17.58 % %
Operating efficiency ratio (5) 71.33 59.80 19.3
Period-end loans, net of unearned
income, to deposits 44.02 73.68 (40.3)
Average loans, net of unearned
income, to deposits 53.44 94.62 (43.5)
Non-GAAP Ratios: (1)
Tangible common equity to tangible 14.9
assets 8.78 % 7.64 % %
Tangible common equity to risk-
weighted assets 15.05 9.31 61.7
Non-GAAP return on average assets
(6) 0.56 1.05 (46.7)
Non-GAAP return on average common
SVBFG stockholders' equity (7) 4.51 10.93 (58.7)
Non-GAAP operating efficiency ratio 64.56 56.07 15.1
Other Statistics:
(100.0)
Common stock repurchases $- $45.6 %
Period-end SVB prime lending rate 4.00 % 4.00 % -
Average SVB prime lending rate 4.00 5.13 (22.0)
NM- Not meaningful
(1) A reconciliation of non-GAAP calculations to GAAP is provided below
under the section "Use of Non-GAAP Financial Measures".
(2) Interest income on non-taxable investments is presented on a fully
taxable equivalent basis using the federal statutory income tax
rate of 35.0 percent. The taxable equivalent adjustments were $0.5
million, $0.5 million and $0.6 million for the quarters ended
December 31, 2009, September 30, 2009 and December 31, 2008,
respectively. The taxable equivalent adjustments were $2.2 million
and $2.3 million for the years ended December 31, 2009 and 2008,
respectively.
(3) Ratio represents annualized consolidated net income attributable to
SVB Financial Group ("SVBFG") divided by quarterly average assets
and annual average assets.
(4) Ratio represents annualized consolidated net income (loss) available
to common stockholders divided by quarterly average SVBFG
stockholders' equity (excluding preferred equity) and annual
average SVBFG stockholders' equity (excluding preferred equity).
(5) The operating efficiency ratio is calculated by dividing noninterest
expense by total taxable equivalent net interest income plus
noninterest income.
(6) Ratio represents non-GAAP annualized consolidated net income
attributable to SVBFG (excluding a non-tax deductible charge of
$11.4 million related to TARP repayment in the fourth quarter of
2009, a non-tax deductible goodwill impairment charge of $4.1
million recorded in the first quarter of 2009 and non-tax
deductible noninterest expense of $3.9 million related to the
conversion premium value of certain of our zero-coupon convertible
notes that were converted prior to maturity ("Coco Loss") recorded
in the second quarter of 2008) divided by quarterly average assets
and annual average assets.
(7) Ratio represents non-GAAP annualized consolidated net income (loss)
available to common stockholders (excluding a non-tax deductible
charge of $11.4 million related to TARP repayment in the fourth
quarter of 2009, a non-tax deductible goodwill impairment charge
of $4.1 million recorded in the first quarter of 2009 and non-tax
deductible $3.9 million Coco Loss recorded in the second quarter of
2008) divided by quarterly average SVBFG stockholders' equity
(excluding preferred equity) and annual average SVBFG stockholders'
equity (excluding preferred equity).
Net Interest Income and Margin
Net interest income, on a fully taxable equivalent basis, was $102.7 million for the fourth quarter of 2009, compared to $97.4 million for the third quarter of 2009 and $97.0 million for the fourth quarter of 2008. The following table provides a summary of changes in interest income and interest expense attributable to both volume and rate changes from the third to the fourth quarter of 2009. Changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate:
Q4'09 compared to Q3'09
-----------------------
Increase (decrease) due to
change in
---------------------------
(Dollars in thousands) Volume Rate Total
---------------------- ------ ---- -----
Interest income:
Short-term investment securities $264 $(69) $195
Investment securities 6,919 (170) 6,749
Loans (3,241) 450 (2,791)
------ --- ------
Increase in interest income, net 3,942 211 4,153
----- --- -----
Interest expense:
Deposits 407 (1,115) (708)
Short-term borrowings 3 (4) (1)
Long-term debt (215) (239) (454)
---- ---- ----
Increase (decrease) in interest
expense, net 195 (1,358) (1,163)
--- ------ ------
Increase in net interest income $3,747 $1,569 $5,316
====== ====== ======
The change in net interest income, on a fully taxable equivalent basis, from the third to the fourth quarter of 2009, was primarily attributable to the following:
-- An increase in interest income of $6.7 million from our interest-earning
investment securities portfolio, primarily related to the growth in
average balances of $780.7 million due to new investments. These
investments were primarily purchases of agency-issued collateralized
mortgage obligations, agency-issued mortgage-backed securities and U.S.
agency securities, which were purchased with excess liquidity resulting
from our continued growth in deposits.
