SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 11/08/2016 16:11:56)
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, 2016
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, 2016 , 52,088,461 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

AFS— Available-for-Sale
APIC— Additional Paid-in Capital
ASC— Accounting Standards Codification
ASU— Accounting Standards Update
CET— Common Equity Tier
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
NIB— Non-Interest Bearing
M&A— Merger and Acquisition
OTTI— Other Than Temporary Impairment
SEC— Securities and Exchange Commission
SPD-SVB— SPD Silicon Valley Bank (China Joint Venture)
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 (UNAUDITED)
 
(Dollars in thousands, except par value and share data)

September 30,
2016

December 31,
2015
Assets




Cash and cash equivalents

$
2,521,319


$
1,503,257

Available-for-sale securities, at fair value (cost of $12,514,893 and $16,375,941, respectively)

12,665,697


16,380,748

Held-to-maturity securities, at cost (fair value of $7,885,333 and $8,758,622, respectively)

7,791,949


8,790,963

Non-marketable and other securities

625,178


674,946

Total investment securities

21,082,824


25,846,657

Loans, net of unearned income

19,112,265


16,742,070

Allowance for loan losses

(240,565
)

(217,613
)
Net loans

18,871,700


16,524,457

Premises and equipment, net of accumulated depreciation and amortization

115,014


102,625

Accrued interest receivable and other assets

683,180


709,707

Total assets

$
43,274,037


$
44,686,703

Liabilities and total equity




Liabilities:




Noninterest-bearing demand deposits

$
31,028,974


$
30,867,497

Interest-bearing deposits

7,160,442


8,275,279

Total deposits

38,189,416


39,142,776

Short-term borrowings

2,421


774,900

Other liabilities

562,912


639,094

Long-term debt

795,971


796,702

Total liabilities

39,550,720


41,353,472

Commitments and contingencies (Note 12 and Note 15)





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; 52,061,435 shares and 51,610,226 shares outstanding, respectively

52


52

Additional paid-in capital

1,219,555


1,189,032

Retained earnings

2,276,865


1,993,646

Accumulated other comprehensive income

96,579


15,404

Total SVBFG stockholders’ equity

3,593,051


3,198,134

Noncontrolling interests

130,266


135,097

Total equity

3,723,317


3,333,231

Total liabilities and total equity

$
43,274,037


$
44,686,703


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 September 30,

Nine months ended September 30,
(Dollars in thousands, except per share amounts)

2016

2015

2016

2015
Interest income:








Loans

$
214,227


$
174,993


$
617,456


$
507,746

Investment securities:








Taxable

83,468


87,609


261,121


253,496

Non-taxable

522


707


1,693


2,220

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

2,196


1,482


5,793


4,071

Total interest income

300,413


264,791


886,063


767,533

Interest expense:








Deposits

1,535


1,158


3,984


4,283

Borrowings

9,717


8,973


28,161


25,894

Total interest expense

11,252


10,131


32,145


30,177

Net interest income

289,161


254,660


853,918


737,356

Provision for loan losses

18,950


33,403


88,624


66,368

Net interest income after provision for loan losses

270,211


221,257


765,294


670,988

Noninterest income:








Gains on investment securities, net

23,178


18,768


41,764


77,006

Gains on derivative instruments, net

19,744


10,244


26,847


66,290

Foreign exchange fees

25,944


22,995


76,998


63,037

Credit card fees

18,295


14,536


49,226


40,841

Deposit service charges

13,356


12,272


39,142


34,309

Client investment fees

7,952


5,683


23,959


15,429

Lending related fees

8,168


7,561


23,783


23,746

Letters of credit and standby letters of credit fees

6,811


5,341


18,414


15,315

Other

20,692


11,077


42,917


22,315

Total noninterest income

144,140


108,477


343,050


358,288

Noninterest expense:








Compensation and benefits

136,568


109,345


374,410


350,030

Professional services

23,443


21,137


67,959


58,834

Premises and equipment

16,291


12,356


47,861


36,800

Business development and travel

8,504


8,028


30,077


28,904

Net occupancy

9,525


8,548


28,919


24,010

FDIC and state assessments

7,805


6,954


21,624


18,705

Correspondent bank fees

3,104


3,070


9,469


9,775

Provision for unfunded credit commitments

1,054


1,047


1,601


249

Other

15,533


14,270


44,292


42,101

Total noninterest expense

221,827


184,755


626,212


569,408

Income before income tax expense

192,524


144,979


482,132


459,868

Income tax expense

76,877


57,017


195,508


175,057

Net income before noncontrolling interests

115,647


87,962


286,624


284,811

Net income attributable to noncontrolling interests

(4,566
)

