SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 11/07/2014 16:36:55)
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 September 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 October 31, 2014 , 50,849,278 shares of the registrant’s common stock ($0.001 par value) were outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
September 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,872,537

 
$
1,538,779

Available-for-sale securities, at fair value (cost of $13,322,059 and $12,055,524, respectively)
 
13,333,436

 
11,986,821

Held-to-maturity securities, at cost (fair value of $6,613,893 and $0, respectively)
 
6,662,025

 

Non-marketable and other securities
 
1,703,550

 
1,595,494

Total investment securities
 
21,699,011

 
13,582,315

Loans, net of unearned income
 
12,017,181

 
10,906,386

Allowance for loan losses
 
(129,061
)
 
(142,886
)
Net loans
 
11,888,120

 
10,763,500

Premises and equipment, net of accumulated depreciation and amortization
 
74,375

 
67,485

Accrued interest receivable and other assets
 
506,964

 
465,110

Total assets
 
$
36,041,007

 
$
26,417,189

Liabilities and total equity
 
 
 
 
Liabilities:
 
 
 
 
Noninterest-bearing demand deposits
 
$
22,461,068

 
$
15,894,360

Interest-bearing deposits
 
8,662,067

 
6,578,619

Total deposits
 
31,123,135

 
22,472,979

Short-term borrowings
 
6,630

 
5,080

Other liabilities
 
517,462

 
404,586

Long-term debt
 
453,764

 
455,216

Total liabilities
 
32,100,991

 
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; 50,820,946 shares and 45,800,418 shares outstanding, respectively
 
51

 
46

Additional paid-in capital
 
1,107,337

 
624,256

Retained earnings
 
1,595,825

 
1,390,732

Accumulated other comprehensive income (loss)
 
18,744

 
(48,764
)
Total SVBFG stockholders’ equity
 
2,721,957

 
1,966,270

Noncontrolling interests
 
1,218,059

 
1,113,058

Total equity
 
3,940,016

 
3,079,328

Total liabilities and total equity
 
$
36,041,007

 
$
26,417,189

 
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 INCOME (UNAUDITED)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
153,292

 
$
139,687

 
$
449,144

 
$
395,216

Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
73,540

 
43,604

 
191,384

 
134,013

Non-taxable
 
772

 
797

 
2,362

 
2,403

Federal funds sold, securities purchased under agreements to resell and other short-term investment securities
 
1,722

 
1,152

 
5,301

 
2,605

Total interest income
 
229,326

 
185,240

 
648,191

 
534,237

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
2,961

 
2,397

 
8,933

 
6,533

Borrowings
 
5,800

 
5,747

 
17,400

 
17,358

Total interest expense
 
8,761

 
8,144

 
26,333

 
23,891

Net interest income
 
220,565

 
177,096

 
621,858

 
510,346

Provision for loan losses
 
16,610

 
10,638

 
19,051

 
35,023

Net interest income after provision for loan losses
 
203,955

 
166,458

 
602,807

 
475,323

Noninterest income:
 
 
 
 
 
 
 
 
Gains on investment securities, net
 
5,644

 
187,862

 
172,236

 
255,861

Gains on derivative instruments, net
 
26,538

 
9,422

 
63,480

 
27,802

Foreign exchange fees
 
17,911

 
13,667

 
53,035

 
41,529

Credit card fees
 
10,909

 
8,188

 
31,440

 
23,245

Deposit service charges
 
10,126

 
8,902

 
29,344

 
26,602

Lending related fees
 
6,029

 
5,265

 
18,208

 
13,835

Letters of credit and standby letters of credit fees
 
4,557

 
3,790

 
11,507

 
10,879

Client investment fees
 
3,814

 
3,393

 
10,751

 
10,392

Other
 
(5,361
)
 
