SVB Financial Group
SVB FINANCIAL GROUP (Form: 10-Q, Received: 08/07/2017 16:30:40)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
  (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer         x              Accelerated filer         ¨     
Non-accelerated filer         ¨      (Do not check if a smaller reporting company)
Smaller reporting company          ¨          Emerging growth company         ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
At July 31, 2017 , 52,693,155 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
ERI— Energy and Resource innovation
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
HTM— Held-to-Maturity
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
SPD-SVB— SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China)
TDR— Troubled Debt Restructuring
UK— United Kingdom
VIE— Variable Interest Entity

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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)

June 30,
2017

December 31,
2016
Assets




Cash and cash equivalents

$
3,854,244


$
2,545,750

Available-for-sale securities, at fair value (cost of $12,053,305 and $12,588,783, respectively)

12,071,052


12,620,411

Held-to-maturity securities, at cost (fair value of $9,910,504 and $8,376,138, respectively)

9,938,371


8,426,998

Non-marketable and other securities

630,670


622,552

Total investment securities

22,640,093


21,669,961

Loans, net of unearned income

20,976,466


19,899,944

Allowance for loan losses

(236,496
)

(225,366
)
Net loans

20,739,970


19,674,578

Premises and equipment, net of accumulated depreciation and amortization

121,947


120,683

Accrued interest receivable and other assets

1,044,125


672,688

Total assets

$
48,400,379


$
44,683,660

Liabilities and total equity




Liabilities:




Noninterest-bearing demand deposits

$
35,046,371


$
31,975,457

Interest-bearing deposits

7,418,920


7,004,411

Total deposits

42,465,291


38,979,868

Short-term borrowings

470


512,668

Other liabilities

1,145,154


618,383

Long-term debt

749,429


795,704

Total liabilities

44,360,344


40,906,623

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; 52,684,159 shares and 52,254,074 shares outstanding, respectively

53


52

Additional paid-in capital

1,283,485


1,242,741

Retained earnings

2,601,007


2,376,331

Accumulated other comprehensive income

14,890


23,430

Total SVBFG stockholders’ equity

3,899,435


3,642,554

Noncontrolling interests

140,600


134,483

Total equity

4,040,035


3,777,037

Total liabilities and total equity

$
48,400,379


$
44,683,660


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

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

Three months ended June 30,

Six months ended June 30,
(Dollars in thousands, except per share amounts)

2017

2016

2017

2016
Interest income:








Loans

$
250,197


$
205,287


$
477,538


$
403,229

Investment securities:








Taxable

95,522


86,603


185,325


177,653

Non-taxable

885


575


1,531


1,171

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

7,323


1,527


10,459


3,597

Total interest income

353,927


293,992


674,853


585,650

Interest expense:








Deposits

2,197


1,261


3,914


2,449

Borrowings

9,034


9,395


18,250


18,444

Total interest expense

11,231


10,656


22,164


20,893

Net interest income

342,696


283,336


652,689


564,757

Provision for credit losses (1)

15,806


36,746


46,540


70,221

Net interest income after provision for credit losses

326,890


246,590


606,149


494,536

Noninterest income:








Gains on investment securities, net

17,630


23,270


33,600


18,586

Gains on equity warrant assets, net (2)

10,820


5,089


17,510


11,695

Foreign exchange fees

26,108


24,088


52,355


51,054

Credit card fees

18,099


15,424


35,829


30,931

Deposit service charges

14,563


13,114


28,538


25,786

Client investment fees

12,982


8,012


22,008


16,007

Lending related fees

8,509


7,802


17,470


15,615

Letters of credit and standby letters of credit fees

7,006


6,014


13,645


11,603

Other (2)

12,811


9,963


25,232


17,633

Total noninterest income

128,528


112,776


246,187


198,910

Noninterest expense:








Compensation and benefits

148,973


115,580


296,149


237,842

Professional services

27,925


25,516


53,344


44,516

Premises and equipment

18,958


16,586


34,816


31,570

Net occupancy

11,126


9,359


22,777


19,394

Business development and travel

11,389


9,327


20,584


21,573

FDIC and state assessments

9,313


6,892


17,995


13,819

Correspondent bank fees

3,163


2,713


6,608


6,365

Other

20,399


13,966


36,606


28,759

Total noninterest expense (1)

251,246


199,939


488,879


403,838

Income before income tax expense

204,172


159,427


363,457


289,608

Income tax expense (3)

71,656


65,047


123,061


118,631

Net income before noncontrolling interests

132,516


94,380


240,396


170,977

Net (income) loss attributable to noncontrolling interests

(9,323
)

(1,416
)

(15,720
)

1,161

Net income available to common stockholders (3)

$
123,193


$
92,964


$
224,676


$
172,138

Earnings per common share—basic (3)

$
2.34


$
1.79


$
4.28


$
3.33

Earnings per common share—diluted (3)

2.32


1.78


4.22


3.30

 
 
(1)
Our consolidated statements of income for the three and six months ended June 30, 2016 were modified from prior period's presentation to conform to the current period's presentation, which reflects our provision for loan losses and provision for unfunded credit commitments together as our “provision for credit losses”. In prior periods, our provision for unfunded credit commitments were reported as a component of noninterest expense.
(2)
Our consolidated statements of income for the three and six months ended June 30, 2016 were modified from prior period's presentation to conform to the current period's presentation, which reflects a new line item to separately disclose net gains on equity warrant assets. In prior periods, net gains on equity warrant assets were reported as a component of gains on derivative instruments, net. We removed the line item gains on derivative instruments, net and reclassified all other gains on derivative instruments, net to other noninterest income.

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(3)
Included in income tax expense, net income available to common shareholders, earnings per common share-basic and earnings for common share-diluted, for the three and six months ended June 30, 2017, are tax benefits recognized associated with the adoption of Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting in the first quarter of 2017. This guidance was adopted on a prospective basis with no change to prior period amounts.

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

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SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 

Three months ended June 30,

Six months ended June 30,
(Dollars in thousands)

2017

2016

2017

2016
Net income before noncontrolling interests

$
132,516


$
94,380


$
240,396


$
170,977

Other comprehensive (loss) income, net of tax:








Change in cumulative translation gains (losses):








Foreign currency translation gains (losses)

1,578


(1,795
)

2,535


(2,049
)
Related tax (expense) benefit

(644
)

731


(1,034
)

835

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








Unrealized holding (losses) gains

(5,639
)

40,937


(13,396
)

211,768

Related tax benefit (expense)

2,500


(16,686
)

5,636


(86,289
)
Reclassification adjustment for losses (gains) included in net income

123


(12,328
)

(485
)

(11,582
)
Related tax (benefit) expense

(50
)

5,017


198


4,713

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

(1,566
)

(2,250
)

(3,337
)

(4,817
)
Related tax benefit

630


905


1,343


1,938

Other comprehensive (loss) income, net of tax

(3,068
)

14,531


(8,540
)

114,517

Comprehensive income

129,448


108,911


231,856


285,494

Comprehensive (income) loss attributable to noncontrolling interests

(9,323
)

(1,416
)

(15,720
)

1,161

Comprehensive income attributable to SVBFG

$
120,125


$
107,495


$
216,136


$
286,655


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

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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, 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

372,282

 

 
6,852

 

 


6,852




6,852

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 (1)


 

 
(6,587
)
 

 


(6,587
)



(6,587
)
Net income (loss)


 

 

 
172,138

 


172,138


(1,161
)

170,977

Capital calls and distributions, net


 

 

 

 




(5,721
)

(5,721
)
Net change in unrealized gains and losses on AFS securities, net of tax


 

 

 

 
118,610


118,610




118,610

Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax


 

 

 

 
(2,879
)