-- A decrease in interest expense of $0.7 million from interest-bearing
deposits, primarily due to our decision to lower certain deposit
interest rates in the third and fourth quarters of 2009 to reflect
current market interest rates.
-- A decrease in interest expense of $0.5 million from our long-term debt,
driven by a decrease in interest expense associated with interest rate
swap agreements for our 5.70% senior and 6.05% subordinated notes, due
to lower London Interbank Offered Rates ("LIBOR").
-- A decrease in interest income from our loan portfolio of $2.8 million
driven principally by a decrease in average loan balances of $176.5
million. Our average prime-lending rate was 4.00 percent for both the
third and fourth quarters of 2009.
Net interest margin, on a fully taxable equivalent basis, was 3.57 percent for the fourth quarter of 2009, compared to 3.70 percent for the third quarter of 2009 and 5.39 percent for the fourth quarter of 2008. The decrease from the third to the fourth quarter of 2009 was primarily a result of a decline in loan balances and an increase in deposits. Consistent with our liquidity and investment strategies, we invested excess liquidity resulting from our continued growth in deposits in overnight cash with the Federal Reserve earning 25 basis points throughout the fourth quarter of 2009. The decline was partially offset by an increase in investments in interest-earning investment securities. While our net interest margin declined quarter-over-quarter, net interest income, on a fully taxable equivalent basis, increased by $5.3 million to $102.7 million for the fourth quarter of 2009, compared to $97.4 million for the third quarter of 2009.
Net interest margin, on a fully taxable equivalent basis, was 3.73 percent and 5.72 percent for the years ended December 31, 2009 and 2008, respectively. While our net interest margin declined year-over-year, net interest income, on a fully taxable equivalent basis, increased to $384.4 million for 2009, compared to $370.9 million for 2008.
On an average basis, for the fourth quarter of 2009, 70.4 percent, or $3.1 billion, of our outstanding gross loans were variable-rate loans that adjust at prescribed measurement dates upon a change in our prime-lending rate or other variable indices. This compares to 71.0 percent, or $3.3 billion, for the third quarter of 2009 and 74.2 percent, or $4.0 billion, for the fourth quarter of 2008.
Investment Securities
Our investment securities portfolio consists of both a fixed income investment portfolio, which primarily represents interest-earning investment securities, and a non-marketable securities portfolio, which primarily represents investments managed as part of our funds management business. Total investment securities were $4.5 billion at December 31, 2009, compared to $3.5 billion at September 30, 2009 and $1.8 billion at December 31, 2008. The increase from the third to the fourth quarter of 2009 was primarily in the fixed income investment portfolio due to securities purchased with excess liquidity resulting from our continued growth in deposits.
Average interest-earning investment securities were $3.3 billion for the fourth quarter of 2009, compared to $2.5 billion for the third quarter of 2009 and $1.4 billion for the fourth quarter of 2008. Period-end interest-earning investment securities were $3.9 billion at December 31, 2009, compared to $3.0 billion at September 30, 2009 and $1.3 billion at December 31, 2008.
Non-marketable securities were $553.5 million ($233.0 million net of noncontrolling interests) as of December 31, 2009, compared to $507.9 million ($211.9 million net of noncontrolling interests) as of September 30, 2009 and $467.2 million ($169.1 million net of noncontrolling interests) as of December 31, 2008. The increase from the third to the fourth quarter of 2009 was primarily attributable to additional capital calls for fund investments in the fourth quarter of 2009. Reconciliations of our non-GAAP non-marketable securities, net of noncontrolling interests, are provided below under the section "Use of Non-GAAP Financial Measures."