17,161

 
14,601

 
24,348

Total noninterest income
 
80,167

 
257,650

 
404,602

 
434,493

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and benefits
 
99,932

 
96,869

 
302,259

 
270,315

Professional services
 
26,081

 
18,966

 
68,383

 
52,759

Premises and equipment
 
12,631

 
12,171

 
36,267

 
34,298

Business development and travel
 
10,022

 
7,378

 
29,465

 
23,433

Net occupancy
 
7,437

 
5,898

 
22,436

 
17,460

FDIC assessments
 
4,587

 
2,913

 
13,660

 
9,148

Correspondent bank fees
 
3,278

 
2,906

 
9,755

 
9,009

Provision for unfunded credit commitments
 
2,225

 
2,774

 
5,533

 
6,135

Other
 
15,796

 
10,649

 
40,113

 
30,273

Total noninterest expense
 
181,989

 
160,524

 
527,871

 
452,830

Income before income tax expense
 
102,133

 
263,584

 
479,538

 
456,986

Income tax expense
 
38,961

 
47,404

 
131,460

 
103,773

Net income before noncontrolling interests
 
63,172

 
216,180

 
348,078

 
353,213

Net income attributable to noncontrolling interests
 
(177
)
 
(148,559
)
 
(142,985
)
 
(196,117
)
Net income available to common stockholders
 
$
62,995

 
$
67,621

 
$
205,093

 
$
157,096

Earnings per common share—basic
 
$
1.24

 
$
1.48

 
$
4.25

 
$
3.48

Earnings per common share—diluted
 
1.22

 
1.46

 
4.17

 
3.43

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

5

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Net income before noncontrolling interests
 
$
63,172

 
$
216,180

 
$
348,078

 
$
353,213

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Change in cumulative translation (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation loss
 
(2,259
)
 
(1,540
)
 
(638
)
 
(6,341
)
Related tax benefit
 
935

 
631

 
281

 
2,539

Change in unrealized (losses) gains on available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized holding (losses) gains
 
(48,724
)
 
27,289

 
62,669

 
(167,021
)
Related tax benefit (expense)
 
19,716

 
(11,032
)
 
(25,292
)
 
68,299

Reclassification adjustment for losses (gains) included in net income
 
990

 
(219
)
 
17,411

 
(949
)
Related tax (benefit) expense
 
(400
)
 
85

 
(7,030
)
 
363

Cumulative-effect adjustment for unrealized gains on securities transferred from available-for-sale to held-to-maturity
 

 

 
37,700

 

Related tax expense
 

 

 
(15,178
)
 

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

 
(2,996
)
 

 
(4,043
)
 

Related tax benefit
 
1,206

 

 
1,628

 

Other comprehensive (loss) income, net of tax
 
(31,532
)
 
15,214

 
67,508

 
(103,110
)
Comprehensive income
 
31,640

 
231,394

 
415,586

 
250,103

Comprehensive income attributable to noncontrolling interests
 
(177
)
 
(148,559
)
 
(142,985
)
 
(196,117
)
Comprehensive income attributable to SVBFG
 
$
31,463

 
$
82,835

 
$
272,601

 
$
53,986

 
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 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
 
906,242

 
1

 
33,241

 

 

 
33,242

 

 
33,242

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
 

 

 
3,148

 

 

 
3,148

 

 
3,148

Net income
 

 

 

 
157,096

 

 
157,096

 
196,117

 
353,213

Capital calls and distributions, net
 

 

 

 

 

 

 
7,922

 
7,922

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

 

 

 

 
(99,308
)
 
(99,308
)
 

 
(99,308
)
Foreign currency translation adjustments, net of tax
 

 

 

 

 
(3,802
)
 
(3,802
)
 

 
(3,802
)
Share-based compensation expense
 

 

 
18,826

 

 

 
18,826

 

 
18,826

Other, net
 

 

 
3

 
1

 

 
4

 

 
4

Balance at September 30, 2013
 
45,608,370

 
$
46

 
$
607,463

 
$
1,331,975

 
$
5,443

 
$
1,944,927

 
$
978,717

 
$
2,923,644

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
 
504,766

 

 
13,878

 

 

 
13,878

 

 
13,878

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
 

 

 
7,973

 

 

 
7,973

 

 
7,973

Net income
 

 

 

 
205,093

 

 
205,093

 
142,985

 
348,078

Capital calls and distributions, net
 

 

 

 

 

 

 
(37,984
)
 
(37,984
)
Net change in unrealized gains and losses on available-for-sale securities, net of tax
 

 

 

 

 
47,758

 
47,758

 

 
47,758

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
 

 

 

 