(6,229
)

(3,405
)

(28,419
)
Net income available to common stockholders

$
111,081


$
81,733


$
283,219


$
256,392

Earnings per common share—basic

$
2.13


$
1.59


$
5.46


$
5.00

Earnings per common share—diluted

2.12


1.57


5.42


4.94

 

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)

2016

2015

2016

2015
Net income before noncontrolling interests

$
115,647


$
87,962


$
286,624


$
284,811

Other comprehensive (loss) income, net of tax:








Change in cumulative translation (losses) gains:








Foreign currency translation (losses) gains

(119
)

(102
)

(2,168
)

2,588

Related tax benefit (expense)

50


87


885


(1,054
)
Change in unrealized (losses) gains on available-for-sale securities:








Unrealized holding (losses) gains

(54,204
)

58,902


157,564


100,468

Related tax benefit (expense)

21,932


(24,200
)

(64,357
)

(41,224
)
Reclassification adjustment for losses (gains) included in net income

15


(13
)

(11,567
)

(2,750
)
Related tax (benefit) expense

(6
)

6


4,707


1,111

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

(1,690
)

(2,565
)

(6,507
)

(7,997
)
Related tax benefit

680


1,032


2,618


3,218

Other comprehensive (loss) income, net of tax

(33,342
)

33,147


81,175


54,360

Comprehensive income

82,305


121,109


367,799


339,171

Comprehensive income attributable to noncontrolling interests

(4,566
)

(6,229
)

(3,405
)

(28,419
)
Comprehensive income attributable to SVBFG

$
77,739


$
114,880


$
364,394


$
310,752


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

Total SVBFG
Stockholders’ Equity

Noncontrolling Interests

Total Equity
(Dollars in thousands)

Shares

Amount






Balance at December 31, 2014

50,924,925


$
51


$
1,120,350


$
1,649,967


$
42,704


$
2,813,072


$
1,238,662


$
4,051,734

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

536,635




14,712






14,712




14,712

Common stock issued under ESOP

27,425




3,512






3,512




3,512

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





10,813






10,813




10,813

Deconsolidation of noncontrolling interest













(1,069,437
)

(1,069,437
)
Net income







256,392




256,392


28,419


284,811

Capital calls and distributions, net













(58,315
)

(58,315
)
Net change in unrealized gains and losses on available-for-sale securities, net of tax









57,605


57,605




57,605

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









(4,779
)

(4,779
)



(4,779
)
Foreign currency translation adjustments, net of tax









1,534


1,534




1,534

Share-based compensation, net





22,262






22,262




22,262

Other, net
 

 

 

 
(224
)
 

 
(224
)
 

 
(224
)
Balance at September 30, 2015

51,488,985


$
51


$
1,171,649


$
1,906,135


$
97,064


$
3,174,899


$
139,329


$
3,314,228

Balance at December 31, 2015

51,610,226


$
52


$
1,189,032


$
1,993,646


$
15,404


$
3,198,134


$
135,097


$
3,333,231

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

408,044




8,661






8,661




8,661

Common stock issued under ESOP

43,165




4,328






4,328




4,328

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





(6,300
)





(6,300
)



(6,300
)
Net income







283,219




283,219


3,405


286,624

Capital calls and distributions, net













(8,236
)

(8,236
)
Net change in unrealized gains and losses on available-for-sale securities, net of tax









86,347


86,347




86,347

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









(3,889
)

(3,889
)



(3,889
)
Foreign currency translation adjustments, net of tax









(1,283
)

(1,283
)



(1,283
)
Share-based compensation, net





23,834






23,834




23,834

Balance at September 30, 2016

52,061,435


$
52


$
1,219,555


$
2,276,865


$
96,579


$
3,593,051


$
130,266


$
3,723,317



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

7

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 

Nine months ended September 30,
(Dollars in thousands)