Loans
Average loans, net of unearned income, were $4.4 billion for the fourth quarter of 2009, compared to $4.5 billion for the third quarter of 2009 and $5.2 billion for the fourth quarter of 2008. The decrease in average loan balances from the third to the fourth quarter of 2009 came primarily from decreases in loans to hardware, software and life science clients, reflecting continued efforts by some clients to deleverage their businesses. Although loan balances have decreased, we continue to make new loans, adding 165 new loan clients in the fourth quarter of 2009, resulting in $380.7 million in new funded loans.
Period-end loans, net of unearned income, were $4.5 billion at December 31, 2009, compared to $4.7 billion at September 30, 2009 and $5.5 billion at December 31, 2008.
Our nonperforming loans totaled $52.7 million at December 31, 2009, compared to $72.2 million at September 30, 2009 and $87.2 million at December 31, 2008. The allowance for loan losses related to nonperforming loans was $8.9 million, $23.4 million and $25.9 million at December 31, 2009, September 30, 2009 and December 31, 2008, respectively. The decrease in nonperforming loans and related allowance for loan losses from the third to the fourth quarter of 2009 came primarily from the charge-offs of impaired loans from our hardware and private client services portfolios.
The following table provides a summary of our loans individually greater than $20 million by industry sector at December 31, 2009, September 30, 2009 and December 31, 2008:
Loans individually greater than $20
million at
-----------------------------------
(Dollars in thousands, except December September December
ratios and client data) 31, 30, 31,
----------------------------- --------- ---------- ---------
2009 2009 2008
---- ---- ----
Technology $356,072 $458,901 $567,867
Private Equity 371,728 272,920 352,065
Life Sciences 45,667 45,717 54,201
Private Client Services 87,179 69,652 105,176
Premium Wineries 76,786 20,307 20,310
All other sectors 20,125 21,000 50,500
------ ------ ------
Total $957,557 $888,497 $1,150,119
======== ======== ==========
Loans individually greater
than $20 million as a
percentage of total gross
loans 20.9 % 18.9 % 20.7 %
Total clients with loans
individually greater than $20
million 32 28 36
Loans individually greater
than $20 million on
nonaccrual status $20,407 $20,022 $66,715
Loans individually greater
than $20 million on
nonaccrual status as a
percentage of total loans
greater than $20 million 2.1 % 2.3 % 5.8 %
Deposits
Average deposits were $9.9 billion for the fourth quarter of 2009, compared to $8.9 billion for the third quarter of 2009 and $5.7 billion for the fourth quarter of 2008. The increase in average deposit balances from the third to the fourth quarter of 2009 came primarily from our noninterest-bearing demand deposits, which grew by $624.9 million to $6.0 billion.
Growth in average balances of noninterest-bearing deposits in the fourth quarter of 2009 was primarily due to the continued low interest rate environment, as well as our clients' desire to maintain short-term liquidity.
Period-end deposits were $10.3 billion at December 31, 2009, compared to $10.1 billion at September 30, 2009 and $7.5 billion at December 31, 2008.
Long-Term Debt
Effective January 1, 2009, we adopted the FASB guidance on debt with conversion options (ASC 470-20, formerly known as FSP APB 14-1), which required a change in the accounting treatment for our convertible debt instruments. The standard requires that the proceeds from the issuance of convertible debt instruments be allocated between a liability and an equity component in a manner that reflects the entity's non-convertible debt borrowing rate when interest expense is recognized in subsequent periods. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. Historical financial statements for 2007 and 2008 are required to be adjusted retrospectively to conform to the standard's new accounting treatment for both our zero-coupon convertible subordinated notes, which matured on June 15, 2008 and our 3.875% convertible senior notes due April 15, 2011.
As a result of adopting these requirements, our net income available to common stockholders for both the third and fourth quarters of 2009 decreased by $0.3 million. Details of certain prior period revised items related to the adoption of this guidance are provided under the section "Changes to Prior Period Balances."
