Edgar Filing: SVB FINANCIAL GROUP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to .

Commission File Number: 000-15637

SVB FINANCIAL GROUP

(formerly Silicon Valley Bancshares)

(Exact name of registrant as specified in its charter)

Delaware		91-1962278
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3003 Tasman Drive, Santa Clara, California 95054 — 1191		http://www.svb.com
(Address of principal executive offices including zip code)		(Registrant’s URL)

(408) 654-7400

Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

At April 28, 2006, 35,534,315 shares of the registrant’s common stock ($0.001 par value) were outstanding.

		Page
PART I - FINANCIAL INFORMATION		3

ITEM 1.	INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3

	INTERIM CONSOLIDATED BALANCE SHEETS	3

	INTERIM CONSOLIDATED STATEMENTS OF INCOME	4

	INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	5

	INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS	6

	NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 4.	CONTROLS AND PROCEDURES	45

PART II - OTHER INFORMATION		48

ITEM 1.	LEGAL PROCEEDINGS	48

ITEM 1A.	RISK FACTORS	48

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	55

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	55

ITEM 5.	OTHER INFORMATION	55

ITEM 6.	EXHIBITS	55

SIGNATURES		56

INDEX TO EXHIBITS		57

PART I - FINANCIAL INFORMATION

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except par value)	March 31, 2006			December 31, 2005
Assets
Cash and due from banks	$	293,022		$	286,446
Federal funds sold, securities purchased under agreement to resell and other short-term investments	256,973			175,652
Investment securities	1,944,335			2,037,270
Loans, net of unearned income	2,757,980			2,843,353
Allowance for loan losses	(35,982		)	(36,785		)
Loans, net	2,721,998			2,806,568
Premises and equipment, net of accumulated depreciation and amortization	26,922			25,099
Goodwill	35,638			35,638
Accrued interest receivable and other assets	167,380			175,042
Total assets	$	5,446,268		$	5,541,715

Liabilities, Minority Interest, and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing demand	$	2,998,220		$	2,934,278
Negotiable order of withdrawal (NOW)	38,071			39,573
Money market	795,216			961,052
Time	316,999			317,827
Total deposits	4,148,506			4,252,730
Federal funds purchased and securities sold under agreement to repurchase	289,604			279,464
Contingently convertible debt	147,810			147,604
Junior subordinated debentures	49,560			48,228
Other borrowings	2,574			11
Other liabilities	83,731			124,921
Total liabilities	4,721,785			4,852,958

Commitments and contingencies

Minority interest in capital of consolidated affiliates	138,365			119,456

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; 35,446,037 and 35,103,145 shares outstanding at March 31, 2006 and December 31, 2005, respectively	35			35
Additional paid-in capital	7,812			8,439
Retained earnings	609,764			587,713
Unearned compensation	—			(5,792		)
Accumulated other comprehensive loss	(31,493		)	(21,094		)
Total stockholders’ equity	586,118			569,301
Total liabilities, minority interest, and stockholders’ equity	$	5,446,268		$	5,541,715

See accompanying notes to interim unaudited consolidated financial statements.

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	For the three months ended
(Dollars in thousands, except per share amounts)	March 31, 2006			March 31, 2005

Interest income:
Loans	$	66,148		$	47,456
Investment securities:
Taxable	20,394			20,745
Non-taxable	823			1,023
Federal funds sold, securities purchased under agreement to resell and other short term investments	2,040			2,959
Total interest income	89,405			72,183
Interest expense:
Deposits	2,325			2,262
Other borrowings	3,201			795
Total interest expense	5,526			3,057
Net interest income	83,879			69,126
Recovery of loan losses	(2,474		)	(3,814		)
Net interest income after recovery of provision for loan losses	86,353			72,940

Noninterest income:
Client investment fees	9,637			7,396
Corporate finance fees	2,438			4,814
Letter of credit and standby letter of credit income	2,350			2,370
Deposit service charges	2,178			2,504
Gains on derivative instruments, net	2,227			4,026
(Losses) gains on investment securities, net	(61		)	1,202
Other	4,632			3,057
Total noninterest income	23,401			25,369

Noninterest expense:
Compensation and benefits (including share-based compensation expense of $5.9 million and $1.2 million, respectively)	44,521			40,268
Professional services	8,355			5,070
Net occupancy	4,205			4,658
Furniture and equipment	3,704			2,719
Business development and travel	2,754			2,090
Correspondent bank fees	1,130			1,221
Data processing services	1,128			1,013
Telephone	907			889
Reduction of unfunded credit commitments	(496		)	(185		)
Other	4,480			3,072
Total noninterest expense	70,688			60,815

Income before minority interest in income of consolidated affiliates, income tax expense and cumulative effect of change in accounting principle	39,066			37,494
Minority interest in net (income) loss of consolidated affiliates	(244		)	441
Income before income tax expense	38,822			37,935
Income tax expense	16,743			14,999
Net income before cumulative effect of change in accounting principle	22,079			22,936
Cumulative effect of change in accounting principle, net of tax	192			—
Net income	$	22,271		$	22,936

Earnings per common share — basic, before cumulative effect of change in accounting principle	$	0.63		$	0.64
Earnings per common share — diluted, before cumulative effect of change in accounting principle	$	0.57		$	0.59
Earnings per common share — basic	$	0.63		$	0.64
Earnings per common share — diluted	$	0.58		$	0.59

See accompanying notes to interim unaudited consolidated financial statements.

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the three months ended
(Dollars in thousands)	March 31, 2006			March 31, 2005

Net income	$	22,271		$	22,936
Other comprehensive (loss) income, net of tax:
Cumulative translation gains (losses):
Translation gains (losses), net of tax	38			—
Change in unrealized (losses) gains on available-for-sale investment securities:
Unrealized holding (losses) gains, net of tax	(10,536		)	(14,051		)
Reclassification adjustment for gains (losses) included in net income, net of tax	99			(203		)
Other comprehensive (loss) income, net of tax	(10,399		)	(14,254		)
Comprehensive income	$	11,872		$	8,682

See accompanying notes to interim unaudited consolidated financial statements.

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the three months ended
(Dollars in thousands)	March 31, 2006			March 31, 2005

Cash flows from operating activities:
Net income	$	22,271		$	22,936
Adjustments to reconcile net income to net cash provided by operating activities:
Recovery of provision for loan losses	(2,474		)	(3,814		)
Changes in fair values of derivatives, net	(359		)	462
Losses (gains) on investment securities, net	61			(1,202		)
Depreciation and amortization	1,872			2,136
Minority interest	244			(441		)
Tax benefits of share compensation and other	4,145			3,284
Share-based payment	5,938			1,245
Amortization of deferred warrant-related loan fees	1,507			(1,746		)
Deferred income tax expense	4,552			2,806
Changes in other assets and liabilities:
Decrease (increase) in accrued interest receivable	2,505			(1,117		)
Decrease in accounts receivable	1,325			396
(Increase) decrease in income tax receivable, net	(11,760		)	5,568
Decrease in accrued retention, incentive plans, other compensation benefits payable	(32,370		)	(25,169		)
Reduction of provision for unfunded credit commitments	(496		)	(185		)
Other, net	6,939			6,781
Net cash provided by operating activities	3,900			11,940

Cash flows from investing activities:
Purchases of available-for-sale securities	(1,002		)	(172,537		)
Proceeds from sales of available-for-sale securities	644			1,829
Proceeds from maturities and pay-downs of available-for-sale securities	94,117			103,511
Purchases of nonmarketable securities (cost method accounting)	(5,976		)	(2,750		)
Proceeds from sales of nonmarketable securities (cost method accounting)	265			2,297
Proceeds from maturities and pay-downs of nonmarketable securities (cost method accounting)	1,443			1,210
Purchases of nonmarketable securities (investment fair value accounting)	(19,971		)	(11,705		)
Proceeds from sales of nonmarketable securities (investment fair value accounting)	3,580			927
Proceeds from maturities and pay-downs of nonmarketable securities (investment fair value accounting)	3,667			—
Net decrease (increase) in loans	85,256			(34,781		)
Proceeds from recoveries of charged-off loans	3,031			5,959
Purchases of premises and equipment	(3,694		)	(3,583		)
Net cash provided by (used for) investing activities	161,360			(109,623		)

Cash flows from financing activities:
Net decrease in deposits	(104,224		)	(63,239		)
Increase in other borrowings, net	12,703			2,095
Capital contributions from minority interest participants, net of distributions	18,665			14,866
Stock compensation related tax benefits	3,156			—
Proceeds from issuance of common stock	17,616			4,831
Repurchase of common stock	(25,279		)	(33,056		)
Net cash used for financing activities	(77,363		)	(74,503		)
Net increase (decrease) in cash and cash equivalents	87,897			(172,186		)
Cash and cash equivalents at beginning of year	462,098			627,218
Cash and cash equivalents at end of period	$	549,995		$	455,032
Supplemental disclosures:
Cash paid during the period for:
Interest paid	$	5,261		$	3,035
Income taxes paid	$	16,636		$	3,673

See accompanying notes to interim unaudited consolidated financial statements.