2016

2015
Cash flows from operating activities:




Net income before noncontrolling interests

$
286,624


$
284,811

Adjustments to reconcile net income to net cash provided by operating activities:




Provision for loan losses

88,624


66,368

Provision for unfunded credit commitments

1,601


249

Changes in fair values of derivatives, net

(24,875
)

(42,295
)
Gains on investment securities, net

(41,764
)

(77,006
)
Depreciation and amortization

35,114


28,504

Amortization of premiums and discounts on investment securities, net

9,622


14,659

Amortization of share-based compensation

22,342


24,174

Amortization of deferred loan fees

(72,807
)

(64,275
)
Pre-tax net gain on SVBIF sale transaction



(1,287
)
Deferred income tax (benefit) expense

(6,839
)

3,131

Changes in other assets and liabilities:




Accrued interest receivable and payable, net

1,169


(6,312
)
Accounts receivable and payable, net

(12,872
)

(18,285
)
Income tax receivable and payable, net

13,181


(29,398
)
Accrued compensation

(48,740
)

(7,702
)
Foreign exchange spot contracts, net

1,803


7,522

Other, net

20,821


71,349

Net cash provided by operating activities

273,004


254,207

Cash flows from investing activities:




Purchases of available-for-sale securities



(2,911,486
)
Proceeds from sales of available-for-sale securities

2,879,409


7,762

Proceeds from maturities and pay downs of available-for-sale securities

1,002,523


1,238,950

Purchases of held-to-maturity securities

(225,526
)

(2,057,030
)
Proceeds from maturities and pay downs of held-to-maturity securities

1,206,367


1,153,363

Purchases of non-marketable and other securities

(41,925
)

(30,245
)
Proceeds from sales and distributions of non-marketable and other securities

54,420


115,338

Net increase in loans

(2,373,798
)

(911,694
)
Proceeds from recoveries of charged-off loans

8,158


5,119

Effect of deconsolidation of noncontrolling interest



15,995

Net proceeds from SVBIF sale transaction



39,284

Purchases of premises and equipment

(37,184
)

(37,465
)
Net cash provided by (used for) investing activities

2,472,444


(3,372,109
)
Cash flows from financing activities:




Net (decrease) increase in deposits

(953,360
)

2,626,379

Net decrease in short-term borrowings

(772,479
)

(4,025
)
(Distributions to noncontrolling interests), net of contributions from noncontrolling interests

(8,236
)

(16,789
)
Tax effect from stock exercises

(6,300
)

10,813

Proceeds from issuance of common stock, ESPP, and ESOP

12,989


18,224

Proceeds from issuance of 3.50% Senior Notes



346,431

Net cash (used for) provided by financing activities

(1,727,386
)

2,981,033

Net increase (decrease) in cash and cash equivalents

1,018,062


(136,869
)
Cash and cash equivalents at beginning of period (1)

1,503,257


1,811,014

Cash and cash equivalents at end of period

$
2,521,319


$
1,674,145

Supplemental disclosures:




Cash paid during the period for:




Interest

$
39,317


$
32,183

Income taxes

186,474


182,479

Noncash items during the period:




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

$
86,347


$
57,605

Distributions of stock from investments (2)

750


64,120

 
 
(1)
Cash and cash equivalents at December 31, 2014 included $15.0 million recognized in assets held-for-sale in conjunction with the SVBIF sale transaction.
(2)
For the nine months ended September 30, 2015 , includes distributions to noncontrolling interests of $41.5 million .