Noninterest Income
Noninterest income was $40.7 million for the fourth quarter of 2009, compared to $34.3 million for the third quarter of 2009 and $25.7 million for the fourth quarter of 2008. The increase in noninterest income from the third to the fourth quarter of 2009 was primarily driven by the following factors:
-- Net gains on investment securities of $6.7 million for the fourth
quarter of 2009, compared to net gains of $3.9 million for the third
quarter of 2009 and net losses of $9.8 million for the fourth quarter of
2008. The net gains of $6.7 million for the fourth quarter of 2009 were
primarily due to unrealized gains of $5.8 million from our managed
co-investment funds as a result of higher valuations, and realized gains
of $3.6 million from distributions to our managed funds of funds. These
gains were partially offset by realized losses of $3.0 million from our
managed co-investment funds due to closures and asset sales at three
portfolio companies. The following table provides a summary of net gains
(losses) on investment securities for the three months ended December
31, 2009 and September 30, 2009:
Three months ended
------------------
December 31, 2009
-----------------
Managed
Co- Managed
Investment Funds Of Debt
(Dollars in thousands) Funds Funds Funds
---------------------- ----------- -------- -----
Unrealized gains $5,819 $184 $467
Realized (losses) gains (3,022) 3,633 376
------ ----- ---
Total gains (losses) on investment
securities, net $2,797 $3,817 $843
====== ====== ====
Less: income attributable to
noncontrolling interests, including
carried interest 1,925 3,856 72
----- ----- ---
Non-GAAP net gains (losses) on
investment securities, net of
noncontrolling interests $872 $(39) $771
==== ==== ====
Three months ended
------------------
September 30,
December 31, 2009 2009
----------------- --------------
(Dollars in thousands) Other Total Total
---------------------- ----- ----- -----
Unrealized gains $205 $6,675 $2,615
Realized (losses) gains (981) 6 1,290
---- --- -----
Total gains (losses) on
investment securities,
net $(776) $6,681 $3,905
===== ====== ======
Less: income
attributable to
noncontrolling
interests, including
carried interest - 5,853 4,880
--- ----- -----
Non-GAAP net gains
(losses) on investment
securities, net of
noncontrolling
interests $(776) $828 $(975)
===== ==== =====
As of December 31, 2009, we held investments, either directly or
through nine of our managed investment funds, in 446 venture
capital and private equity funds, 73 companies and five debt
funds.
--Net gains on derivative instruments of $1.4 million for the
fourth quarter of 2009, compared to net losses of $1.1 million
for the third quarter of 2009 and net gains of $5.0 million for
the fourth quarter of 2008. The following table provides a
summary of our net gains (losses) on derivative instruments:
Three months ended
------------------
December December
(Dollars in thousands) 31, September 30, 31,
---------------------- --------- ------------- ---------
2009 2009 2008
---- ---- ----
Gains (losses) on foreign
exchange forward contracts, net:
Gains on client foreign exchange
forward contracts, net $426 $360 $2,466
Gains (losses) on internal
foreign exchange forward
contracts, net (1) 406 (128) 3,200
--- ---- -----
Total gains (losses) on foreign
exchange forward contracts, net 832 232 5,666
Change in fair value of interest
rate swap - - (2,232)
Gains on covered call options (2) - - -
Net gains (losses) on equity
warrant assets 538 (1,322) 1,592
--- ------ -----
Total gains (losses) on
derivative instruments, net $1,370 $(1,090) $5,026
====== ======= ======
Year ended
----------
December December
(Dollars in thousands) 31, 31,
---------------------- --------- ---------
2009 2008
---- ----
Gains (losses) on foreign exchange forward
contracts, net:
Gains on client foreign exchange forward
contracts, net $1,730 $4,233
Gains (losses) on internal foreign exchange
forward contracts, net (1) (2,258) 5,185
------ -----
Total gains (losses) on foreign exchange forward
contracts, net (528) 9,418
Change in fair value of interest rate swap (170) (1,856)
Gains on covered call options (2) - 402
Net gains (losses) on equity warrant assets (55) 10,541
--- ------
Total gains (losses) on derivative instruments,
net $(753) $18,505
===== =======
(1) Represents the change in fair value of foreign exchange forward
contracts used to economically reduce our foreign exchange
exposure 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.
(2) Represents net gains on covered call options by one of our
consolidated sponsored debt funds.
The increase in net gains (losses) on derivative instruments from the third to the fourth quarter of 2009 was primarily driven by the following factors:
-- Net gains on equity warrant assets of $0.5 million for the fourth
quarter of 2009, compared to net losses of $1.3 million for the third
quarter of 2009. The net gains on equity warrant assets of $0.5 million
for the fourth quarter of 2009 were primarily driven by net gains of
$1.3 million from the exercise of certain warrant positions, partially
offset by $0.9 million from warrant cancellations and expirations.