 
(2,415
)
 
(2,415
)
 

 
(2,415
)
Foreign currency translation adjustments, net of tax
 

 

 

 

 
(357
)
 
(357
)
 

 
(357
)
Common stock issued in public offering
 
4,485,000

 
5

 
434,861

 

 

 
434,866

 

 
434,866

Share-based compensation expense
 

 

 
22,479

 

 

 
22,479

 

 
22,479

Balance at September 30, 2014
 
50,820,946

 
$
51

 
$
1,107,337

 
$
1,595,825

 
$
18,744

 
$
2,721,957

 
$
1,218,059

 
$
3,940,016

   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)
 
 
Nine months ended September 30,
(Dollars in thousands)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income before noncontrolling interests
 
$
348,078

 
$
353,213

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
19,051

 
35,023

Provision for unfunded credit commitments
 
5,533

 
6,135

Changes in fair values of derivatives, net
 
11,087

 
(16,594
)
Gains on investment securities, net
 
(172,236
)
 
(255,861
)
Depreciation and amortization
 
29,041

 
26,474

Amortization of premiums and discounts on investment securities, net
 
18,700

 
21,040

Tax expense from stock exercises
 
(1
)
 
(1,353
)
Amortization of share-based compensation
 
22,285

 
18,945

Amortization of deferred loan fees
 
(59,550
)
 
(51,941
)
Deferred income tax benefit
 
(17,897
)
 
(3,488
)
Changes in other assets and liabilities:
 
 
 
 
Accrued interest receivable and payable, net
 
(17,488
)
 
(5,183
)
Accounts receivable and payable, net
 
(12,890
)
 
1,463

Income tax payable and receivable, net
 
(14,234
)
 
(7,787
)
Accrued compensation
 
(24,241
)
 
(7,481
)
Foreign exchange spot contracts, net
 
97,357

 
12,442

Other, net
 
(25,388
)
 
(27,005
)
Net cash provided by operating activities
 
207,207

 
98,042

Cash flows from investing activities:
 
 
 
 
Purchases of available-for-sale securities
 
(8,060,750
)
 
(906,495
)
Proceeds from sales of available-for-sale securities
 
32,135

 
10,207

Proceeds from maturities and pay downs of available-for-sale securities
 
1,352,369

 
1,879,424

Purchases of held-to-maturity securities
 
(1,577,634
)
 

Proceeds from maturities and pay downs of held-to-maturity securities
 
327,913

 

Purchases of non-marketable and other securities (cost and equity method accounting)
 
(23,965
)
 
(20,019
)
Proceeds from sales and distributions of non-marketable and other securities (cost and equity method accounting)
 
47,478

 
47,069

Purchases of non-marketable and other securities (fair value accounting)
 
(182,247
)
 
(108,663
)
Proceeds from sales and distributions of non-marketable and other securities (fair value accounting)
 
264,389

 
103,105

Net increase in loans
 
(1,103,447
)
 
(867,075
)
Proceeds from recoveries of charged-off loans
 
5,313

 
8,163

Purchases of premises and equipment
 
(29,332
)
 
(20,837
)
Net cash (used for) provided by investing activities
 
(8,947,778
)
 
124,879

Cash flows from financing activities:
 
 
 
 
Net increase in deposits
 
8,650,156

 
820,539

Increase (decrease) in short-term borrowings
 
1,550

 
(160,530
)
Capital contributions from noncontrolling interests, net of distributions
 
(37,984
)
 
7,922

Tax benefit from stock exercises
 
7,973

 
4,501

Proceeds from issuance of common stock, ESPP, and ESOP
 
17,768

 
38,408

Net proceeds from public equity offering
 
434,866

 

Net cash provided by financing activities
 
9,074,329

 
710,840

Net increase in cash and cash equivalents
 
333,758

 
933,761

Cash and cash equivalents at beginning of period
 
1,538,779

 
1,008,983

Cash and cash equivalents at end of period
 
$
1,872,537

 
$
1,942,744

Supplemental disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
30,259

 
$
28,339

Income taxes
 
154,746

 
107,282

Noncash items during the period:
 
 
 
 
Changes in unrealized gains and losses on available-for-sale securities, net of tax
 