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

8

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 2016 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, 2015 (“ 2015 Form 10-K”).
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 2015 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
Prior to April 1, 2015, the Company’s consolidated financial statements included the accounts of SVB Financial Group and entities in which we had a controlling interest.  The determination of whether we had controlling interest was based on consolidation principles prescribed by ASC Topic 810 and whether the controlling interest in an entity was a voting interest entity or a variable interest entity (“VIE”). However, during the three months ended June 30, 2015, we early adopted the provisions of ASU 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02), which simplifies consolidation accounting by reducing the number of consolidation models and changing various aspects of current GAAP, including certain consolidation criteria for variable interest entities. The new guidance eliminates the presumption that a general partner of a limited partnership arrangement should consolidate a limited partnership. The amendments to ASC Topic 810 in ASU 2015-02 modify the evaluation of whether limited partnerships and similar entities are VIEs or voting entities. With these changes, we determined that the majority of our investments in limited partnership arrangements are VIEs under the new guidance while these entities were typically voting interest entities under the prior guidance.
ASU 2015-02 provided a single model for evaluating VIE entities for consolidation. VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. We assess VIEs to determine if we are the primary beneficiary of a VIE.  A primary beneficiary is defined as a variable interest holder that has a controlling financial interest. A controlling financial interest requires both: (a) power to direct the activities that most significantly impact the VIE’s economic performance, and (b) obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. Under this analysis, we evaluate kick-out rights and other participating rights which could provide us a controlling financial interest. The primary beneficiary of a VIE is required to consolidate the VIE.
ASU 2015-02 also changed how we evaluate fees paid to managers of our limited partnership investments. Under the new guidance, we exclude those fee arrangements that are not deemed to be variable interests from the analysis of our interests in our investments in VIEs and the determination of a primary beneficiary, if any.

9


Our consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate voting entities in which we have control through voting interests. We determine whether we have a controlling financial interest in a VIE by determining if we have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and whether we have significant variable interests. Generally, we have significant variable interests if our commitments to a limited partnership investment represent a significant amount of the total commitments to the entity. We also evaluate the impact of related parties on our determination of variable interests in our consolidation conclusions. We consolidate VIEs in which we are the primary beneficiary based on a controlling financial interest. If we are not the primary beneficiary of a VIE, we record our pro-rata interests or our cost basis in the VIE, as appropriate, based on other accounting guidance within GAAP.
All significant intercompany accounts and transactions with consolidated entities have been eliminated. We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new accounting standard update (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. This guidance will be effective January 1, 2018, either on a full retrospective approach or a modified retrospective approach, with early adoption permitted, but not before January 1, 2017. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In January 2016, the FASB issued a new accounting standard update (ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)), which will significantly change the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities. This guidance will be effective on January 1, 2018, on a prospective basis with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In February 2016, the FASB issued a new accounting standard update (ASU 2016-02, Leases (Topic 842)), which will require for all operating leases the recognition of a right-of-use asset and a lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. This guidance will be effective on January 1, 2019, on a modified retrospective basis, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In March 2016, the FASB issued a new accounting standard update (ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323)), which eliminates the requirement that when an investment qualifies for use of the equity method due to an increase in level of ownership or influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. This guidance will be effective January 1, 2017, on a prospective basis, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In March 2016, the FASB issued a new accounting standard update (ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)), which is intended to improve the operability and understandability of the implementation guidance by clarifying the following: how an entity should identify the unit of accounting for the principal versus agent evaluation; how the control principle applies to transactions, such as service arrangements; reframes the indicators to focus on a principal rather than an agent, removes the credit risk and commission indicators and clarifies the relationship between the control principle and the indicators; and revises the existing illustrative examples and adds new illustrative examples. This guidance will be effective January 1, 2018, either on a full retrospective approach or a modified retrospective approach, with early adoption permitted, but not before January 1, 2017. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In March 2016, the FASB issued a new accounting standard update (ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718)), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  Under the ASU, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement in the period when the awards vest or are settled. The guidance also permits an entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This guidance will be effective January 1, 2017. Early adoption is permitted, but all of the guidance must be adopted in the same period. We plan to adopt the share-based payment guidance in the first quarter of 2017. Currently, we record excess tax benefits and tax deficiencies to APIC at the

10


time of vesting and or settlement, however, upon adoption of this standard, the excess tax benefits and tax deficiencies will be recorded to the income statement as income tax expense or benefit. We do not expect the guidance to have a material impact on our annual earnings; however, the impact will vary period to period depending on the volatility of the Company's stock price and the actual timing of settlement of awards. We would expect the most significant impact to occur during our second quarter as the majority of awards vest during that period.
In April 2016, the FASB issued a new accounting standard update (ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing), which amends the new revenue recognition guidance on accounting for licenses of intellectual property and identifying performance obligations. The amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or a point in time. The amendments also clarify when a promised good or service is separately identifiable, that is distinct within the context of the contract, and allow entities to disregard items that are immaterial in the context of a contract. The effective date and transition requirements for this update are the same as those of the new standard. This guidance is effective January 1, 2018, on either a full retrospective approach or a modified retrospective approach, with early adoption permitted, but not before January 1, 2017. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In June 2016, the FASB issued a new accounting standard update (ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), which amends the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance will be effective January 1, 2020, on a modified retrospective approach, with early adoption permitted, but not before January 1, 2020. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.
In August 2016, the FASB issued a new accounting standard update (ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments), which clarifies the guidance on eight specific cash flow issues. This guidance will be effective January 1, 2018 on a full retrospective approach, with early adoption permitted. We are currently evaluating the impact this guidance will have on our statement of cash flows.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
2.
Stockholders’ Equity and EPS
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, 2016 and 2015 :
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
Income Statement Location
 