Included in the net gains of $1.3 million from the exercise of warrants
is a gain of $1.1 million from a single warrant position.
-- Net gains of $0.4 million from foreign exchange forward contracts
hedging our foreign currency denominated loans in the fourth quarter of
2009, compared to net losses of $0.1 million in the third quarter of
2009.
Non-GAAP noninterest income, net of noncontrolling interests, was $34.1 million for the fourth quarter of 2009, compared to $29.2 million for the third quarter of 2009 and $34.3 million for the fourth quarter of 2008. Reconciliations of our non-GAAP noninterest income and non-GAAP net gains (losses) on investment securities, both of which exclude amounts attributable to noncontrolling interests, are provided below under the section "Use of Non-GAAP Financial Measures."
Noninterest Expense
Noninterest expense was $87.9 million for the fourth quarter of 2009, compared to $79.8 million for the third quarter of 2009 and $61.8 million for the fourth quarter of 2008.
The following table provides a summary of certain noninterest expense items:
Three months ended
------------------
December September December
(Dollars in thousands) 31, 30, 31,
---------------------- --------- ---------- ---------
2009 2009 2008
---- ---- ----
Compensation and benefits:
Salaries and wages $26,481 $26,100 $27,116
Incentive Compensation Plan 7,872 6,732 (8,782)
Employee Stock Ownership Plan - - (4,370)
Other employee benefits 14,236 12,983 9,913
------ ------ -----
Total compensation and benefits 48,589 45,815 23,877
FDIC assessments 3,182 2,589 1,644
Impairment of goodwill - - -
Provision for (reduction of) unfunded
credit commitments 1,999 65 1,607
Other (1) 34,137 31,338 34,702
------ ------ ------
Total noninterest expense $87,907 $79,807 $61,830
======= ======= =======
Full-time equivalent employees 1,258 1,259 1,244
===== ===== =====
Year ended
----------
December December
(Dollars in thousands) 31, 31,
---------------------- --------- ---------
2009 2008
---- ----
Compensation and benefits:
Salaries and wages $108,417 $103,157
Incentive Compensation Plan 25,163 24,398
Employee Stock Ownership Plan - 235
Other employee benefits 56,051 49,525
------ ------
Total compensation and benefits 189,631 177,315
FDIC assessments 17,035 3,451
Impairment of goodwill 4,092 -
Provision for (reduction of) unfunded
credit commitments (1,367) 1,252
Other (1) 134,475 130,869
------- -------
Total noninterest expense $343,866 $312,887
======== ========
Full-time equivalent employees 1,258 1,244
===== =====
(1) Other noninterest expense includes professional services, premises
and equipment, net occupancy, business development and travel,
correspondent bank fees, loss from cash settlement of conversion
premium of zero-coupon convertible subordinated notes, and other
noninterest expenses. For further details of noninterest expense
items, please refer to "Interim Consolidated Statements of
Income".
The increase in noninterest expense from the third to the fourth quarter of 2009 was primarily attributable to the following:
-- An increase of $2.8 million in compensation and benefits expense,
primarily resulting from a $1.3 million increase in expenses relating to
our warrant incentive plan and retention plan, mainly due to net
proceeds from warrants, and a $1.1 million increase in incentive
compensation related expenses.
-- A provision for unfunded credit commitments of $2.0 million for the
fourth quarter of 2009, compared to a provision of $0.1 million for the
third quarter of 2009. The provision for unfunded credit commitments of
$2.0 million for the fourth quarter of 2009 was primarily reflective of
an increase in the balance of our total unfunded credit commitments,
which increased to $5.3 billion as of December 31, 2009, compared to
$4.8 billion at September 30, 2009.
Non-GAAP noninterest expense, net of noncontrolling interests, was $84.6 million for the fourth quarter of 2009, compared to $76.9 million for the third quarter of 2009 and $58.8 million for the fourth quarter of 2008. Reconciliations of our non-GAAP noninterest expense, net of noncontrolling interests, are provided below under the section "Use of Non-GAAP Financial Measures."