$
47,758

 
$
(99,308
)
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 nine months ended September 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 our 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 provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. The guidance requires that revenue from contracts with customers be recognized upon delivery of a good or service based on the amount of consideration expected to be received, and requires additional disclosures about revenue. The guidance will be 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 our financial position, results of operations or stockholders' equity.
In August 2014, the FASB issued a new accounting standard (ASU 2014-15, Going Concern (Topic 205-40)), which requires management to evaluate for each annual and interim reporting period whether there is substantial doubt about an entity's ability to continue as a going concern. The guidance will be effective for annual and quarterly periods ending after December 15, 2016 with early adoption permitted. We are currently developing processes and controls to adopt this guidance by the adoption period and do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or stockholders' equity.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.

10


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 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 nine months ended September 30, 2014 and 2013 :
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars and shares in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
62,995

 
$
67,621

 
$
205,093

 
$
157,096

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding-basic
 
50,752

 
45,580

 
48,281

 
45,180

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and ESPP
 
534

 
429

 
580

 
405

Restricted stock units
 
285

 
193

 
339

 
180

Denominator for diluted calculation
 
51,571

 
46,202

 
49,200

 
45,765

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.24

 
$
1.48

 
$
4.25

 
$
3.48

Diluted
 
$
1.22

 
$
1.46

 
$
4.17

 
$
3.43

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 nine months ended September 30, 2014 and 2013 :
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Shares in thousands)
 
2014
 
2013
 
2014
 
2013
Stock options
 
241

 
343

 
140

 
546

Restricted stock units
 
1

 

 
2

 
1

Total
 
242

 
343

 
142

 
547

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 nine months ended September 30, 2014 and 2013 :
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
Income Statement Location
 
2014
 
2013
 
2014
 
2013
Reclassification adjustment for losses (gains) included in net income
 
Gains on investment securities, net
 
$
990

 
$
(219
)
 
$
17,411

 
$
(949
)
Related tax (benefit) expense
 
Income tax expense
 
(400
)
 
85

 
(7,030
)
 
363

Total reclassification adjustment for losses (gains) included in net income, net of tax
 
 
 
$
590

 
$
(134
)
 
$
10,381

 
$
(586
)

11


3.
Share-Based Compensation
For the three and nine months ended September 30, 2014 and 2013 , we recorded share-based compensation and related tax benefits as follows:  
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Share-based compensation expense
 
$
7,520

 
$
6,723

 
$
22,285

 
$
18,945

Income tax benefit related to share-based compensation expense
 
(2,676
)
 
(2,243
)
 
(7,351
)
 
(5,801
)
Unrecognized Compensation Expense
As of September 30, 2014 , unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
 
  Unrecognized  
Expense
 
Average
Expected
Recognition
  Period - in Years  
Stock options
 
$
16,282

 
2.64
Restricted stock units
 
35,324

 
2.56
Total unrecognized share-based compensation expense
 
$
51,606

 
 
Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the nine months ended September 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
 
239,383

 
108.27

 
 
 
 
Exercised
 
(283,498
)
 
47.56

 
 
 
 
Forfeited
 
(21,975
)
 
71.17

 
 
 
 
Outstanding at September 30, 2014
 
1,448,069

 
65.30

 
4.25
 
$
67,825,947

Vested and expected to vest at September 30, 2014
 
1,397,466

 
64.55

 
4.20
 
66,495,669

Exercisable at September 30, 2014
 
727,829

 
50.48

 
3.08
 
44,843,070

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $112.09 as of September 30, 2014 . The total intrinsic value of options exercised during the three and nine months ended September 30, 2014 was $7.7 million and $18.4 million , respectively, compared to $6.5 million and $18.4 million for the comparable 2013 period.
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the nine months ended September 30, 2014 :
 
 
Shares    
 
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2013
 
682,347

 
$
65.93

Granted
 
197,687

 
107.85

Vested
 
(200,856
)
 
64.05

Forfeited
 
(25,268
)
 
73.02

Nonvested at September 30, 2014
 
653,910

 
78.91

4.
Cash and Cash Equivalents
The following table details our cash and cash equivalents at September 30, 2014 and December 31, 2013 :
(Dollars in thousands)
 