2016

2015
 
2016
 
2015
Reclassification adjustment for losses (gains) included in net income
 
Gains on investment securities, net
 
$
15

 
$
(13
)
 
$
(11,567
)
 
$
(2,750
)
Related tax (benefit) expense
 
Income tax expense
 
(6
)
 
6

 
4,707

 
1,111

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

 
$
(7
)
 
$
(6,860
)
 
$
(1,639
)
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, 2016 and 2015 :

11


 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars and shares in thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
111,081

 
$
81,733

 
$
283,219

 
$
256,392

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding-basic
 
52,046

 
51,479

 
51,842

 
51,254

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and ESPP
 
233

 
382

 
245

 
411

Restricted stock units
 
134

 
187

 
142

 
213

Denominator for diluted calculation
 
52,413

 
52,048

 
52,229

 
51,878

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
2.13

 
$
1.59

 
$
5.46

 
$
5.00

Diluted
 
$
2.12

 
$
1.57

 
$
5.42

 
$
4.94


The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation due to the antidilutive effect for the three and nine months ended September 30, 2016 and 2015 :
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Shares in thousands)
 
2016
 
2015
 
2016
 
2015
Stock options
 
518

 
142

 
444

 
169

Restricted stock units
 
120

 
1

 
9

 

Total
 
638

 
143

 
453

 
169

3.
Share-Based Compensation
For the three and nine months ended September 30, 2016 and 2015 , we recorded share-based compensation and related tax benefits as follows:  
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Share-based compensation expense
 
$
7,916

 
$
8,188

 
$
22,342

 
$
24,174

Income tax benefit related to share-based compensation expense
 
(2,881
)
 
(3,051
)
 
(7,461
)
 
(8,381
)
Unrecognized Compensation Expense
As of September 30, 2016 , unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
 
  Unrecognized  
Expense
 
Average
Expected
Recognition
  Period - in Years  
Stock options
 
$
11,150

 
2.52
Restricted stock units
 
51,094

 
2.68
Total unrecognized share-based compensation expense
 
$
62,244

 
 

12


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, 2016 :
 
 
Options
 
Weighted
Average
 Exercise Price 
 
Weighted Average Remaining Contractual Life - in Years  
 
Aggregate
  Intrinsic Value  
of In-The-
Money
Options
Outstanding at December 31, 2015
 
1,137,228

 
$
77.12

 
 
 
 
Granted
 
177,203

 
105.11

 
 
 
 
Exercised
 
(141,248
)
 
43.90

 
 
 
 
Forfeited
 
(19,305
)
 
100.80

 
 
 
 
Expired
 
(190
)
 
19.48

 
 
 
 
Outstanding at September 30, 2016
 
1,153,688

 
85.10

 
3.83
 
$
31,649,669

Vested and expected to vest at September 30, 2016
 
1,123,538

 
84.47

 
3.77
 
31,469,498

Exercisable at September 30, 2016
 
706,677

 
72.25

 
2.81
 
27,648,800

The aggregate intrinsic value of outstanding options shown in the table above represents the pre-tax intrinsic value based on our closing stock price of $110.54 as of September 30, 2016 . The total intrinsic value of options exercised during the three and nine months ended September 30, 2016 was $1.5 million and $8.2 million , respectively, compared to $2.2 million and $24.0 million for the comparable 2015 periods.
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the nine months ended September 30, 2016 :
 
 
Shares    
 
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2015
 
572,038

 
$
103.50

Granted
 
359,028

 
100.17

Vested
 
(215,587
)
 
87.67

Forfeited
 
(24,508
)
 