Income Tax Expense
Effective January 1, 2009, we adopted new accounting standards (ASC 810-10-65, formerly known as SFAS No. 160), which requires us to clearly identify and distinguish between the interests of the Company and the interests of the noncontrolling owners by presenting noncontrolling interests after net income (loss) in our interim consolidated statements of income. As a result, our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net (income) loss attributable to noncontrolling interests.
Our effective tax rate was 39.6 percent for the fourth quarter of 2009, compared to 41.1 percent for the third quarter of 2009. The decrease in the tax rate from the third to the fourth quarter of 2009 was primarily attributable to the higher impact of tax advantaged investments, partially offset by the tax impact of higher non-deductible officers' compensation expense on overall pre-tax income.
Our effective tax rate was 42.3 percent for the year ended December 31, 2009, compared to 41.3 percent for 2008. The increase in the tax rate was primarily attributable to the tax impact of the $4.1 million non-tax deductible goodwill impairment associated with eProsper in the first quarter of 2009 as well as the tax impact of higher non-deductible officers' compensation expense on overall pre-tax income.
Credit Quality
The following table provides a summary of our allowance for loan losses:
Three months ended
------------------
(Dollars in thousands, except December September
ratios) 31, 30, December 31,
----------------------------- 2009 2009 2008
---- ---- ----
Allowance for loan losses,
beginning balance $86,713 $110,473 $60,290
Provision for loan losses 17,291 8,030 70,957
Gross loan charge-offs (33,106) (46,553) (25,509)
Loan recoveries 1,552 14,763 1,658
----- ------ -----
Allowance for loan losses,
ending balance $72,450 $86,713 $107,396
-------------------------- ======= ======= ========
Provision as a percentage of
total gross loans
(annualized) 1.50 % 0.68 % 5.08 %
Gross loan charge-offs as a
percentage of average total
gross loans (annualized) 2.98 4.03 1.93
Net loan charge-offs as a
percentage of average total
gross loans (annualized) 2.84 2.75 1.80
Allowance for loan losses as a
percentage of total gross
loans 1.58 1.85 1.93
Total gross loans at period-
end $4,582,966 $4,692,498 $5,551,636
Average total gross loans 4,402,909 4,583,320 5,266,916
Year ended
----------
(Dollars in thousands, except ratios) December 31, December 31,
------------------------------------- 2009 2008
---- ----
Allowance for loan losses, beginning
balance $107,396 $47,293
Provision for loan losses 90,180 100,713
Gross loan charge-offs (143,570) (47,815)
Loan recoveries 18,444 7,205
------ -----
Allowance for loan losses, ending balance $72,450 $107,396
----------------------------------------- ======= ========
Provision as a percentage of total gross
loans (annualized) 1.97 % 1.81 %
Gross loan charge-offs as a percentage
of average total gross loans
(annualized) 3.03 1.02
Net loan charge-offs as a percentage of
average total gross loans (annualized) 2.64 0.87
Allowance for loan losses as a percentage
of total gross loans 1.58 1.93
Total gross loans at period-end $4,582,966 $5,551,636
Average total gross loans 4,739,210 4,666,025
Our provision for loan losses was $17.3 million for the fourth quarter of 2009, an increase of $9.3 million from the third quarter of 2009. Our provision for loan losses in the third quarter of 2009 was inclusive of an $11.4 million recovery from a single loan.
Gross loan charge-offs of $33.1 million for the fourth quarter of 2009, primarily came from our software and hardware client portfolios. Gross loan charge-offs included $17.0 million of loans that were previously included as nonperforming loans.
Our allowance for loan losses decreased from $107.4 million at December 31, 2008 to $72.5 million at December 31, 2009. The decrease in allowance for loan losses is reflective of continuing improvement in credit quality trends in our loan portfolio since the second quarter of 2009 as indicated by several factors including the following:
-- A 52.7 percent decrease in nonperforming loans from a peak of $111.5
million at June 30, 2009 to $52.7 million at December 31, 2009.
-- A 25 percent decrease in classified loans from the second quarter of
2009 to the fourth quarter of 2009.
-- A majority of the net charge-offs were from nonperforming loans that had
previously been specifically reserved for - for 2009 we identified
specific reserves of $51 million and saw related net charge-offs of $53
million. Other net charge-offs were concentrated in our early-stage
portfolio with a small amount of charge-offs coming from our private
client services portfolio.