September 30, 2014
 
December 31, 2013
Cash and due from banks (1)
 
$
1,815,581

 
$
1,349,688

Securities purchased under agreements to resell (2)
 
50,834

 
172,989

Other short-term investment securities
 
6,122

 
16,102

Total cash and cash equivalents
 
$
1,872,537

 
$
1,538,779

 
 
(1)
At September 30, 2014 and December 31, 2013 , $883 million 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 $442 million and $300 million , respectively.
(2)
At September 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 $52 million and $176 million , respectively. None of these securities received as collateral were sold or repledged as of September 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 September 30, 2014 and December 31, 2013 are as follows:
 
 
September 30, 2014
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
6,886,952

 
$
2,245

 
$
(12,898
)
 
$
6,876,299

U.S. agency debentures
 
3,592,129

 
28,744

 
(15,040
)
 
3,605,833

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
2,003,337

 
20,671

 
(18,075
)
 
2,005,933

Agency-issued collateralized mortgage obligations—variable rate
 
830,139

 
5,818

 

 
835,957

Equity securities
 
9,502

 
749

 
(837
)
 
9,414

Total available-for-sale securities
 
$
13,322,059

 
$
58,227

 
$
(46,850
)
 
$
13,333,436


 
 
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




12


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 September 30, 2014 :
 
 
September 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
 
$
4,736,436

 
$
(12,898
)
 
$

 
$

 
$
4,736,436

 
$
(12,898
)
U.S. agency debentures
 
688,808

 
(2,373
)
 
553,231

 
(12,667
)
 
1,242,039

 
(15,040
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
659,886

 
(2,523
)
 
469,850

 
(15,552
)
 
1,129,736

 
(18,075
)
Equity securities
 
5,546

 
(837
)
 

 

 
5,546

 
(837
)
Total temporarily impaired securities: (1)
 
$
6,090,676

 
$
(18,631
)
 
$
1,023,081

 
$
(28,219
)
 
$
7,113,757

 
$
(46,850
)
 
 
(1)
As of September 30, 2014 , we identified a total of 182 investments that were in unrealized loss positions, of which 34 investments totaling $1.0 billion with unrealized losses of $28.2 million have been in an impaired position for a period of time greater than 12 months. As of September 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 September 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
)



13


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 September 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.
 
 
September 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
 
$
6,876,299

 
1.08
%
 
$
100,189

 
0.15
%
 
$
6,041,278

 
0.99
%
 
$
734,832

 
1.97
%
 
$

 
%
U.S. agency debentures
 
3,605,833

 
1.63

 
695,199

 
1.64

 
2,225,869

 
1.52

 
684,765

 
2.01

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations - fixed rate
 
2,005,933

 
2.01

 

 

 

 

 
483,473

 
2.59

 
1,522,460

 
1.83

Agency-issued collateralized mortgage obligations - variable rate
 
835,957

 
0.71

 

 

 

 

 

 

 
835,957

 
0.71

Total
 
$
13,324,022

 
1.35

 
$
795,388

 
1.45

 
$
8,267,147

 
1.13

 
$
1,903,070

 
2.14

 
$
2,358,417

 
1.43



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 September 30, 2014 are as follows:
 
 
September 30, 2014
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Held-to-maturity securities, at cost:
 
 
 
 
 
 
 
 
U.S. agency debentures (1)
 
$
349,993

 
$
1,588

 
$
(1,165
)
 
$
350,416

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
2,919,715

 
16

 
(20,712
)
 
2,899,019

Agency-issued collateralized mortgage obligations—fixed rate
 
2,489,538

 
384

 
(24,052
)
 
2,465,870

Agency-issued collateralized mortgage obligations—variable rate
 
139,182

 
7

 
(14
)
 
139,175

Agency-issued commercial mortgage-backed securities
 
679,379

 
350

 
(4,391
)
 
675,338

Municipal bonds and notes
 
84,218

 
81

 
(224
)
 
84,075

Total held-to-maturity securities
 
$
6,662,025

 
$
2,426

 
$
(50,558
)
 
$
6,613,893

 
 
(1)
Consists of pools of Small Business Investment Company debentures issued and guaranteed by the U.S. Small Business Administration, an independent agency of the United States.