106.50

Nonvested at September 30, 2016
 
690,971

 
106.61

4.
Variable Interest Entities
Our involvement with VIEs includes our investments in venture capital and private equity funds, debt funds, private and public portfolio companies and our investments in qualified affordable housing projects.
The following table presents the carrying amounts and classification of significant variable interests in consolidated and unconsolidated VIEs as of September 30, 2016 and December 31, 2015 :

13


(Dollars in thousands)
 
Consolidated VIEs
 
Unconsolidated VIEs
 
Maximum Exposure to Loss in Unconsolidated VIEs
September 30, 2016:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
12,870

 
$

 
$

Non-marketable and other securities (1)
 
195,956

 
312,693

 
312,693

Accrued interest receivable and other assets
 
333

 

 

Total assets
 
$
209,159

 
$
312,693

 
$
312,693

Liabilities:
 
 
 
 
 
 
Accrued expenses and other liabilities (1)
 
909

 
52,846

 

Total liabilities
 
$
909

 
$
52,846

 
$

December 31, 2015:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,811

 
$

 
$

Non-marketable and other securities (1)
 
203,714

 
364,450

 
364,450

Accrued interest receivable and other assets
 
494

 

 

Total assets
 
$
216,019

 
$
364,450

 
$
364,450

Liabilities:
 
 
 
 
 
 
Accrued expenses and other liabilities (1)
 
433

 
90,978

 

Total liabilities
 
$
433

 
$
90,978

 
$

 
 
(1)
Included in our unconsolidated non-marketable and other securities portfolio at September 30, 2016 and December 31, 2015 are investments in qualified affordable housing projects of $106.5 million and $154.4 million , respectively and related unfunded commitments of $52.8 million and $91.0 million , respectively.

Non-marketable and other securities
Our non-marketable and other securities portfolio primarily represents investments in venture capital and private equity funds, debt funds, private and public portfolio companies and investments in qualified affordable housing projects. A majority of these investments are through third party funds held by SVB Financial in which we do not have controlling or significant variable interests. These investments represent our unconsolidated VIEs in the table above. Our non-marketable and other securities portfolio also includes investments from SVB Capital. SVB Capital is the venture capital investment arm of SVB Financial, which focuses primarily on funds management. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. We have a controlling and significant variable interest in five of these SVB Capital funds and consolidate these funds for financial reporting purposes.
All investments are generally nonredeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. Subject to applicable regulatory requirements, including the Volcker Rule, we also make commitments to invest in venture capital and private equity funds, but are not obligated to fund commitments beyond our initial investment. For additional details, see Note 12—"Off-Balance Sheet Arrangements, Guarantees, and Other Commitments" of the "Notes to Interim Consolidated Financial Statements (unaudited)" under Part I, Item 1 of this report.
The Bank also has variable interests in low income housing tax credit funds, in connection with fulfilling its responsibilities under the Community Reinvestment Act ("CRA"), that are designed to generate a return primarily through the realization of federal tax credits. These investments are typically limited partnerships in which the general partner, other than the Bank, holds the power over significant activities of the VIE; therefore, these investments are not consolidated. For additional information on our investments in qualified affordable housing projects see Note 6—“Investment Securities" of the "Notes to Interim Consolidated Financial Statements (unaudited)" under Part I, Item 1 of this report.
As of September 30, 2016 , our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $208.3 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $312.7 million .

14


5.
Cash and Cash Equivalents
The following table details our cash and cash equivalents at September 30, 2016 and December 31, 2015 :
(Dollars in thousands)
 
September 30, 2016

December 31, 2015
Cash and due from banks (1)
 
$
2,352,469

 
$
1,372,743

Securities purchased under agreements to resell (2)
 
163,719

 
125,391

Other short-term investment securities
 
5,131

 
5,123

Total cash and cash equivalents
 
$
2,521,319

 
$
1,503,257

 
 
(1)
At September 30, 2016 and December 31, 2015 , $1.3 billion and $405 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 $724 million and $500 million , respectively.
(2)
At September 30, 2016 and December 31, 2015 , securities purchased und er agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $167 million an d $128 million , respectively. None of these securities received as collateral were sold or pledged as of September 30, 2016 or December 31, 2015 .
6.
Investment Securities
Our investment securities portfolio consists of: (i) an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest-earning investment securities, and, (ii) a non-marketable and other securities portfolio, which primarily represents investments managed as part of our funds management business.
Available-for-Sale Securities
The components of our available-for-sale investment securities portfolio at September 30, 2016 and December 31, 2015 are as follows:
 
 
September 30, 2016
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
8,828,906

 
$
110,721

 
$

 
$
8,939,627

U.S. agency debentures
 
2,089,590

 
36,982

 

 
2,126,572

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
1,089,956

 
4,896

 
(2,563
)
 
1,092,289

Agency-issued collateralized mortgage obligations—variable rate
 
504,134

 
839

 
(486
)
 
504,487

Equity securities
 
2,307

 
637

 
(222
)
 
2,722

Total available-for-sale securities
 
$
12,514,893

 
$
154,075

 
$
(3,271
)
 
$
12,665,697


 
 
December 31, 2015
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
11,679,450

 
$
19,134

 
$
(20,549
)
 
$
11,678,035

U.S. agency debentures
 
2,677,453

 
17,684

 
(5,108
)
 
2,690,029

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
1,408,206

 
6,591

 
(15,518
)
 
1,399,279

Agency-issued collateralized mortgage obligations—variable rate
 
604,236

 
3,709

 
(9
)
 
607,936

Equity securities
 
6,596

 
460

 
(1,587
)
 
5,469

Total available-for-sale securities
 
$
16,375,941

 
$
47,578

 
$
(42,771
)
 
$
16,380,748

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, 2016 :

15


 
 
September 30, 2016
 
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 

 

Agency-issued collateralized mortgage obligations—fixed rate
 
$
310,991

 
$
(469
)
 
$
247,100

 
$
(2,094
)
 
$
558,091

 
$
(2,563
)
Agency-issued collateralized mortgage obligations—variable rate
 
221,818

 
(486
)
 

 

 
221,818

 
(486
)
Equity securities
 
932

 
(222
)
 

 

 
932

 
(222
)
Total temporarily impaired securities: (1)
 
$
533,741

 
$
(1,177
)
 
$
247,100

 
$
(2,094
)
 
$
780,841

 
$
(3,271
)
 
 
(1)
As of September 30, 2016 , we identified a total of 103 investments that were in unrealized loss positions, of which 14 investments totaling $247.1 million with unrealized losses of $2.1 million have been in an impaired position for a period of time greater than 12 months. As of September 30, 2016 , 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, 2016 , 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, 2015 :
 
 
December 31, 2015
 
 
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
 
$
7,467,519

 
$
(20,549
)
 
$

 
$

 
$
7,467,519

 
$
(20,549
)
U.S. agency debentures
 
760,071

 
(5,108
)
 

 

 
760,071

 
(5,108
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
545,404

 
(4,681
)
 
373,284

 
(10,837
)
 
918,688

 
(15,518
)
Agency-issued collateralized mortgage obligations—variable rate
 
7,776

 
(9
)
 

 

 
7,776

 
(9
)
Equity securities
 
2,955

 
(1,587
)
 

 

 
2,955

 
(1,587
)
Total temporarily impaired securities (1):
 
$
8,783,725

 
$
(31,934
)
 
$
373,284

 
$
(10,837
)
 
$
9,157,009

 
$
(42,771
)
 
 
(1)
As of December 31, 2015, we identified a total of 243 investments that were in unrealized loss positions, of which 18 investments totaling $373.3 million with unrealized losses of $10.8 million have been in an impaired position for a period of time greater than 12 months.



16


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, 2016 . 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 and U.S. agency debentures, the expected maturity is the actual contractual maturity of the notes. 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. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
 
 
September 30, 2016
 
 
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
 
$
8,939,627

 
1.31
%
 
$
1,652,444

 
0.80
%
 
$
7,287,183

 
1.43
%
 
$

 
%
 
$

 
%
U.S. agency debentures
 
2,126,572

 
1.60

 
426,210

 
1.17

 
1,700,362

 
1.71

 

 

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations - fixed rate
 
1,092,289

 
1.91

 

 

 

 

 
755,958

 
2.09

 
336,331

 
1.52

Agency-issued collateralized mortgage obligations - variable rate
 
504,487

 
0.71

 

 

 

 

 

 

 
504,487

 
0.71

Total
 
$
12,662,975