(2,879
)



(2,879
)
Foreign currency translation adjustments, net of tax


 

 

 

 
(1,214
)

(1,214
)



(1,214
)
Share-based compensation, net


 

 
16,196

 

 


16,196




16,196

Balance at June 30, 2016

52,025,673


$
52


$
1,209,821


$
2,165,784


$
129,921


$
3,505,578


$
128,215


$
3,633,793

Balance at December 31, 2016

52,254,074


$
52


$
1,242,741


$
2,376,331


$
23,430


$
3,642,554


$
134,483


$
3,777,037

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

419,247

 
1

 
11,821

 

 


11,822




11,822

Common stock issued under ESOP

10,838

 

 
2,094

 

 


2,094




2,094

Income tax effect from stock options exercised, vesting of restricted stock and other (1)
 

 

 

 

 

 

 

 

Net income


 

 

 
224,676

 


224,676


15,720


240,396

Capital calls and distributions, net


 

 

 

 




(9,603
)

(9,603
)
Net change in unrealized gains and losses on AFS securities, net of tax


 

 

 

 
(8,047
)

(8,047
)



(8,047
)
Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax


 

 

 

 
(1,994
)

(1,994
)



(1,994
)
Foreign currency translation adjustments, net of tax


 

 

 

 
1,501


1,501




1,501

Share-based compensation, net


 

 
26,829

 

 


26,829




26,829

Balance at June 30, 2017

52,684,159


$
53


$
1,283,485


$
2,601,007


$
14,890


$
3,899,435


$
140,600


$
4,040,035

 
(1)
During the first quarter of 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require that all excess tax benefits and tax deficiencies associated with share-based compensation be recognized in income tax expense or benefit in the income statement. Previously, tax effects resulting from changes in the Company's share price subsequent to grant date of share-based compensation awards were recorded through additional paid-in-capital in stockholders' equity at the time of vesting and exercise. This guidance was adopted on a prospective basis with no change to prior period amounts. See Note 1—“Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.





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

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

Six months ended June 30,
(Dollars in thousands)

2017

2016
Cash flows from operating activities:




Net income before noncontrolling interests

$
240,396


$
170,977

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




Provision for credit losses

46,540


70,221

Changes in fair values of equity warrant assets, net of proceeds from exercises

(9,053
)
 
(1,803
)
Changes in fair values of derivatives, net

8,505


(1,636
)
Gains on investment securities, net

(33,600
)

(18,586
)
Depreciation and amortization

26,268


23,768

Amortization of premiums and discounts on investment securities, net

1,747


7,923

Amortization of share-based compensation

19,095


14,425

Amortization of deferred loan fees

(51,869
)

(46,896
)
Deferred income tax benefit

(9,827
)

(6,374
)
Excess tax benefit from exercise of stock options and vesting of restricted shares (1)
 
(13,028
)
 

Changes in other assets and liabilities:




Accrued interest receivable and payable, net

(8,852
)

232

Accounts receivable and payable, net

(6,227
)

(2,598
)
Income tax receivable and payable, net

840


(32,915
)
Accrued compensation

(51,636
)

(79,858
)
Foreign exchange spot contracts, net

159,607


53,870

Other, net

41,172


(8,683
)
Net cash provided by operating activities

360,078


142,067

Cash flows from investing activities:




Purchases of available-for-sale securities

(1,174,666
)


Proceeds from sales of available-for-sale securities

5,024


2,878,272

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

1,715,291


660,464

Purchases of held-to-maturity securities

(2,298,290
)

(140,641
)
Proceeds from maturities and pay downs of held-to-maturity securities

806,386


743,117

Purchases of non-marketable and other securities

(9,435
)

(31,239
)
Proceeds from sales and distributions of non-marketable and other securities

60,355


28,064

Net increase in loans

(1,066,056
)

(2,085,829
)
Purchases of premises and equipment

(21,496
)