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Nature of Business

SVB Financial Group (formerly known as Silicon Valley Bancshares and individually referred to herein as “SVB Financial Group, the Parent”) and its subsidiaries (collectively referred to as the “Company” or “SVB Financial Group”) offer clients financial products and services through five strategic business groups: Commercial Banking, SVB Capital, SVB Alliant, SVB Global and Private Client Services. (see Note 10. Segment Reporting).

SVB Financial Group, the Parent is a bank holding company and a financial holding company whose principal subsidiary is Silicon Valley Bank (the “Bank”), a California-chartered bank, founded in 1983, and headquartered in Santa Clara, California. SVB Financial Group serves more than 11,000 clients across the country, through its 27 regional offices in the United States and three subsidiaries outside the United States. The Bank has 13 offices throughout California and operates regional offices across the country in Arizona, Colorado, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia, and Washington. The three international offices are located in Bangalore, India; Shanghai, China; and London, England.

Through our Commercial Banking business group which includes Silicon Valley Bank and its subsidiaries, we serve clients in all stages of maturity ranging from emerging-growth companies to established, private and public companies in the technology, life science and premium wine industries. We define “emerging-growth” clients as companies in the start-up or early stages of their lifecycle; these companies tend to be privately held and backed by venture capital; they generally have few employees, are primarily engaged in research and development, have brought relatively few products or services to market, and have no or little revenue. By contrast, we define “established” and “corporate technology” clients as companies that tend to be more mature; these companies may be publicly traded, and more established in the markets in which they participate. In 2006, we began using “SVB Silicon Valley Bank” to refer to our Commercial Banking activities.

SVB Capital focuses on the business needs of our venture capital and private equity clients, establishing and maintaining relationships with those firms domestically and internationally. Through this segment, we provide banking services and financial solutions, including traditional deposit and checking accounts, loans, letters of credit, and cash management services. SVB Capital also makes investments in venture capital and other private equity firms and in companies in the niches we serve. The group manages four venture funds and oversees investments, including investments in several sponsored limited partnerships, such as Gold Hill Venture Lending Partners 03, LP, and its parallel funds, which primarily provide secured debt, typically to emerging-growth clients in their earliest stages; and the Partners for Growth funds, which are special situation debt funds that provide secured debt to, primarily, higher-risk, middle market clients in their later stages.

SVB Alliant, our investment banking subsidiary, provides merger and acquisition advisory services (“M&A”), private placement advisory services through our Private Capital Group, strategic alliance services, and specialized financial studies such as valuations and fairness opinions. SVB Alliant is a broker-dealer registered with the U.S. Securities and Exchange Commission (“SEC”) and a member of the National Association of Securities Dealers, Inc. (“NASD”). In 2005, we established SVB Alliant Europe Limited, a subsidiary based in London, England, that will provide investment advisory services to companies in Europe when the subsidiary becomes licensed to do so by the Financial Services Authority in England.

SVB Global (formerly referred to as our “Global Financial Services” group) , which we began referring to as “SVB Global” in 2006, includes our foreign subsidiaries which facilitate our clients’ global expansion into major technology centers around the world. The SVB Global group provides a variety of services, including consulting and business services, referrals, and knowledge sharing, as well as identifying business opportunities for SVB Financial Group.

Our Private Client Services and Other group is principally comprised of our Private Client Services group and other business services units. Private Client Services (formerly Private Banking) provides a wide range of credit services to high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. The Private Client Services group helps our clients meet their cash management needs by providing deposit account products and services, including checking accounts, deposit accounts, money market accounts, and certificates of deposit.

2. Basis of Presentation

The accompanying unaudited interim consolidated financial statements contain all adjustments (of a normal and recurring nature) that are, in the opinion of management, necessary to fairly present our financial position results of operations

and cash flows in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results for any future periods. These interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 Form 10-K”).

The consolidated balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Part II, Item 8. Consolidated Financial Statements and Supplementary Data -Note 2. Summary of Significant Accounting Policies presented in our Annual Report on Form 10-K for the year ended December 31, 2005.

The preparation of interim consolidated financial statements in conformity with GAAP in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Federal Funds Sold, Securities Purchased under Agreement to Resell and Other Short-Term Investments

Federal funds sold, securities purchased under agreement to resell and other short-term investment securities as reported in the interim consolidated balance sheets include interest-bearing deposits in other financial institutions of $26.3 million and $34.7 million at March 31, 2006 and December 31, 2005, respectively.

Share-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”), which requires the measurement and recognition of compensation expense based on estimated fair value for all share-based payment awards including stock options, employee stock purchases under employee stock purchase plans, non-vested share awards (restricted stock) and stock appreciation rights. SFAS No. 123 (R) supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, which provides the Staff’s views regarding implementation issues related to SFAS No. 123 (R).

We adopted the provisions of SFAS No. 123 (R) using the modified prospective transition method beginning January 1, 2006. See Note 4. Share-Based Compensation. In accordance with that transition method, we have not restated prior periods for the effect of compensation expense calculated under SFAS No. 123 (R). We have selected the Black-Scholes option-pricing model as the most appropriate method for determining the estimated fair value of all our awards.

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), which replaces APB No. 20 “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 also changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principles, as well as changes required by an accounting pronouncement in the unusual instance it does not include specific transition provisions. Specifically, SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. SFAS No. 154 was effective for us beginning January 1, 2006. We do not expect the adoption of SFAS No. 154 to have a material impact on our results of operations or financial condition.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (“SFAS 155”). Hybrid financial instruments are financial instruments that contain an embedded derivative within a single instrument. SFAS 155 permits entities an option to elect to record hybrid financial instruments at fair value as one financial instrument. Prior to this amendment, hybrid financial instruments were required to be separated into two instruments, a derivative and host, and generally only the derivative was recorded at fair value. SFAS 155 requires that beneficial interests in securitized assets be evaluated for derivatives, either freestanding or embedded. SFAS 155 is effective for all financial instruments acquired or issued after January 1, 2007. Additionally, SFAS 155 provides a one-time opportunity to apply the fair value election to hybrid financial instruments existing at the date of implementation at fair value as one financial instrument, with any difference between the carrying amount of the existing

hybrid financial instruments and the fair value of the single financial instrument being recorded as a cumulative effect adjustment to beginning retained earnings. We are currently assessing the impact of SFAS 155 on our consolidated financial position and results of operations.

3. Earnings Per Share (EPS)

The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2006 and March 31, 2005:

	For the three months ended March 31,
(Dollars and shares in thousands, except per share amounts)	Net Income		Weighted Average Shares	Per Share Amount

2006:
Basic EPS:
Income available to common stockholders	$	22,271	35,086	$	0.63
Effect of dilutive securities:
Share-based compensation and convertible debt	—		3,361

Diluted EPS:
Income available to common stockholders and assumed conversions	$	22,271	38,447	$	0.58

2005:
Basic EPS:
Income available to common stockholders	$	22,936	35,632	$	0.64
Effect of dilutive securities:
Share-based compensation and convertible debt	—		3,134

Diluted EPS:
Income available to common stockholders and assumed conversions	$	22,936	38,766	$	0.59

In September 2004, the EITF reached final consensus on EITF 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” (EITF 04-8), that contingently convertible securities should be treated as convertible securities and included in the calculation of diluted earnings per common share. The potential dilutive effect of the contingently convertible debt using the treasury stock method was approximately 1.5 million shares and 1.0 million shares for the quarters ended March 31, 2006 and March 31, 2005, respectively. The assumed proceeds under the treasury stock method were calculated by subtracting the aggregate weighted average conversion price for the average market price of the shares related to the contingently convertible debt. We included the dilutive effect of the $150.0 million zero-coupon, convertible subordinated notes due June 15, 2008 in our fully diluted earnings per share (EPS) calculation using the treasury stock method, in accordance with the provisions of EITF No. 90-19, “Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion” (EITF 90-19) and SFAS No. 128, “Earnings Per Share” (SFAS No. 128). However, the exposure draft of SFAS No. 128(R), if adopted in its proposed form, will require us to change our accounting for the calculation of EPS on our contingently convertible debt to the “if converted” method. The “if converted” treatment of the contingently convertible debt would have decreased EPS by $0.04 per diluted common share, or 7.2 percent and by $0.05 per diluted common shares or 8.5 percent for the three months ended March 31, 2006 and 2005, respectively.

4. Share-Based Compensation

Equity Incentive Plans

Our 1997 Equity Incentive Plan (the 1997 Plan), provides for the grant of incentive stock options to employees and nonstatutory stock options, stock appreciation rights, restricted stock purchase awards, stock bonuses, and restricted stock units (collectively Stock Awards) to employees, directors and non employees. The 1997 Plan provides a means by which selected employees, directors and non employees of the Company may be given an opportunity to purchase shares of our common stock

at a price not less than 100% of the fair market value of the common stock on the date the option is granted for incentive and nonstatutory stock or receive cash based on stock appreciation. Options may vest over various periods not in excess of five years from the date of grant and expire five to ten years from the date of grant.

The 1997 Plan provides for the granting of shares of our common stock to directors, employees, and non employees. Shares granted under this plan may be subject to certain vesting requirements and resale restrictions (“restricted stock”). For the quarters ended March 31, 2006 and 2005, we made restricted stock awards for 201 shares of restricted stock at a weighted-average fair value of 49.36 per share and 5,690 shares at a weighted-average fair value of 45.50 per share, respectively. We awarded 13,205 restricted stock units with an aggregate intrinsic value of $700,525 for the three month period ended March 31, 2006. At March 31, 2006, there were 250,862 shares of restricted stock outstanding, the vesting of these shares occurs on various dates through the years ending December 31, 2006, 2007, 2008 and 2009.

Employee Stock Purchase Plan

We maintain an employee stock purchase plan (ESPP) under which participating employees may annually contribute up to 10% of their gross compensation to purchase shares of our common stock at 85% of its fair market value at either the beginning or end of each six-month offering period, whichever price is less. All employees are eligible to participate in the ESPP. Eligible employees become Plan participants on the first day of hire. To be eligible, an employee must, among other requirements, be age 18 or above and complete at least one hour of service as an employee of us or any of our affiliates. Effective January 1, 2006, we began recognizing compensation expense in accordance with SFAS 123R. At March 31, 2006, a total of 986,613 shares of our common stock were reserved for future issuance under the ESPP. There were no shares issued under the ESPP during the three months ended March 31, 2006. The next purchase will be on June 30, 2006 at the end of the current six-month offering period

Pro forma Information for Periods Prior to the Adoption of SFAS No. 123(R)

Prior to the adoption of SFAS No. 123 (R), we provided the disclosures required under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosures.” Previously reported amounts have not been restated.

If compensation cost related to our stock option awards to employees and directors and to the ESPP had been determined under the fair value method prescribed under SFAS No. 123, our net income, basic earnings per share, and diluted earnings per share would have been the pro forma amounts shown below for the three months ended March 31, 2005:

	For the three months ended
	March 31,
(Dollars in thousands, except per share amounts)	2005

Net income, as reported	$	22,936
Add: Stock-based compensation expense, net of tax reported in net income	662
Less: Total stock-based employee compensation expense determined under fair value based method, net of tax	(5,318		)
Net income, pro forma	$	18,280

Earnings per common share – basic:
As reported	$	0.64
Pro forma	0.51
Earnings per diluted share – diluted:
As reported	$	0.59
Pro forma	0.48

Impact of the Adoption of SFAS No. 123 (R)

We adopted SFAS No. 123 (R) and related interpretations using the modified prospective transition method beginning January 1, 2006. Accordingly, during the three-month period ended March 31, 2006, we recorded share-based compensation expense for awards granted prior to but not yet vested as of January 1, 2006 as if the fair value method required for pro forma disclosure under SFAS No. 123 were in effect for expense recognition purposes adjusted for estimated forfeitures. For restricted stock grants, we continued to recognize compensation expense using the accelerated amortization method under FIN 28. For share-based awards granted after January 1, 2006 we have recognized compensation expense based on the estimated grant date fair value method required under SFAS No. 123 (R). For these awards we have recognized compensation expense using a straight-line amortization method. As SFAS No. 123 (R) requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation for the three-month period ended March 31, 2006 has been reduced for estimated forfeitures. Upon adoption, we recorded a cumulative effect of change in accounting principle net of tax to reflect the application of an assumed forfeiture rate to all restricted share awards which continued to vest subsequent to the implementation date. The impact on our results of continuing operations of recording share-based compensation for the three-month period ended March 31, 2006 was as follows:

Share-based Payment Expense

	For the three months ended
	March 31,
(Dollars in thousands, except per share amounts)	2006

Total share-based compensation expense	$	5,938
Income tax benefit	1,275
Total share-based compensation expense, net of tax	$	4,663

Impact on earnings per common share:
Basic	$	0.13
Diluted	0.12

Unrecognized Compensation Expense

	March 31, 2006
(Dollars in thousands)	Unrecognized Expense		Average Expected Recognition Period – in Years

Stock option awards	$	21,025	1.11
Restricted stock awards	5,188		1.06
Employee stock purchase plan	350		0.25
Total unrecognized share-based compensation expense	$	26,563

Valuation Assumptions

As of March 31, 2006 and 2005, the fair value of share-based awards for employee stock option awards, restricted stock and employee stock purchases made under our ESPP was estimated using the Black-Scholes option pricing model. The following weighted average assumptions were used:

	For the three months ended March 31,
	2006			2005
Equity Incentive Plan Awards
Expected term of options in years	5.2			5.1
Expected volatility of the Company’s underlying common stock	30.4		%	39.5		%
Risk-free interest rate	4.48		%	3.89		%
Expected dividend yield	—		%	—		%
Weighted average fair values-stock options	$	18.28		$	18.19
Weighted average fair value-stock awards	$	49.36		$	45.50

ESPP
Expected term of options in years	0.5			0.5
Expected volatility of the Company’s underlying common stock	22.5		%	24.8		%
Risk-free interest rate	4.40		%	2.63		%
Expected dividend yield	—		%	—		%
Weighted average fair value	$	10.23		$	10.01

The expected term was based on the implied term of the stock options using a lattice option-pricing model with early exercise factors based on historic employee exercise behavior. The expected volatilities for the Equity Incentive Plan for the three months ended March 31, 2006 and 2005 were calculated using a blended rate consisting of equal measures of our historic volatility and our expected volatility over a five-year term. The expected volatilities for the ESPP for the three months ended March 31, 2006 and 2005 are equal to the historical volatility for the previous six month periods. The expected risk-free interest rates for all periods were based on the yields of Treasury Securities, as reported by the Federal Reserve Bank of New York, with maturities equal to the expected terms of the employee stock options.

Share-Based Payment Award Activity

The table below provides stock option information related to the 1989 Stock Option Plan and the 1997 Plan for the three-month periods ended March 31, 2006 and 2005:

	March 31, 2006
	Shares		Weighted- Average Exercise Price
Outstanding at beginning of period	6,024,455		$	28.84
Granted	39,550		50.79
Exercised	(792,938	)	23.09
Forfeited	(120,436	)	34.05
Outstanding at March 31	5,150,631		29.81
Exercisable at March 31	3,007,828		$	26.12

Intrinsic Value	Shares	Weighted- Average Exercise Price		Remaining Contractual Life in Years	Aggregate Intrinsic Value of In-The-Money Options ($)
Outstanding at March 31, 2006	5,150,631	$	29.81	4.61	$	119,722,700
Exercisable at March 31, 2006	3,007,828	$	26.12	4.50	$	81,009,938

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value as of March 31, 2006. This value is based on the Company’s closing stock price of $53.05 as of March 31, 2006. The total intrinsic value of options exercised during the three months ended March 31, 2006 and March 31, 2005, was $21.5 million and $4.7 million, respectively. Cash received from stock option exercises was $17.6 million and $4.8 million during the three months ended March 31, 2006 and 2005, respectively. The tax benefit of stock options exercised was $6.8 million and $2.5 million for the three months ended March 31, 2006 and 2005, respectively.

The following table summarizes information regarding stock options outstanding as of March 31, 2006:

			Outstanding Options				Vested Options
Ranges of Exercise Prices			Shares	Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price		Shares	Weighted- Average Exercise Price
$8.25	-	$17.07	702,323	4.10	$	13.62	604,224	$	13.12
17.20	-	23.69	567,635	5.24	22.35		477,298	22.57
23.90	-	25.17	561,269	2.58	25.06		270,960	25.00
25.29	-	26.40	554,086	5.31	26.06		550,212	26.06
26.66	-	31.29	570,841	5.68	30.91		417,508	30.97
31.40	-	35.04	114,518	4.51	33.32		94,819	33.20
35.26	-	35.26	528,512	2.59	35.26		246,380	35.26
35.54	-	36.30	519,991	4.99	35.57		130,505	35.61
36.34	-	42.19	519,104	5.36	39.68		136,872	39.62
43.26	-	51.69	512,352	5.87	46.00		79,050	49.45
$8.25	-	$51.69	5,150,631	4.61	$	29.81	3,007,828	$	26.12

The Company expects to satisfy the exercise of stock options and future grants of restricted stock by issuing new shares registered under the Plan. At March 31, 2006, options for 1,553,149 shares were available for future grant under the 1997 Plan.

The table below provides restricted stock award information related to the 1989 Stock Option Plan and the 1997 Plan for the three-month periods ended March 31, 2006 and 2005:

	March 31, 2006				March 31, 2005
	Shares		Weighted- Average Fair Value		Shares		Weighted- Average Fair Value
Outstanding at beginning of period	253,848		$	42.12	251,113		$	29.56
Granted	201		49.36		5,690		45.50
Vested	(201	)	49.36		(92,382	)	17.39
Forfeited	(2,986	)	44.36		(643	)	17.09
Outstanding at March 31	250,862		$	42.10	163,778		$	37.03

The total fair value of restricted stock grants that vested during the three months ended March 31, 2006 and March 31, 2005 was $9.9 thousand and $1.6 million respectively.

5. Investment Securities

The detailed composition of our investment securities is presented as follows:

(Dollars in thousands)	March 31, 2006		December 31, 2005

Available-for-sale securities, at fair value	$	1,740,288	$	1,850,655
Non-marketable securities (investment company fair value accounting):
Venture capital fund investments(1)	90,205		81,280
Other private equity investments(2)	27,505		26,782
Other investments(3)	28,301		25,300
Non-marketable securities (equity method accounting):
Other investments (4)	13,082		10,985
Low income housing tax credit funds	13,913		11,682
Non-marketable securities (cost method accounting):
Fund investments	27,514		26,924
Other private equity investments	3,527		3,662
Total investment securities	$	1,944,335	$	2,037,270

(1)	Includes $60.3 million and $58.7 million related to SVB Strategic Investors Fund, LP at March 31, 2006 and December 31, 2005, respectively. We have a controlling ownership interest of 12.6% in the fund. Also includes $28.8 million and $22.1 million related to SVB Strategic Investors Fund II, LP, at March 31, 2006 and December 31, 2005, respectively. We have a controlling interest of 8.6% in the fund. Additionally, it includes $1.1 million and $0.5 million related to SVB Strategic Investors Fund III, LP at March 31, 2006 and December 31, 2005, respectively. We have a controlling interest of 11.6% in the fund.

(2)	Includes $27.5 million and $26.8 million related to Silicon Valley BancVentures, LP at March 31, 2006 and December 31, 2005, respectively. We have a controlling ownership interest of 10.7% in the fund.

(3)	Includes $28.3 million and $25.3 million related to Partners for Growth, LP at March 31, 2006 and December 31, 2005, respectively. We have a majority ownership interest of 50.0% in the fund.

(4)	Includes $6.3 million and $5.6 million related to Gold Hill Venture Lending Partners 03, LLC, the general partners of Gold Hill Venture Lending 03, LP, as of March 31, 2006 and December 31, 2005, respectively. We have a majority interest of 90.7% in Gold Hill Venture Lending Partners 03, LLC. Gold Hill Venture Lending Partners 03, LLC has an ownership interest of 5.0% in the fund. It also includes $6.1 million and $5.4 million related to Gold Hill Venture Lending Partners 03, LP, as of March 31, 2006 and December 31, 2005, respectively. We have a direct ownership interest of 4.8% in the fund. Additionally, it includes $0.7 million to Partners for Growth II, LP as of March 31, 2006. We have an ownership interest of 24.2% in the fund.

The following table breaks out our unrealized losses on our available-for-sale investment securities portfolio into categories of less than 12 months or 12 months or longer as of March 31, 2006:

	March 31, 2006
	Less than twelve months					Twelve months or longer					Total
	Fair Value of Investments		Unrealized Losses Investments			Fair Value of Investments (1)		Unrealized Losses(1)			Fair Value of Investments		Unrealized Losses
	(Dollars in thousands)
U.S. Treasury securities	$	9,850	$	(118	)	$	19,894	$	(105	)	$	29,744	$	(223	)
U.S. agencies and corporations:
Collateralized mortgage obligations	394,818		(8,717		)	374,526		(15,155		)	769,344		(23,872		)
Mortgage-backed securities	296,873		(10,028		)	160,976		(8,185		)	457,849		(18,213		)
Discount notes and bonds	48,564		(1,401		)	189,047		(5,991		)	237,611		(7,392		)
Asset-backed securities	—		—			87,654		(1,511		)	87,654		(1,511		)
Commercial mortgage-backed securities	68,395		(2,779		)	—		—			68,395		(2,779		)
Total temporarily impaired securities	$	818,500	$	(23,043	)	$	832,097	$	(30,947	)	$	1,650,597	$	(53,990	)

(1) As of March 31, 2006, we identified investments totaling $832.1 million with unrealized losses of $30.9 million whose fair value has been less than their adjusted cost for a period of time greater than twelve months. We had two U.S. Treasury securities totaling $19.9 million with unrealized losses of $0.1 million which were purchased in October 2003 and February 2005. We had 43 securities classified as collateralized mortgage obligations totaling $374.5 million with unrealized losses of $15.2 million which were originally purchased between July 1998 and February 2005 We had 16 securities classified as mortgage-backed securities totaling $161.0 million with unrealized losses of $8.2 million which were originally purchased between July 2001 and April 2004. We had 15 securities classified as discount notes and bonds totaled $189.0 million with unrealized losses of $6.0 million which were originally purchased between February 2003 and February 2005. We had 15 securities classified as asset-backed securities totaled $87.7 million with unrealized losses of $1.5 million which were originally purchased between October 2002 and February 2005. All investments with unrealized losses for a period of time greater than twelve months are either rated AAA by Moody’s and/or S&P or are issued by the US Treasury government or a government-sponsored enterprise. Because these securities are of superior credit quality, the unrealized losses are due solely to increases in market interest rates and we expect to recover the impairment prior to or at maturity, thus the Company deems these impairments to be temporary. We have the intent and ability to hold the securities until the market value recovers. Market valuations and impairment analysis on assets in the investment portfolio are reviewed and monitored on an ongoing basis.

The following table presents the components of gains and losses on investment securities, for the three months ended March 31, 2006 and March 31, 2005.

	For the three months ended
(Dollars in thousands)	March 31, 2006			March 31, 2005

Gross gains on investment securities:
Available-for-sale securities, at fair value	$	170		$	50
Non-marketable securities (investment company fair value accounting):
Venture capital fund investments	2,567			1,595
Other private equity investments	2			405
Other investments	3			—
Non-marketable securities (equity method accounting)	207			—
Non-marketable securities (cost method accounting):
Venture capital fund investments	76			2,051
Total gross gains on investment securities	3,025			4,101

Gross losses on investment securities:
Available-for-sale securities, at fair value	—			(397		)
Non-marketable securities (investment company fair value accounting):
Venture capital fund investments	(2,196		)	(1,205		)
Non-marketable securities (equity method accounting)	(552		)	(51		)
Non-marketable securities (cost method accounting):
Venture capital fund investments	(293		)	(846		)
Other private equity investments	(45		)	(400		)
Total gross losses on investment securities	(3,086		)	(2,899		)
Gains (losses) on investment securities, net	$	(61	)	$	1,202

6. Loans and Allowance for Loan Losses

The detailed composition of loans, net of unearned income of $19.3 million and $20.6 million for the periods ended March 31, 2006 and December 31, 2005, respectively, is presented in the following table:

(Dollars in thousands)	March 31, 2006		December 31, 2005

Commercial loans	$	2,345,592	$	2,410,893

Vineyard development	102,418		104,881
Commercial real estate	18,723		20,657
Total real estate construction	121,141		125,538

Real estate term — consumer	42,724		39,906
Real estate term — commercial	7,827		10,694
Total real estate term	50,551		50,600

Consumer and other	240,696		256,322
Total loans, net of unearned income	$	2,757,980	$	2,843,353

The activity in the allowance for loan losses for the three months ended March 31, 2006 and March 31, 2005 was as follows:

	Three months ended March 31,
(Dollars in thousands)	2006			2005

Beginning balance	$	36,785		$	37,613
Recovery of provision for loan losses	(2,474		)	(3,814		)
Loans charged off	(1,361		)	(4,060		)
Recoveries	3,032			5,959
Ending balance	$	35,982		$	35,698

The aggregate recorded investment in loans for which impairment has been determined in accordance with SFAS No. 114 totaled $3.9 million and $13.4 million at March 31, 2006 and March 31, 2005, respectively. Allocations of the allowance for loan losses specific to impaired loans totaled $0.3 million at March 31, 2006, and $3.8 million at March 31, 2005. Average impaired loans for the first quarter of 2006 and 2005 totaled $5.6 million and $13.8 million, respectively.

7. Borrowings

The following table represents the outstanding borrowings at March 31, 2006 and December 31, 2005:

(Dollars in thousands)	Maturity	March 31, 2006		December 31, 2005
Other borrowings	Overdraft	$	79	$	11
Revolving line of credit – structured lending fund	Due on Demand	2,495		—
Total other borrowings		$	2,574	$	11

Federal funds purchased and securities sold under agreement to repurchase	Less than One Month	$	289,604	$	279,464
Contingently convertible debt	June 15, 2008	147,810		147,604
Junior subordinated debentures	October 15, 2033	49,560		48,228

Interest expense related to other borrowings was $6,000 and $75,000 for the three months ended March 31, 2006 and 2005, respectively. The weighted average interest rates associated with the our borrowings outstanding for the three months ended March 31, 2006 and the year ended December 31, 2005 was 3.33% and 2.27%, respectively.

Contingently Convertible Debt

The fair value of the convertible debt at March 31, 2006 was $238.4 million, based on quoted market prices. We intend to settle the principal amount of $150.0 million (accreted value) in cash. Based on the terms of the notes, if, at any time before June 15, 2007, the per share stock price on the last trading day of the immediately preceding fiscal quarter was 110% or more of the then current conversion price, the notes would become convertible. The per share closing price of $53.05 of our common stock on March 31, 2006, the last trading day of first quarter of 2006, was 57.8% or more than the then current conversion price of $33.6277. Accordingly, during the first quarter of 2006, our note holders held the right, at their option, to convert their notes, in whole or in part, subject to certain limitations, at the conversion price of $33.6277. We received conversion notice relating to the notes in an aggregate principal amount of $39,000 during the first quarter of 2006 and $103,000 cumulatively.

Concurrent with the issuance of the convertible notes, we entered into a convertible note hedge at a cost of $39.3 million and a warrant transaction providing proceeds of $17.4 million with respect to our common stock, with the objective of decreasing our exposure to potential dilution from conversion of the notes (see Note 8. Derivative Financial Instruments - Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock).

Available Lines of Credit

As of March 31, 2006, we have available $491.0 million in federal funds and lines of credit, $391.0 of which were unused. In addition to the available federal funds lines we have reverse repurchase agreement lines available with multiple securities dealers. Reverse repurchase lines allow us to finance short term borrowings using various fixed income securities as collateral. At March 31, 2006, we borrowed $189.6 million against our reverse repurchase lines.

8. Derivative Financial Instruments

We designate a derivative as held for hedging purposes or non-hedging when we enter into a derivative contract. The designation may change based upon management’s reassessment or changing circumstances. Derivative instruments that we obtain or use include interest rate swaps, forward contracts, options and warrants. A swap agreement is a contract between two

parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date, and rate or price. An option or warrant contract is an agreement that conveys to the purchaser the right, but not the obligation, to buy or sell a quantity of a financial instrument (including another derivative financial instrument), index, currency or commodity at a predetermined rate or price during a period or at a time in the future. Option or warrant agreements can be transacted on organized exchanges or directly between parties. The gross positive fair values of derivative assets are recorded as a component of the other assets line item on the balance sheets. The gross negative fair values of derivative liabilities are recorded as a component of the other liabilities line item on the balance sheets.

The total notional or contractual amounts, credit risk amount and estimated net fair value for derivatives as of March 31, 2006 and December 31, 2005 were as follows:

	At March 31, 2006
	Notional or contractual amount		Credit risk Amount (1)		Estimated net fair value
					Asset (liability)
	(Dollars in thousands)
Derivatives
Interest rate swap	$	50,000	$	—	$	(2,871	)
Foreign exchange spot and forwards	462,212		2,747		(124		)
Foreign currency options	7,284		55		—
Equity warrant assets	105,650		28,343		28,343
Equity conversion option	1,000		451		451

	At December 31, 2005
	(Dollars in thousands)
Fair Value Hedge
Interest rate swap	$	50,000	$	—	$	(1,314	)

Derivatives
Foreign exchange spot and forwards	432,733		5,701		766
Foreign currency options	18,772		101		—
Equity warrant assets	108,574		27,802		27,802
Equity conversion option	1,000		451		451

(1) Credit risk amounts reflect the replacement cost for those contracts in a gain position in the event of nonperformance by all such counterparties.

Fair Value Hedges

Derivative instruments that we hold as part of our interest rate risk management may include interest rate swaps, caps and floors, and forward contracts. On October 30, 2003, we entered into an interest rate swap agreement with a notional amount of $50.0 million. This agreement economically hedges against the risk of changes in fair values associated with the majority of our 7.0% fixed rate, junior subordinated debentures. For information on our junior subordinated debentures, see Note 7. Borrowings.

The terms of this fair value hedge agreement provide for a swap of our 7.0% fixed rate payment for a variable rate based on London Inter-Bank Offer Rate (LIBOR) plus a spread. This derivative agreement provided a benefit of $0.2 million and $0.4 million in the three months ended March 31, 2006 and 2005, respectively. The swap agreement largely mirrors the terms of the junior subordinated debentures and therefore is callable by the counterparty anytime on or after October 30, 2008. Changes in the fair value of the swap are recognized in net income as a gain or loss on derivative instruments. Changes in the fair value of the derivative agreement are primarily dependent on changes in market interest rates in relation to this interest swap agreement. We recorded a negative change in fair value of $2.9 million for the quarter ended March 31, 2006.

Derivatives

We enter into various derivative contracts primarily to provide derivative products or services to customers. These derivatives are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. All of these contracts are carried at fair value with changes in fair value recorded on the line item gains (losses) on derivatives, net as part of our noninterest income, a component of consolidated net income.

We enter into foreign exchange forward contracts and non-deliverable foreign exchange forward contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency at a future date, depending upon the clients’ need. For each of the foreign exchange forward contracts and non-deliverable foreign exchange forward contracts entered into with our clients, we enter into an opposite way foreign exchange forward contract and non-deliverable foreign exchange forward contract with a correspondent bank, which mitigates the risk of fluctuations in foreign currency exchange rates. These contracts are short-term in nature, typically expiring within one year. We have not experienced

nonperformance by counterparties and therefore have not incurred related losses. Further, we anticipate performance by all counterparties to such agreements.

We enter into foreign exchange forward contracts with correspondent banks to economically hedge foreign exchange exposure risk related to certain foreign currency denominated loans. These contracts are short term in nature, typically expiring within one year. We have not experienced nonperformance by counterparties and therefore have not incurred related losses. Further, we anticipate performance by all counterparties to such foreign exchange forward contracts.

We enter into foreign currency option contracts with clients involved in international trade finance activities, either as the purchaser or seller of foreign currency options, depending upon the client’s need. For each of the currency option contracts entered into with our clients, we enter into an opposite way foreign currency option contract with a correspondent bank, which mitigates the risk of fluctuations in foreign currency exchange rates. These contracts typically expire in less than one year. We have not experienced nonperformance by counterparties and therefore have not incurred related losses. Further, we anticipate performance by all counterparties.

We obtain derivative equity warrant assets to purchase an equity position in a client company’s stock in consideration for providing credit facilities and less frequently for providing other services. The purpose of obtaining warrants from client companies is intended to increase future revenue. The change in fair value of equity warrant assets is recorded in noninterest income, a component of consolidated net income. The change in fair value of the warrants resulted in a net gain (loss) of $0.3 million and ($0.8) million for the three months ended March 31, 2006 and 2005, respectively.

Derivative Fair Value Instruments Indexed to and Potentially Settled in a Company’s Own Stock

On May 20, 2003, we issued $150.0 million of zero-coupon, convertible subordinated notes at face value, due June 15, 2008, (See Note 7. Borrowings). These notes include a conversion feature which is indexed to and could potentially be settled in our stock. The conversion option is an embedded derivative, which, pursuant to paragraphs 11(a) and 12(c) of SFAS No. 133, qualifies as an embedded derivative indexed to our stock. If it was a freestanding derivative, it would be classified in stockholders’ equity. Thus, the embedded derivative is not considered a derivative for purposes of SFAS No. 133 and is not recorded on our financial statements at fair value.

Concurrent with the issuance of the $150 million principal amount of contingently convertible notes, (See Note 7 Borrowings), we entered into a convertible note hedge (purchased call option) at a cost of $39.3 million and a warrant transaction providing proceeds of $17.4 million with respect to our common stock, with the objective of decreasing our exposure to potential dilution from conversion of the contingently convertible notes.

At issuance under the terms of the convertible note hedge, upon the occurrence of conversion events, we had the right to purchase up to approximately 4,460,610 shares of our common stock from the counterparty at a price of $33.6277 per common share. The convertible note hedge agreement will expire on June 15, 2008. We have the option to settle any amounts due under the convertible hedge either in cash or net shares of our common stock. The cost of the convertible note hedge is included in stockholders’ equity in accordance with the guidance in EITF 00-19.

At issuance under the warrant agreement, the counterparty could purchase up to approximately 4,460,608 shares of our common stock at $51.34 per share, upon the occurrence of conversion events defined above. The warrant transaction will expire on June 15, 2008. The proceeds of the warrant transaction were included in stockholders’ equity in accordance with the guidance in EITF 00-19. Due to conversion events in 2005 and 2006, the counterparty’s right to purchase our stock under warrant has been decreased by 3,063 shares. Also see Note 3. Earnings Per Share.

9. Common Stock Repurchase

We currently have in place a program authorizing our repurchase of up to $305.0 million of stock. The repurchase program was initially authorized by our Board of Directors and announced on May 7, 2003 for $160.0 million (with no expiration date), and was subsequently increased by $75.0 million (announced on January 27, 2005 and to be repurchased before June 30, 2006) and $70.0 million (announced on January 26, 2006 and to be repurchased before June 30, 2007). Unless earlier terminated by the Board, the program will expire on June 30, 2007. The Company’s trading window closed at the close of business on March 3, 2006. To continue the repurchase program, the Company put into effect a 10b5-1 plan which allowed the Company to automatically repurchase a predetermined number shares per day at the market price on every trading day until the trading window re-opened on May 2, 2006. As of March 31, 2006, we had repurchased 7.0 million shares totaling $229.3 million. During the three months ended March 31, 2006, we repurchased 510,000 shares of our common stock. At March 31, 2006, the approximate dollar value of shares that may still be repurchased under this program was $75.7 million.

10. Segment Reporting

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” we report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing financial performance as our reportable segments. Please refer to the discussion of our segment organization in our 2005 Annual Report on Form 10-K, “Part I. Item 1. Business – Business Overview.”

We are organized into five lines of banking and financial services for management reporting: Commercial Banking, SVB Capital, SVB Alliant, SVB Global (formerly referred to as “Global Financial Services”), and Private Client Services and Other Business Services. These operating segments are strategic units that offer different services to different clients. The segments are managed separately because they appeal to different markets and, accordingly, require different strategies. The results of operating segments are based on our internal profitability reporting process. This process assigns each client relationship in its entirety, to a primary operating segment. The process assigns income and expenses to the operating segments according to the customer’s primary relationship designation. Additionally, working capital and its associated costs are allocated to the operating segments on an economic basis, treating each operating segment as if it were an independent entity. Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, the internal profitability reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of operating segments based on our internal operating structure and is not necessarily comparable with similar information for other financial services companies. Changes in the management structure or the allocation process have resulted, and may in the future result in changes in our allocation methodology as this process is under constant refinement. In the event of such changes, results for prior periods have been, and may be, restated for comparability. Changes in an individual client’s primary relationship designation have resulted, and may in the future result in the inclusion of certain clients in different segments in different periods.

As of March 31, 2006, based on the quantitative threshold for determining reportable segments as required by SFAS No. 131, our reportable segments are Commercial Banking and SVB Capital. SVB Alliant, Private Client Services and SVB Global do not meet the separate reporting thresholds as defined by SFAS No. 131 and as such, have been aggregated in a column labeled Other Business Services for segment reporting purposes. For further information, please see our 2005 Form 10-K under “Part II. Item 8. Consolidated Financial Statements and Supplementary Data - Note 25. Segment Reporting.”

Commercial Banking provides solutions to the needs of our commercial clients in the technology, life science, and premium wine industries, through our lending, cash and deposit management, and global banking and trade products and services.

SVB Capital focuses on the business needs of our venture capital and private equity clients while establishing and maintaining relationships with those firms domestically and internationally. Through this segment, we provide banking services and financial solutions, including traditional deposit and checking accounts, loans, letters of credit, and cash management services. SVB Capital also makes investments in venture capital and other private equity firms and in companies in the niches we serve. The group manages four venture funds and oversees hundreds of investments, including investments in several sponsored limited partnerships, such as Gold Hill Venture Lending Partners 03, LP, and its parallel funds, which primarily provide secured debt, typically to emerging-growth clients in their earliest stages; and the Partners for Growth funds, which are special situation debt funds that provide secured debt to, primarily, higher-risk, middle market clients in their later stages.

The Other Business Services segment is principally comprised of Private Client Services, SVB Alliant, and SVB Global and other business service units that are not part of the Commercial Banking or SVB Capital segments. The Private Client Services group provides a wide range of credit services to high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. Those products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans, airplane loans, and capital call lines of credit. SVB Alliant provides investment banking products and services including, merger and acquisition services, strategic alliances services, and specialized financial studies such as valuations and fairness opinions. SVB Global (formerly referred to as our “Global Financial Services” group) includes our foreign subsidiaries that facilitates our clients’ global expansion into major technology centers around the world SVB Global provides a variety of services, including consulting and business services, referrals, and knowledge sharing, as well as identifying business opportunities for SVB Financial Group.

The other business services units provide various products and services. The Other Business Services segment also reflects those adjustments necessary to reconcile the results of operating segments based on our internal profitability reporting process to the interim consolidated financial statements prepared in conformity with GAAP.

Our primary source of revenue is from net interest income. Accordingly, our segments are reported using net interest income. We also evaluate performance based on noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. We do not allocate income taxes to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore it is not possible to provide period-end asset balances for segment reporting purposes.

Our segment information at and for the three months ended March 31, 2006 and March 31, 2005 are as follows:

	Commercial Banking				SVB Capital			Other Business Services				Total
	(Dollars in thousands)
Three months ended March 31, 2006
Net interest income	$		65,241		$	6,732		$		11,906		$	83,879
Provision for (recovery of) loan losses(1)	(570			)	—			(1,904			)	(2,474			)
Noninterest income (2)	20,215				1,725			1,461				23,401
Noninterest expense (3)	46,334				4,505			19,849				70,688
Minority interest in net (income) loss of consolidated affiliates	—				—			(244			)	(244			)
Income (loss) before income tax expense and cumulative effect of change in accounting principle	$		39,692		$	3,952		$		(4,822	)	$	38,822

Total average loans	$		2,248,183		$	61,228		$		354,037		$	2,663,448
Total average assets (4)	3,730,617				666,079			868,098				5,264,794
Total average deposits	3,239,528				625,062			196,961				4,061,551
Goodwill at March 31, 2006	—				—			35,638				35,638

Three months ended March 31, 2005
Net interest income	$		50,721		$	4,327		$		14,078		$	69,126
Provision for (recovery of) loan losses(1)	(3,413			)	(401		)	(3,814			)
Noninterest income (2)	18,610				3,118			3,641				25,369
Noninterest expense (3)	42,207				4,696			13,912				60,815
Minority interest in net (income) losses of consolidated affiliates	—				—			441				441
Income (loss) before income tax expense	$		30,537		$	2,749		$	4,649			$	37,935

Total average loans	$		1,822,657		$	82,245		$	268,013			$	2,172,915
Total average assets	3,877,685				640,785			613,411				5,131,881
Total average deposits	3,439,873				601,928			155,343				4,197,144
Goodwill at March 31, 2005	—				—			35,638				35,638


Year Ended December 31, 2005
Total average loans	$		2,032,672		$	61,749		$		273,941		$	2,368,362
Total average assets (4)	3,807,150				680,626			702,001				5,189,777
Total average deposits	3,356,655				637,108			172,713				4,166,476
Goodwill at December 31, 2005	—				—			35,638				35,638

Year Ended December 31, 2004
Total average loans	$		1,630,961		$	76,522		$		244,172		$	1,951,655
Total average assets (4)	3,629,524				550,566			592,819				4,772,909
Total average deposits	3,231,625				518,066			155,717				3,905,408
Goodwill at December 31, 2004	—				—			35,638				35,638

Year Ended December 31, 2003
Total average loans	$	1,506,055			$	64,560		$		227,375		$		1,797,990
Total average assets (4)	3,021,016				517,940			517,512				4,056,468
Total average deposits	2,607,706				483,838			186,022				3,277,566
Goodwill at December 31, 2003	—				—			37,548				37,548

(1) For segment reporting purposes, we report net loan charge-offs as the provision for loan losses. Thus the Other Business Services segment includes $(0.8) million and $(1.9) million for the three-month periods ended March 31, 2006 and 2005, respectively, which represents the difference between net charge-offs and the provision for loan losses.

(2) Commercial Banking segment includes direct depreciation and amortization of $0.8 million and $0.4 million for the three months ended March 31, 2006 and 2005, respectively. Due to the complexity of our cost allocation model, it is not feasible to determine the exact amount of the remaining depreciation and amortization expense allocated to the various business segments.

(3) The internal reporting model used by our management to assess segment performance does not calculate tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates.

(4) Total Average Assets have been corrected to reflect the current composition of particular segments and prior periods presented have been corrected accordingly. Specifically, certain assets previously reported in the other Business Services segment have been reclassified into the commercial Banking and SVB Capital segments.

11. Obligations Under Guarantees

We provide guarantees related to financial and performance standby letters of credit issued to our clients to enhance their credit standings and enable them to complete a wide variety of business transactions. Financial standby letters of credit are conditional commitments issued by us to guarantee the payment by a client to a third party (beneficiary). Financial standby letters of credit are primarily used to support many types of domestic and international payments. Performance standby letters of credit are issued to guarantee the performance of a client to a third party when certain specified future events have occurred. Performance standby letters of credit are primarily used to support performance instruments such as bid bonds, performance bonds, lease obligations, repayment of loans, and past due notices. These standby letters of credit have fixed expiration dates and generally require a fee paid by a client at the time we issue the commitment. Fees generated from these standby letters of credit are recognized in noninterest income over the commitment period using the straight-line method.

The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to clients, and accordingly, we use a credit evaluation process and collateral requirements similar to those for loan commitments. Our standby letters of credit are often cash-secured by our clients. The actual liquidity needs or the credit

risk that we have experienced historically have been lower than the contractual amount of letters of credit issued because a significant portion of these conditional commitments expire without being drawn upon.

The table below summarizes our standby letter of credits at March 31, 2006. The maximum potential amount of future payments represents the amount that could be remitted under the standby letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.

(Dollars in thousands as of March 31, 2006)	Expires within one year or less		Expires after one year		Total amount outstanding		Maximum amount of future payments
Financial standby	$	565,491	$	64,147	$	629,638	$	629,638
Commercial standby	4,782		—		4,782		4,782
Performance standby	10,970		9,126		20,096		20,096
Total	$	581,243	$	73,273	$	654,516	$	654,516

At March 31, 2006, the carrying amount of the liabilities related to financial and performance standby letters of credit was approximately $3.9 million. At March 31, 2006, cash and investment securities collateral available to us to reimburse losses under financial and performance standby letters of credits was $271.6 million.

Additionally, the Bank, as a financial provider, routinely guarantees credit cards for some of our customers which have been provided by an unaffiliated financial institution. We have recourse against the customer for any amount it is required to pay to a third party in the event of default under these arrangements. These guarantees are subject to the same credit policies, underwriting standards and approval process as loans made by us. Certain of these amounts are secured by certificates of deposit and other assets which we have rights to in the event of nonperformance by the customers. The total amount of this guarantee was $59.2 million at March 31, 2006. It is not considered probable that material losses would be incurred by us as a result of these arrangements.

12. Related Party Transactions

The Bank increased its commitment under a revolving line of credit facility to an aggregate amount of $30.0 million to Gold Hill Venture Lending 03, LP, a venture debt fund (“Gold Hill”), and its affiliated funds. We have a 9.3% effective ownership interest in Gold Hill, as well as a 90.7% majority interest in its general partner, Gold Hill Venture Lending Partners 03, LLC. The line of credit expires in August 2006 and bears an interest rate of prime plus one percent. The highest aggregate balance outstanding during the quarter ended March 31, 2006 was approximately $30.0 million.

13. Legal Matters

On May 24, 2001, Gateway Communications, Inc. (Gateway) filed a lawsuit in the United States Bankruptcy Court for the Southern District of Ohio (Western Division) naming the Bank as a defendant. Gateway (the debtor in the bankruptcy case) alleges that the Bank’s actions in connection with a loan resulted in Gateway’s bankruptcy, and seeks $20,000,000 in compensatory damages, punitive damages, interest and attorneys’ fees. On June 24, 2003, the Court dismissed four of the five counts in the complaint, including the claim for punitive damages, leaving one breach of contract claim. We believe that the sole remaining claim has no merit and intend to defend the lawsuit vigorously. Thus, we have not accrued any amount related to potential damages from this case as they are not considered probable and reasonably estimable. The action is scheduled for trial in July 2006.

We are unable to predict at this time the final outcome of the above matter and the ultimate effect, if any, on our liquidity, consolidated financial position or results of operations.

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. Based upon information available to us, our review of such claims to date and consultation with our outside legal counsel, management believes the liability relating to these actions, if any, will not have a material adverse effect on our liquidity, consolidated financial position, or results of operations. Where appropriate, as we determine, reserves have been established in accordance with SFAS No. 5, “Accounting for Contingencies.” The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material effect.

14. Income Taxes

Income Tax Rate Comparison

Tax rate for the quarter ended March 31, 2005	39.5	%
Add: Share-based compensation	3.6
Tax rate for the quarter ended March 31, 2006	43.1	%

Our effective tax rate was 43.1% for the first quarter ended March 31, 2006, compared with 39.5% for the first quarter ended March 31, 2005. The higher tax rate was primarily attributable to the 3.6% tax impact of certain categories of share-based payment expense recognized under SFAS 123(R) that are not deductible for tax purposes in the period the related expense was recognized.

15. Subsequent Event

From April 1, 2006 through May 3, 2006, the Company repurchased 192,000 shares of its common stock totaling $10.0 million under the stock repurchase program leaving $65.7 million that still may be repurchased under the program. To continue the repurchase program, the Company put into effect a 10b5-1 plan which allowed the Company to automatically repurchase a predetermined number shares per day at the market price on every trading day until the trading window re-opened on May 2, 2006.

In April 2006, the Bank issued a letter of credit in the amount of $200 thousand on behalf of SurgRx, Inc. The initial maturity date of the letter of credit is April 4, 2007, but the letter of credit will be automatically renewed unless affirmatively terminated by SurgRx until its final expiry on May 10, 2010. The letter of credit is secured by a certificate of deposit pledged by SurgRx, Inc. which certificate of deposit is held by the Bank. David Clapper, one of our directors, is the Chief Executive Officer of SurgRx, Inc.

In April 2006, two of the managing directors of the SVB Alliant business unit resigned from the Company. The Company is actively conducting a search for their successors.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis below contain forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Item 3. Quantitative and Qualitative Disclosures about Market Risk—Factors That May Affect Future Results.”

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and notes as presented in Part I - Item 1 of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”). Certain reclassifications have been made to prior years’ results to conform to the current period’s presentations. Such reclassifications had no effect on our results of operations or stockholders’ equity.

Overview of Company Operations

SVB Financial Group is a bank holding company and a financial holding company that was incorporated in the state of Delaware in March 1999. In May 31, 2005, we changed our name from Silicon Valley Bancshares to SVB Financial Group. Our principal subsidiary, Silicon Valley Bank, is a California state-chartered bank and a member of the Federal Reserve System. Silicon Valley Bank’s deposits are insured by the Federal Deposit Insurance Corporation. SVB Financial Group’s corporate headquarters is located at 3003 Tasman Drive, Santa Clara, California 95054, and our telephone number is 408.654.7400. When we refer to “we” or use similar words, we intend to include SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank. When we refer to “SVB Financial Group, the Parent” or “the parent company” we are referring only to the parent company, SVB Financial Group.

For over 20 years, we have been dedicated to helping entrepreneurs succeed, specifically focusing on industries where we have deep knowledge and relationships. Our focus is on the technology, life science, private equity, and premium wine industries. We continue to diversify our products and services to support our clients throughout their life cycles, regardless of their age or size. We offer a range of financial services that generate three distinct sources of income interest rate differentials, fee-based services and investments in private equity and venture capital funds.

In part, our income is generated from interest rate differentials. The difference between the interest rates received on interest-earning assets, such as loans extended to clients and securities held in our investment portfolio, and the interest rates paid by us on interest-bearing liabilities, such as deposits and other borrowings, accounts for the major portion of our earnings. Our deposits are largely obtained from commercial clients within our technology, life science, private equity, and premium wine industry sectors, and, to a lesser extent, from individuals served by our Private Client Services group. We do not obtain deposits from conventional retail sources and have no brokered deposits. As part of negotiated credit facilities and certain other services, we frequently obtain rights to acquire stock in the form of warrants in certain client companies.

Fee-based services also generate income for our business. We market our full range of financial services to all of our commercial and private equity firm clients. In addition to commercial banking and private client services, we offer fee-based merger and acquisition services, private placements, and investment and advisory services. Our ability to integrate and cross-sell our diverse financial services to our clients is a strength of our business model.

In addition, we seek to obtain returns through investments in private equity and venture capital fund investments. We manage four limited partnerships: a venture capital fund that invests directly in privately held companies and three funds that invest in other venture capital funds.

Business Overview

SVB Financial Group is organized into groups, which manage the diverse financial services we offer:

Commercial Banking

We provide solutions to the needs of our commercial clients in the technology, life science, private equity and premium wine industries through our lending, deposit account and cash management, and global banking and trade products and services.

Through our lending products and services, we extend loans and other credit facilities to our commercial clients, most often secured by the assets of our clients. Lending products and services include traditional term loans, equipment loans, revolving lines of credit, accounts-receivable based lines of credit, asset-based loans, real estate loans, vineyard development loans, and financing of affordable housing projects. We often obtain warrants to purchase an equity position in a client company’s stock in consideration for making loans, or for providing other services.

Our deposit account and cash management products and services provide commercial clients with short and long-term cash management solutions. Deposit account products and services include traditional deposit and checking accounts, certificates of deposit, and money market accounts. In connection with deposit accounts, we also provide lockbox and merchant services that facilitate quicker depositing of checks and other payments to clients’ accounts. Cash management products and services include wire transfer and Automated Clearing House (ACH) payment services to enable clients to transfer funds quickly from their deposit accounts. Additionally, the cash management services unit provides collection services, disbursement services, electronic funds transfers, and online banking through SVBeConnect.

Our global banking and trade products and services facilitate our clients’ global finance and business needs. These products and services include foreign exchange services that allow commercial clients to manage their foreign currency risks through the purchase and sale of currencies on the global inter-bank market. To facilitate our clients’ international trade, we offer a variety of loans and credit facilities guaranteed by the Export-Import Bank of the United States. We also offer letters of credit, including export, import, and standby letters of credit, to enable clients to ship and receive goods globally.

We offer a variety of investment services and solutions to our Commercial Banking clients and others which enable companies to better manage their assets. SVB Silicon Valley Bank’s Repurchase Agreement Program (Repo) is designed for our Venture Capital and Private Equity clients. Through our broker-dealer subsidiary, SVB Securities, we offer money market mutual funds and fixed income securities. SVB Securities is registered with the SEC and a member of the National Association of Securities Dealers, Inc. (NASD). We also offer investment advisory services through SVB Asset Management, our registered investment advisory subsidiary. SVB Asset Management specializes in outsourced treasury management, customized cash portfolio management and reporting and monitoring for corporations.

SVB Capital

SVB Capital makes investments in venture capital and other private equity firms and in companies in the niches we serve. The segment also manages four venture funds that are consolidated into our financial statements; SVB Strategic Investors Fund, LP, SVB Strategic Investors Fund II, LP, and SVB Strategic Investors Fund III, LP, which are funds of funds that invest in other venture funds, and Silicon Valley BancVentures, LP, a direct equity venture fund that invests in privately-held technology and life-science companies. This segment also includes 2004 investments in Gold Hill Venture lending Partners 03, LP and its parallel funds (collectively known as Gold Hill Venture Lending Partners 03, LP), which provide secured debt, primarily to emerging growth clients in their earliest stages, and the Partners for Growth funds that provide secured debt to, primarily, higher risk, middle market clients in their later stages. We define “emerging-growth” clients as companies in the start-up or early stages of their lifecycle. These companies tend to be privately-held and backed by venture capital; they generally have few employees, have brought relatively few products or services to market, and have no or little revenue. By contrast, “middle market” clients tend to be more mature; they may be publicly-traded and more established in the markets in which they participate, although not necessarily the leading players in their industries.

Other Business Services

The Other Business Services segment is principally comprised of SVB Alliant, SVB Global and Private Client Services, and other business service units that are not part of the Commercial Banking or SVB Capital segments. SVB Alliant, SVB Global and Private Client Services do not meet the separate reporting thresholds as defined by SFAS No. 131 and as such,

have been aggregated as Other Business Services for segment reporting purposes.

SVB Alliant

Through SVB Alliant, our investment banking subsidiary, we provide merger and acquisition advisory services, strategic alliance services, and specialized financial studies such as valuations and fairness opinions. In October 2003, we enhanced our investment banking product set by launching a Private Capital Group that provides advisory services for the private placement of securities. SVB Alliant is a broker-dealer registered with the U.S. Securities and Exchange Commission (“SEC”) and a member of the National Association of Securities Dealers, Inc. (“NASD”).

SVB Global

SVB Global (formerly referred to as our “Global Financial Services” group) includes our foreign subsidiaries that facilitates our clients’ global expansion into major technology centers around the world SVB Global provides a variety of services, including consulting and business services, referrals, and knowledge sharing, as well as identifying business opportunities for SVB Financial Group.

Private Client Services and Other

Our Private Client Services and Other group is principally comprised of our Private Client Services group and other business services units. Private Client Services provides a wide range of credit services to high-net-worth individuals using both long-term secured and short-term unsecured lines of credit. Those products and services include home equity lines of credit, secured lines of credit, restricted stock purchase loans, airplane loans, and capital call lines of credit. We also help our clients meet their cash management needs by providing deposit account products and services, including checking accounts, deposit accounts, money market accounts, and certificates of deposit. As a result of the Private Client Services group’s recent decision to focus on its core banking and credit products, we sold Woodside Asset Management during the quarter ended March 31, 2006. The impact of the sale had an immaterial impact on our financial condition and results of operations.

Critical Accounting Policies and Estimates

The accompanying management’s discussion and analysis of results of operations and financial condition are based upon our interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

A summary of significant accounting policies and a description of accounting policies that are considered critical are described in “Part II. Item 8. Consolidated Financial Statements and Supplementary Data—Note 2. Significant Accounting Policies” and in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in our 2005 Form 10-K.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”. SFAS No. 155 permits fair value measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. We are currently assessing the impact of SFAS No.155 on our consolidated financial position and results of operations.

Results of Operations

Earnings Summary

We reported net income of $22.3 million for the three months ended March 31, 2006, $0.7 million, or 2.9% lower than net income of $22.9 million for the three months ended March 31, 2005. Earnings per diluted common share were $0.58 for the three months ended March 31, 2006, as compared to $0.59 for the comparable prior year period.

Dilutive Effect of Contingently Convertible Debt on our Diluted Earnings per Share Calculation

We included the dilutive effect of the $150.0 million zero-coupon, convertible subordinated notes due June 15, 2008 in our diluted earnings per share (EPS) calculation using the treasury stock method, in accordance with the provisions of Emerging Issue Task Force (EITF) issue No. 90-19, “Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion” and Statement of Financial Accounting Standard (SFAS) No. 128, “Earnings Per Share”. The exposure draft of SFAS No. 128(R), if adopted in its proposed form, will require us to change our accounting for the calculation of EPS on our contingently convertible debt to the “if converted method.” The “if converted treatment” of the contingently convertible debt would have decreased EPS by $0.04 per diluted common share, or 7.2% for the three months ended March 31, 2006, and by $0.05 per diluted common share, or 8.5% for the three months ended March 31, 2005, respectively.

Three Months ended March 31, 2006 Compared to Three Months ended March 31, 2005

Consolidated net income decreased by $0.7 million for the three months ended March 31, 2006 versus the three months ended March 31, 2005.

• Net interest income increased by $14.8 million due to an increase in average loans, and due to an improvement in yields generated from these loans.

• The increase in noninterest expense of $9.9 million was largely attributable to an increase of $4.3 million in compensation expense, an increase of $3.3 million in professional services fees and an aggregate increase of $1.7 million in furniture and equipment and business development expenses.

The major components and changes of net income are summarized in the following table:

	For the three months ended March 31,						%
(Dollars in thousands)	2006			2005			Change

Net interest income	$	83,879		$	69,126		21.3	%
Recovery of provision for loan losses	(2,474		)	(3,814		)	(35.1	)
Noninterest income	23,401			25,369			(7.8	)
Noninterest expense	70,688			60,815			16.2
Minority interest in net income of consolidated affiliates	(244		)	441			(155.3	)
Income before income tax expense	38,822			37,935			2.3
Income tax expense	16,743			14,999			11.6
Cumulative effect of change in accounting principle, net of tax	192			—			—
Net income	$	22,271		$	22,936		(2.9	)
Return on average assets(1)	1.72		%	1.81		%
Return on average stockholders’ equity(1)	15.77		%	17.17		%
Average stockholders’ equity to average assets	10.88		%	10.55		%

(1) Quarterly ratios represent annualized net income divided by quarterly average assets/equity.

Net Interest Income and Margin

Net interest income is defined as the difference between interest earned primarily on loans, investment securities, federal funds sold, securities purchased under agreement to resell and other short-term investment securities, and interest paid on funding sources, primarily deposits. Net interest income is our principal source of revenue. Net interest margin is defined as the amount of annualized net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average yield earned on interest-earning assets is the amount of annualized taxable-equivalent interest

income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is defined as annualized interest expense as a percentage of average funding sources.

The following tables set forth average assets, liabilities, minority interest, stockholders’ equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three months ended March 31, 2006 and 2005, respectively. (For a description of certain off-balance sheet arrangements, see also “Note 11. Obligations Under Guarantees” to the interim financial statements contained in this report.)

AVERAGE BALANCES, RATES AND YIELDS

	For the three months ended March 31,
	2006						2005
(Dollars in thousands)	Average Balance		Interest Income/ Expense		Yield/ Rate		Average Balance		Interest Income/ Expense		Yield/ Rate

Interest-earning assets:
Federal funds sold, securities purchased under agreement to resell and other short-term investments(1)	$	196,894	$	2,040	4.20	%	$	474,359	$	2,959	2.53	%
Investment securities:
Taxable	1,781,098		20,395		4.64		1,878,723		20,745		4.48

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1 - INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Share-Based Compensation

Recent Accounting Pronouncements

4. Share-Based Compensation

Contingently Convertible Debt

Available Lines of Credit

Critical Accounting Policies and Estimates

Recent Accounting Pronouncements

Results of Operations

Earnings Summary

Net Interest Income and Margin