Additionally, while loans greater than $10 million represented a significant source of loan losses in 2009, the size of loans added to the classified portfolio during the latter half of 2009 were less than $10 million with the largest addition being $8.8 million and the largest addition to nonperforming loans in the fourth quarter of 2009 was $1 million. Our overall percentage of allowance for loan losses decreased from a high of 2.26 percent at June 30, 2009, to 1.58 percent at December 31, 2009 due almost entirely to the successful resolution of the large nonperforming loans and the fact that new additions to nonperforming loans have been smaller in size and are expected to maintain that trend into 2010.
As such, we believe that our current allowance for loan losses of $72.5 million (1.58 percent of total gross loans) is adequate and indicative of ongoing levels of future net charge-offs. The following table provides a summary of our credit quality information:
Period end balances at
----------------------
(Dollars in thousands, except December December
ratios) 31, September 30, 31,
----------------------------- --------- ------------- ---------
2009 2009 2008
---- ---- ----
Allowance for loan losses as a
percentage of total gross
loans 1.58 % 1.85 % 1.93 %
Allowance for loan losses for
performing loans as a
percentage of total gross
performing loans 1.40 1.37 1.49
Allowance for loan losses for
nonperforming loans as a
percentage of total gross
nonperforming loans 16.83 32.36 29.70
Allowance for loan losses $72,450 $86,713 $107,396
Allowance for loan losses for
total gross performing loans 63,582 63,357 81,485
Allowance for loan losses for
total gross nonperforming
loans 8,868 23,356 25,911
Total gross performing loans 4,530,283 4,620,325 5,464,387
Total gross nonperforming loans 52,683 72,173 87,249
Noncontrolling Interests
Net income attributable to noncontrolling interests was $3.3 million for the fourth quarter of 2009, compared to net income of $2.2 million for the third quarter of 2009 and a net loss of $11.7 million for the fourth quarter of 2008. Net income attributable to noncontrolling interests of $3.3 million for the fourth quarter of 2009 was primarily a result of the following:
-- Gains on investment securities (including carried interest) attributable
to noncontrolling interests of $5.9 million, stemming mainly from gains
of $3.9 million from our managed funds of funds and $1.9 million from
our managed co-investment funds.
-- Noninterest expense of $3.3 million, principally related to management
fees paid by the noncontrolling interests to the general partner
entities managed by SVB Capital.
SVBFG Stockholders' Equity
In the fourth quarter of 2009, we closed a public offering of 7,965,568 shares of common stock at an offering price of $38.50 per share. We received net proceeds of $292.1 million after deducting underwriting discounts and commissions.
On December 23, 2009, the Company redeemed in full 235,000 outstanding shares of preferred stock, for $235 million, plus $1.2 million of accrued and unpaid dividends, from the U.S. Treasury under the CPP. The redemption of the preferred shares resulted in a non-cash charge of $11.4 million in the fourth quarter of 2009.
Net income available to common stockholders was reduced by $14.7 million and $3.6 million for the fourth and third quarters of 2009, respectively, related to dividends and discount amortization in connection with our preferred stock issued under the CPP on December 12, 2008 and the subsequent repayment on December 23, 2009.
Accumulated other comprehensive income decreased by $19.6 million to $5.9 million as of December 31, 2009, compared to $25.5 million as of September 30, 2009, primarily due to decreases in the fair value of our fixed income investment portfolio as a result of increases in long-term interest rates.
Additional paid-in-capital increased by $297.1 million to $389.5 million as of December 31, 2009, compared to $92.4 million as of September 30, 2009, primarily due to the closing of our public offering on November 24, 2009.
Outlook for the Year Ending December 31, 2010
Our outlook for the year ending December 31, 2010 is provided below on a GAAP basis, unless otherwise noted. We have provided our current outlook for the expected full year results of our significant forecasted activities. In general, we do not provide our outlook for selected items where the timing or financial impact are particularly uncertain, or for certain potential unusual or one-time items, nevertheless, we have provided directional guidance on two such items, specifically net gains (losses) on equity warrant assets and net gains (losses) on investment securities, net of noncontrolling interests. 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, 2010, compared to our 2009 results, we currently expect the following outlook:
