SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 08/08/2014 16:19:06)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
  (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         .
Commission File Number: 000-15637  
SVB FINANCIAL GROUP
(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
(Address of principal executive offices)
 
(Zip Code)
(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   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   x     Accelerated filer   ¨     Non-accelerated filer   ¨     Smaller reporting company   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
At July 31, 2014 , 50,732,080 sh ares of the registrant’s common stock ($0.001 par value) were outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interim Consolidated Statements of Stockholders' Equity (unaudited) for the six months ended June 30, 2014 and 2013
 
 
 
 
Interim Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013
 
 
 
 
Notes to Interim Consolidated Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2

Table of Contents

Glossary of Acronyms that may be used in this Report

ASC — Accounting Standards Codification
ASU – Accounting Standards Update
EHOP – Employee Home Ownership Program of the Company
EPS – Earnings Per Share
ESOP – Employee Stock Ownership Plan of the Company
ESPP – 1999 Employee Stock Purchase Plan of the Company
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FHLB – Federal Home Loan Bank
FRB - Federal Reserve Bank
FTE - Full-Time Employee
FTP – Funds Transfer Pricing
GAAP - Accounting principles generally accepted in the United States of America
IASB – International Accounting Standards Board
IPO – Initial Public Offering
IRS – Internal Revenue Service
IT – Information Technology
LIBOR – London Interbank Offered Rate
M&A – Merger and Acquisition
OTTI – Other Than Temporary Impairment
SEC – Securities and Exchange Commission
TDR – Troubled Debt Restructuring
UK – United Kingdom
VIE – Variable Interest Entity

3

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1.        INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands, except par value and share data)
 
June 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,649,831

 
$
1,538,779

Available-for-sale securities, at fair value (cost $11,613,679 and $12,055,524, respectively)
 
11,672,790

 
11,986,821

Held-to-maturity securities, at cost (fair value $5,454,996 and $0, respectively)
 
5,463,920

 

Non-marketable and other securities
 
1,757,235

 
1,595,494

Total investment securities
 
18,893,945

 
13,582,315

Loans, net of unearned income
 
11,348,711

 
10,906,386

Allowance for loan losses
 
(120,728
)
 
(142,886
)
Net loans
 
11,227,983

 
10,763,500

Premises and equipment, net of accumulated depreciation and amortization
 
71,465

 
67,485

Accrued interest receivable and other assets
 
465,792

 
465,110

Total assets
 
$
33,309,016

 
$
26,417,189

Liabilities and total equity
 
 
 
 
Liabilities:
 
 
 
 
Noninterest-bearing demand deposits
 
$
20,235,549

 
$
15,894,360

Interest-bearing deposits
 
8,116,998

 
6,578,619

Total deposits
 
28,352,547

 
22,472,979

Short-term borrowings
 
4,910

 
5,080

Other liabilities
 
559,073

 
404,586

Long-term debt
 
454,462

 
455,216

Total liabilities
 
29,370,992

 
23,337,861

Commitments and contingencies (Note 11 and Note 14)
 

 


SVBFG 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; 50,695,206 shares and 45,800,418 shares outstanding, respectively
 
51

 
46

Additional paid-in capital
 
1,092,582

 
624,256

Retained earnings
 
1,532,830

 
1,390,732

Accumulated other comprehensive income (loss)
 
50,276

 
(48,764
)
Total SVBFG stockholders’ equity
 
2,675,739

 
1,966,270

Noncontrolling interests
 
1,262,285

 
1,113,058

Total equity
 
3,938,024

 
3,079,328

Total liabilities and total equity
 
$
33,309,016

 
$
26,417,189

 
See accompanying notes to interim consolidated financial statements (unaudited).

4

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
147,680

 
$
131,785

 
$
295,852

 
$
255,529

Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
63,424

 
44,657

 
117,844

 
90,409

Non-taxable
 
794

 
807

 
1,590

 
1,606

Federal funds sold, securities purchased under agreements to resell and other short-term investment securities
 
1,943

 
734

 
3,579

 
1,453

Total interest income
 
213,841

 
177,983

 
418,865

 
348,997

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
3,068

 
2,085

 
5,972

 
4,136

Borrowings
 
5,808

 
5,817

 
11,600

 
11,611

Total interest expense
 
8,876

 
7,902

 
17,572

 
15,747

Net interest income
 
204,965

 
170,081

 
401,293

 
333,250

Provision for loan losses
 
1,947

 
18,572

 
2,441

 
24,385

Net interest income after provision for loan losses
 
203,018

 
151,509

 
398,852

 
308,865

Noninterest income:
 
 
 
 
 
 
 
 
(Losses) gains on investment securities, net
 
(57,320
)
 
40,561

 
166,592

 
67,999

Foreign exchange fees
 
17,928

 
13,667

 
35,124

 
27,863

Gains on derivative instruments, net
 
12,775

 
8,087

 
36,942

 
18,379

Credit card fees
 
10,249

 
7,609

 
20,531

 
15,057

Deposit service charges
 
9,611

 
8,907

 
19,218

 
17,700

Lending related fees
 
5,876

 
4,596

 
12,179

 
8,570

Client investment fees
 
3,519

 
3,524

 
6,937

 
6,999

Letters of credit and standby letters of credit fees
 
2,810

 
3,654

 
6,950

 
7,089

Other
 
8,762

 
7,634

 
19,962

 
7,187

Total noninterest income
 
14,210

 
98,239

 
324,435

 
176,843

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and benefits
 
99,820

 
84,742

 
202,327

 
173,446

Professional services
 
21,113

 
16,633

 
42,302

 
33,793

Premises and equipment
 
12,053

 
11,402

 
23,635

 
22,127

Business development and travel
 
9,249

 
7,783

 
19,443

 
16,055

Net occupancy
 
7,680

 
5,795

 
15,000

 
11,562

FDIC assessments
 
4,945

 
2,853

 
9,073

 
6,235

Correspondent bank fees
 
3,274

 
3,049

 
6,477

 
6,104

Provision for unfunded credit commitments
 
2,185

 
1,347

 
3,308

 
3,361

Other
 
13,127

 
9,688

 
24,317

 
19,623

Total noninterest expense
 
173,446

 
143,292

 
345,882

 
292,306

Income before income tax expense
 
43,782

 
106,456

 
377,405

 
193,402

Income tax expense
 
33,582

 
29,968

 
92,499

 
56,369

Net income before noncontrolling interests
 
10,200

 
76,488

 
284,906

 
137,033

Net loss (income) attributable to noncontrolling interests
 
40,597

 
(27,904
)
 
(142,808
)
 
(47,558
)
Net income available to common stockholders
 
$
50,797

 
$
48,584

 
$
142,098

 
$
89,475

Earnings per common share—basic
 
$
1.05

 
$
1.08

 
$
3.02

 
$
1.99

Earnings per common share—diluted
 
1.04

 
1.06

 
2.96

 
1.96

 

See accompanying notes to interim consolidated financial statements (unaudited).

5

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Net income before noncontrolling interests
 
$
10,200

 
$
76,488

 
$
284,906

 
$
137,033

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in cumulative translation Income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation income (loss)
 
157

 
(3,975
)
 
1,621

 
(4,801
)
Related tax (expense) benefit
 
(76
)
 
1,611

 
(654
)
 
1,908

Change in unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses)
 
82,064

 
(172,209
)
 
111,393

 
(194,311
)
Related tax (expense) benefit
 
(33,203
)
 
69,666

 
(45,008
)
 
79,332

Reclassification adjustment for losses (gains) included in net income
 
16,480

 
(775
)
 
16,421

 
(730
)
Related tax (benefit) expense
 
(6,653
)
 
296

 
(6,630
)
 
278

Cumulative-effect adjustment for unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of amortization
 
36,653

 

 
36,653

 

Related tax expense, net of amortization
 
(14,756
)
 

 
(14,756
)
 

Other comprehensive income (loss), net of tax
 
80,666

 
(105,386
)
 
99,040

 
(118,324
)
Comprehensive income (loss)
 
90,866

 
(28,898
)
 
383,946

 
18,709

Comprehensive loss (income) attributable to noncontrolling interests
 
40,597

 
(27,904
)
 
(142,808
)
 
(47,558
)
Comprehensive income (loss) attributable to SVBFG
 
$
131,463

 
$
(56,802
)
 
$
241,138

 
$
(28,849
)
 
See accompanying notes to interim consolidated financial statements (unaudited).

6

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total SVBFG
Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
(Dollars in thousands)
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2012
 
44,627,182

 
$
45

 
$
547,079

 
$
1,174,878

 
$
108,553

 
$
1,830,555

 
$
774,678

 
$
2,605,233

Common stock issued under employee benefit plans, net of restricted stock cancellations
 
758,415

 

 
27,120

 

 

 
27,120

 

 
27,120

Common stock issued under ESOP
 
74,946

 

 
5,166

 

 

 
5,166

 

 
5,166

Income tax benefit from stock options exercised, vesting of restricted stock and other
 

 

 
1,515

 

 

 
1,515

 

 
1,515

Net income
 

 

 

 
89,475

 

 
89,475

 
47,558

 
137,033

Capital calls, net
 

 

 

 

 

 

 
1,903

 
1,903

Net change in unrealized gains and losses on available-for-sale securities, net of tax
 

 

 

 

 
(115,431
)
 
(115,431
)
 

 
(115,431
)
Foreign currency translation adjustments, net of tax
 

 

 

 

 
(2,893
)
 
(2,893
)
 

 
(2,893
)
Share-based compensation expense
 

 

 
12,445

 

 

 
12,445

 

 
12,445

Other, net
 

 

 
3

 
1

 

 
4

 

 
4

Balance at June 30, 2013
 
45,460,543

 
$
45

 
$
593,328

 
$
1,264,354

 
$
(9,771
)
 
$
1,847,956

 
$
824,139

 
$
2,672,095

Balance at December 31, 2013
 
45,800,418

 
$
46

 
$
624,256

 
$
1,390,732

 
$
(48,764
)
 
$
1,966,270

 
$
1,113,058

 
$
3,079,328

Common stock issued under employee benefit plans, net of restricted stock cancellations
 
379,026

 

 
8,127

 

 

 
8,127

 

 
8,127

Common stock issued under ESOP
 
30,762

 

 
3,890

 

 

 
3,890

 

 
3,890

Income tax benefit from stock options exercised, vesting of restricted stock and other
 

 

 
6,164

 

 

 
6,164

 

 
6,164

Net income
 

 

 

 
142,098

 

 
142,098

 
142,808

 
284,906

Capital calls, net
 

 

 

 

 

 

 
6,419

 
6,419

Net change in unrealized gains and losses on available-for-sale securities, net of tax
 

 

 

 

 
76,176

 
76,176

 

 
76,176

Cumulative-effect for unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax
 

 

 

 

 
22,522

 
22,522

 

 
22,522

Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax
 

 

 

 

 
(625
)
 
(625
)
 

 
(625
)
Foreign currency translation adjustments, net of tax
 


 

 

 


 
967

 
967

 

 
967

Common stock issued in public offering
 
4,485,000

 
5

 
434,861

 

 

 
434,866

 

 
434,866

Share-based compensation expense
 

 

 
15,284

 

 

 
15,284

 

 
15,284

Balance at June 30, 2014
 
50,695,206

 
$
51

 
$
1,092,582

 
$
1,532,830

 
$
50,276

 
$
2,675,739

 
$
1,262,285

 
$
3,938,024

   See accompanying notes to interim consolidated financial statements (unaudited).

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income before noncontrolling interests
 
$
284,906

 
$
137,033

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
2,441

 
24,385

Provision for unfunded credit commitments
 
3,308

 
3,361

Changes in fair values of derivatives, net
 
14,566

 
(4,296
)
Gains on investment securities, net
 
(166,592
)
 
(67,999
)
Depreciation and amortization
 
19,036

 
17,281

Amortization of premiums and discounts on investment securities, net
 
14,419

 
14,884

Tax expense from stock exercises
 

 
(1,346
)
Amortization of share-based compensation
 
14,765

 
12,222

Amortization of deferred loan fees
 
(39,071
)
 
(32,066
)
Deferred income tax expense
 
5,123

 
321

Changes in other assets and liabilities:
 
 
 
 
Accrued interest receivable and payable, net
 
(11,326
)
 
(4,312
)
Accounts receivable and payable, net
 
(3,303
)
 
4,140

Income tax payable and receivable, net
 
5,176

 
(11,591
)
Accrued compensation
 
(48,848
)
 
(39,658
)
Foreign exchange spot contracts, net
 
119,577

 
20,933

Other, net
 
(12,910
)
 
(40,920
)
Net cash provided by operating activities
 
201,267

 
32,372

Cash flows from investing activities:
 
 
 
 
Purchases of available-for-sale securities
 
(6,045,269
)
 
(220,031
)
Proceeds from sales of available-for-sale securities
 
23,708

 
8,293

Proceeds from maturities and pay downs of available-for-sale securities
 
1,050,927

 
1,337,107

Purchases of held-to-maturity securities
 
(120,426
)
 

Proceeds from maturities and pay downs of held-to-maturity securities
 
74,236

 

Purchases of non-marketable and other securities (cost and equity method accounting)
 
(13,532
)
 
(10,858
)
Proceeds from sales and distributions of non-marketable and other securities (cost and equity method accounting)
 
38,265

 
20,378

Purchases of non-marketable and other securities (fair value accounting)
 
(126,907
)
 
(65,943
)
Proceeds from sales and distributions of non-marketable and other securities (fair value accounting)
 
146,509

 
52,103

Net increase in loans
 
(440,780
)
 
(671,105
)
Proceeds from recoveries of charged-off loans
 
2,933

 
5,536

Purchases of premises and equipment
 
(18,744
)
 
(13,546
)
Net cash (used for) provided by investing activities
 
(5,429,080
)
 
441,934

Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
5,879,568

 
(486,378
)
Decrease in short-term borrowings
 
(170
)
 
(160,710
)
Capital contributions from noncontrolling interests, net of distributions
 
6,419

 
1,903

Tax benefit from stock exercises
 
6,164

 
2,861

Proceeds from issuance of common stock, ESPP, and ESOP
 
12,018

 
32,286

Net proceeds from public equity offering
 
434,866

 

Net cash provided by (used for) financing activities
 
6,338,865

 
(610,038
)
Net increase (decrease) in cash and cash equivalents
 
1,111,052

 
(135,732
)
Cash and cash equivalents at beginning of period
 
1,538,779

 
1,008,983

Cash and cash equivalents at end of period
 
$
2,649,831

 
$
873,251

Supplemental disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
17,535

 
$
15,655

Income taxes
 
75,057

 
64,423

Noncash items during the period:
 
 
 
 
Changes in unrealized gains and losses on available-for-sale securities, net of tax
 
$
76,176

 
$
(115,431
)
Transfers from available-for-sale securities to held-to-maturity

 
5,418,572

 


See accompanying notes to interim consolidated financial statements (unaudited).

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation
SVB Financial Group is a diversified financial services company, as well as a bank holding company and financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services to support our clients of all sizes and stages throughout their life cycles. In these notes to our consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.
The accompanying unaudited interim consolidated financial statements reflect 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 GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the 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 and six months ended June 30, 2014 are not necessarily indicative of results to be expected for any future periods. These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 (“ 2013 Form 10-K”).
During the second quarter of 2014, we re-designated certain securities from the classification of "available-for-sale" ("AFS") to "held-to-maturity" ("HTM"). Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized gains(losses), net of tax, are retained in other comprehensive income, and the carrying value of the held-to-maturity securities are amortized over the life of the securities in a manner consistent with the amortization of a premium or discount. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Other than the re-designation of securities from AFS to HTM, the accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data—Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2013 Form 10-K.
The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Estimates may change as new information is obtained. Significant items that are subject to such estimates include measurements of fair value, the valuation of non-marketable securities, the valuation of equity warrant assets, the adequacy of the allowance for loan losses and reserve for unfunded credit commitments, and the recognition and measurement of income tax assets and liabilities.
Principles of Consolidation and Presentation
Our consolidated financial statements include the accounts of SVB Financial Group and entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity or a VIE and whether the applicable accounting guidance requires consolidation. All significant intercompany accounts and transactions have been eliminated.
Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant decisions relating to the entity’s operations. For these types of entities, the Company’s determination of whether it has a controlling interest is based on ownership of the majority of the entities’ voting equity interest or through control of management of the entities.
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We determine whether we have a controlling financial interest in a VIE by considering whether our involvement with the VIE is significant and whether we are the primary beneficiary based on the following:
1.
We have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance;

9


2.
The aggregate indirect and direct variable interests held by the Company have the obligation to absorb losses or the right to receive benefits from the entity that could be significant to the VIE; and,
3.
Qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE.
Voting interest entities in which we have a controlling financial interest or by which we control through management rights are consolidated into our financial statements.
We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide. We are variable interest holders in certain partnerships for which we are not the primary beneficiary. We perform on-going reassessments on the status of the entities and whether facts or circumstances have changed in relation to previously evaluated voting interest entities and our involvement in VIEs which could cause our consolidation conclusion to change.
Impact of Adopting ASU No. 2013-08, Amendments to the Scope, Measurement and Disclosure Requirement for Investment Companies
In June 2013, the FASB issued an accounting standards update, which modified the guidance in ASC 946 for determining whether an entity is an investment company, as well as the measurement and disclosure requirements for investment companies. The ASU does not change current accounting where a noninvestment company parent retains the specialized accounting applied by an investment company subsidiary in consolidation. ASU 2013-08 was effective on a prospective basis for the interim and annual reporting periods beginning after December 15, 2013, and was therefore adopted in the first quarter of 2014. This standard did not have any impact on our financial position, results of operations or stockholders' equity.
Impact of Adopting ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists    
In July 2013, the FASB issued a new accounting standard which requires an unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. ASU 2013-11 was effective for, and adopted by the Company, in the first quarter of 2014. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial position, results of operations or stockholders' equity.
Recently Issued Accounting Pronouncements
In January 2014, the FASB issued a new accounting standard (ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects), which permits entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes to make an accounting policy election to use proportional amortization method or apply an equity or cost method. If the proportional amortization method is elected, retrospective presentation is required for prior periods. The guidance is effective on a retrospective basis for the interim and annual reporting periods beginning after December 15, 2014, with early adoption available. We are currently assessing the impact of this guidance, however, we do not expect it to have a material impact on our financial position, results of operations or stockholders' equity.
In May 2014, the FASB issued a new accounting standard (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), which does not apply to financial instruments, and is effective on a retrospective basis beginning on January 1, 2017. We do not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial position, results of operations or stockholders' equity.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
2.
Stockholders’ Equity and EPS
Common Stock
In the second quarter of 2014, to support the continued growth of our balance sheet, we completed a registered public offering of 4,485,000 shares of our common stock at an offering price of $101.00 per share. We received net proceeds of $434.9 million after deducting underwriting discounts and commissions.
EPS
Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include

10


the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options and restricted stock units outstanding under our equity incentive plans and our ESPP. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2014 and 2013 :
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars and shares in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
50,797

 
$
48,584

 
$
142,098

 
$
89,475

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding-basic
 
48,168

 
45,164

 
47,025

 
44,985

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and ESPP
 
569

 
380

 
601

 
384

Restricted stock units
 
308

 
140

 
361

 
168

Denominator for diluted calculation
 
49,045

 
45,684

 
47,987

 
45,537

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.05

 
$
1.08

 
$
3.02

 
$
1.99

Diluted
 
$
1.04

 
$
1.06

 
$
2.96

 
$
1.96

The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation as they were deemed to be antidilutive for the three and six months ended June 30, 2014 and 2013 :
 
 
Three months ended June 30,
 
Six months ended June 30,
(Shares in thousands)
 
2014
 
2013
 
2014
 
2013
Stock options
 
167

 
635

 
90

 
693

Restricted stock units
 
2

 

 
1

 

Total
 
169

 
635

 
91

 
693

Accumulated Other Comprehensive Income
The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2014 and 2013 :
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
Income Statement Location
 
2014
 
2013
 
2014
 
2013
Reclassification adjustment for losses (gains) included in net income
 
(Losses) gains on investment securities, net
 
$
16,480

 
$
(775
)
 
$
16,421

 
$
(730
)
Related tax (benefit) expense
 
Income tax expense
 
(6,653
)
 
296

 
(6,630
)
 
278

Total reclassification adjustment for losses (gains) included in net income, net of tax
 
 
 
$
9,827

 
$
(479
)
 
$
9,791

 
$
(452
)
3.
Share-Based Compensation
For the three and six months ended June 30, 2014 and 2013 , we recorded share-based compensation and related tax benefits as follows:  
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Share-based compensation expense
 
$
7,687

 
$
6,396

 
$
14,765

 
$
12,222

Income tax benefit related to share-based compensation expense
 
(2,515
)
 
(1,955
)
 
(4,675
)
 
(3,558
)

11


Unrecognized Compensation Expense
As of June 30, 2014 , unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
 
  Unrecognized  
Expense
 
Average
Expected
Recognition
  Period - in Years  
Stock options
 
$
18,118

 
2.80
Restricted stock units
 
38,897

 
2.69
Total unrecognized share-based compensation expense
 
$
57,015

 
 
Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the six months ended June 30, 2014 :
 
 
Options
 
Weighted
Average
 Exercise Price 
 
Weighted Average Remaining Contractual Life in Years  
 
Aggregate
  Intrinsic Value  
of In-The-
Money
Options
Outstanding at December 31, 2013
 
1,514,159

 
$
55.27

 
 
 
 
Granted
 
229,476

 
108.30

 
 
 
 
Exercised
 
(160,652
)
 
46.96

 
 
 
 
Forfeited
 
(13,654
)
 
70.36

 
 
 
 
Outstanding at June 30, 2014
 
1,569,329

 
63.74

 
4.38
 
$
83,017,236

Vested and expected to vest at June 30, 2014
 
1,510,886

 
62.94

 
4.32
 
81,128,378

Exercisable at June 30, 2014
 
820,343

 
50.28

 
3.28
 
54,421,775

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $116.62 as of June 30, 2014 . The total intrinsic value of options exercised during the three and six months ended June 30, 2014 was $3.5 million and $10.7 million , respectively, compared to $7.2 million and $11.9 million for the comparable 2013 period.
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the six months ended June 30, 2014 :
 
 
Shares    
 
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2013
 
682,347

 
$
65.93

Granted
 
180,679

 
108.06

Vested
 
(196,253
)
 
64.08

Forfeited
 
(11,549
)
 
71.33

Nonvested at June 30, 2014
 
655,224

 
78.00

4.
Cash and Cash Equivalents
The following table details our cash and cash equivalents at June 30, 2014 and December 31, 2013 :
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Cash and due from banks (1)
 
$
2,589,946

 
$
1,349,688

Securities purchased under agreements to resell (2)
 
53,764

 
172,989

Other short-term investment securities
 
6,121

 
16,102

Total cash and cash equivalents
 
$
2,649,831

 
$
1,538,779

 
 

12


(1)
At June 30, 2014 and December 31, 2013 , $1.7 billion and $715 million , respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $443 million and $300 million , respectively.
(2)
At June 30, 2014 and December 31, 2013 , securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $55 million and $176 million , respectively. None of these securities received as collateral were sold or repledged as of June 30, 2014 or December 31, 2013 .
5.
Investment Securities
Our investment securities portfolio consists of an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest-earning investment securities, and a non-marketable and other securities portfolio, which primarily represents investments managed as part of our funds management business.
Available-for-Sale Securities
The major components of our available-for-sale investment securities portfolio at June 30, 2014 and December 31, 2013 are as follows:
 
 
June 30, 2014
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
4,871,469

 
$
11,526

 
$
(823
)
 
$
4,882,172

U.S. agency debentures
 
3,714,346

 
41,999

 
(10,472
)
 
3,745,873

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
2,128,052

 
28,146

 
(13,369
)
 
2,142,829

Agency-issued collateralized mortgage obligations—variable rate
 
887,862

 
3,073

 
(23
)
 
890,912

Equity securities
 
11,950

 
629

 
(1,575
)
 
11,004

Total available-for-sale securities
 
$
11,613,679

 
$
85,373

 
$
(26,262
)
 
$
11,672,790


 
 
December 31, 2013
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. agency debentures
 
$
4,344,652

 
$
41,365

 
$
(40,785
)
 
$
4,345,232

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
2,472,528

 
17,189

 
(16,141
)
 
2,473,576

Agency-issued collateralized mortgage obligations—fixed rate
 
3,386,670

 
24,510

 
(85,422
)
 
3,325,758

Agency-issued collateralized mortgage obligations—variable rate
 
1,183,333

 
3,363

 
(123
)
 
1,186,573

Agency-issued commercial mortgage-backed securities
 
581,475

 
552

 
(17,423
)
 
564,604

Municipal bonds and notes
 
82,024

 
4,024

 
(21
)
 
86,027

Equity securities
 
4,842

 
692

 
(483
)
 
5,051

Total available-for-sale securities
 
$
12,055,524

 
$
91,695

 
$
(160,398
)
 
$
11,986,821






13


The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months and 12 months or longer as of June 30, 2014 :
 
 
June 30, 2014
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
698,273

 
$
(823
)
 
$

 
$

 
$
698,273

 
$
(823
)
U.S. agency debentures
 
200,773

 
(290
)
 
555,839

 
(10,182
)
 
756,612

 
(10,472
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
135,122

 
(189
)
 
479,641

 
(13,180
)
 
614,763

 
(13,369
)
Agency-issued collateralized mortgage obligations—variable rate
 
75,974

 
(23
)
 

 

 
75,974

 
(23
)
Equity securities
 
7,335

 
(1,575
)
 

 

 
7,335

 
(1,575
)
Total temporarily impaired securities: (1)
 
$
1,117,477

 
$
(2,900
)
 
$
1,035,480

 
$
(23,362
)
 
$
2,152,957

 
$
(26,262
)
 
 
(1)
As of June 30, 2014 , we identified a total of 81 investments that were in unrealized loss positions, of which 33 investments totaling $1.0 billion with unrealized losses of $23.4 million have been in an impaired position for a period of time greater than 12 months. As of June 30, 2014 , we do not intend to sell any impaired fixed income investment securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis. Based on our analysis as of June 30, 2014 , we deem all impairments to be temporary, and therefore changes in value for our temporarily impaired securities as of the same date are included in other comprehensive income. Market valuations and impairment analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis.
The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months and 12 months or longer as of December 31, 2013 :
 
 
December 31, 2013
 
 
Less than 12 months
 
12 months or longer
 
Total
(Dollars in thousands)
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
U.S. agency debentures
 
$
1,821,045

 
$
(40,785
)
 
$

 
$

 
$
1,821,045

 
$
(40,785
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
1,480,870

 
(14,029
)
 
19,830

 
(2,112
)
 
1,500,700

 
(16,141
)
Agency-issued collateralized mortgage obligations—fixed rate
 
2,098,137

 
(79,519
)
 
134,420

 
(5,903
)
 
2,232,557

 
(85,422
)
Agency-issued collateralized mortgage obligations—variable rate
 
109,699

 
(123
)
 

 

 
109,699

 
(123
)
Agency-issued commercial mortgage-backed securities
 
464,171

 
(17,423
)
 

 

 
464,171

 
(17,423
)
Municipal bonds and notes
 
3,404

 
(21
)
 

 

 
3,404

 
(21
)
Equity securities
 
910

 
(483
)
 

 

 
910

 
(483
)
Total temporarily impaired securities 
 
$
5,978,236

 
$
(152,383
)
 
$
154,250

 
$
(8,015
)
 
$
6,132,486

 
$
(160,398
)



14


The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income investment securities classified as available-for-sale as of June 30, 2014 . The weighted average yield is computed using the amortized cost of fixed income investment securities, which are reported at fair value. For U.S. Treasury securities, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower rate environments.
 
 
June 30, 2014
 
 
Total
 
One Year
or Less
 
After One Year to
Five Years
 
After Five Years to
Ten Years
 
After
Ten Years
(Dollars in thousands)
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
U.S. treasury securities
 
$
4,882,172

 
1.11
%
 
$
50,062

 
0.12
%
 
$
4,337,387

 
1.01
%
 
$
494,723

 
2.03
%
 
$

 
%
U.S. agency debentures
 
3,745,873

 
1.62

 
590,227

 
1.47

 
2,231,645

 
1.55

 
924,001

 
1.89

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations - fixed rate
 
2,142,829

 
2.01

 

 

 

 

 
380,924

 
2.69

 
1,761,905

 
1.87

Agency-issued collateralized mortgage obligations - variable rate
 
890,912

 
0.71

 

 

 

 

 

 

 
890,912

 
0.71

Total
 
$
11,661,786

 
1.41

 
$
640,289

 
1.36

 
$
6,569,032

 
1.19

 
$
1,799,648

 
2.10

 
$
2,652,817

 
1.48




15


Held-to-Maturity Securities

During the second quarter of 2014, we re-designated certain securities from the classification of “available-for-sale” to “held-to-maturity”. The securities re-designated primarily consisted of agency-issued mortgage securities and collateralized mortgage obligations ("CMOs") with a total carrying value of $5.4 billion at June 1, 2014. At the time of re-designation the securities had net unrealized gains totaling $22.5 million , net of tax, recorded in other comprehensive income and are being amortized over the life of the securities in a manner consistent with the amortization of a premium or discount. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. Held-to-maturity securities are carried on the balance sheet at amortized cost and the changes in the value of these securities, other than impairment charges, are not reported on the financial statements.

The major components of our held-to-maturity investment securities portfolio at June 30, 2014 are as follows:
 
 
June 30, 2014
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Held-to-maturity securities, at cost:
 
 
 
 
 
 
 
 
U.S. agency debentures (1)
 
$
318,260

 
$
1,244

 
$
(165
)
 
$
319,339

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
3,051,644

 
847

 
(3,991
)
 
3,048,500

Agency-issued collateralized mortgage obligations—fixed rate
 
1,309,382

 
619

 
(8,939
)
 
1,301,062

Agency-issued collateralized mortgage obligations—variable rate
 
148,422

 
19

 
(1
)
 
148,440

Agency-issued commercial mortgage-backed securities
 
550,269

 
2,149

 
(515
)
 
551,903

Municipal bonds and notes
 
85,943

 
16

 
(207
)
 
85,752

Total held-to-maturity securities
 
$
5,463,920

 
$
4,894

 
$
(13,818
)
 
$
5,454,996

 
 
</