(24,057
)
Net cash (used for) provided by investing activities

(1,982,887
)

2,028,151

Cash flows from financing activities:




Net increase (decrease) in deposits

3,485,423


(1,546,209
)
Net decrease in short-term borrowings

(512,198
)

(271,681
)
Principal payments of long-term debt
 
(46,235
)
 

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

(9,603
)

(5,721
)
Tax effect from stock exercises (1)



(6,587
)
Proceeds from issuance of common stock, ESPP and ESOP

13,916


11,180

Net cash provided by (used for) financing activities

2,931,303


(1,819,018
)
Net increase in cash and cash equivalents

1,308,494


351,200

Cash and cash equivalents at beginning of period

2,545,750


1,503,257

Cash and cash equivalents at end of period

$
3,854,244


$
1,854,457

Supplemental disclosures:




Cash paid during the period for:




Interest

$
22,293


$
20,942

Income taxes

137,371


157,825

Noncash items during the period:




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

$
(8,047
)

$
118,610

Distributions of stock from investments

2,514


265

 
(1)
During the first quarter of 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance was adopted on a prospective basis with no change to prior period amounts. See Note 1—“Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.

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

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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 a 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 (not including subsidiaries).
The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 2017 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, 2016 (“ 2016 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 2016 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 allowance 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 consolidated entities. We consolidate voting entities in which we have control through voting interests or entities through which we have a controlling financial interest in a variable interest entity (“VIE”). We determine whether we have a controlling financial interest in a VIE by determining if we have: (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses, or (c) the right to receive the expected returns of the entity. 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.
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 also 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.
We also evaluate fees paid to managers of our limited partnership investments. 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. Fee arrangements based on terms that are customary and commensurate with the services provided are deemed not to be variable interests and are, therefore, excluded.

10


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.
Adoption of New Accounting Standards
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. We adopted this guidance on January 1, 2017 and elected to estimate the number of awards that are expected to vest which, is consistent with the previous accounting guidance. In addition, we also elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method.
Previously, tax effects resulting from changes in the Company's share price subsequent to grant date of share-based compensation awards were recorded through additional paid-in capital in stockholders' equity at the time of vesting and exercise. The adoption of the amended accounting guidance resulted in a $7.0 million and $13.1 million reduction of income tax expense (that previously would have been reflected as additional paid-in capital), or a benefit of $0.13 and $0.25 per diluted common share, for the three and six months ended June 30, 2017, respectively. We expect the impact of this amendment will vary period to period depending on the volatility of the Company's stock price and the timing of vesting and/or settlement of awards.
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. 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 further clarifies ASU 2014-09 by providing implementation guidance on principal versus agent evaluation. 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. These amendments will be effective January 1, 2018, either on a full retrospective approach or a modified retrospective approach. This guidance is not applicable to financial instruments (i.e. loans and fixed income securities) and as such, is not expected to impact a majority of our revenue, which is primarily net interest income. Our initial assessment has identified our credit card products and our carried interest allocations from our venture capital investments as revenue sources most likely to be impacted by the new guidance. We continue to evaluate the impact of this guidance to our noninterest income, on our presentation and disclosures and on timing of revenue recognition.
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 for our cost method venture capital and private equity fund investments with readily determinable fair values. Our cost method venture capital and private equity fund investments that do not have readily determinable fair values will be carried at cost, minus impairment, if any, and remeasured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The actual adjustment to opening retained earnings will depend upon the fair value of our investments at the adoption date.
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 plan to adopt the lease accounting guidance in the first quarter of 2019 and are currently evaluating the impact this guidance will have on our consolidated financial statements by reviewing our existing lease contracts and service contracts that may include embedded leases. We expect to recognize right-of-use assets and related lease liabilities associated predominantly with noncancelable operating leases included in the table of minimum future payments in the amount of $217 million as disclosed in Note 18 of our 2016 Form 10-K.
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

11


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, 2019. We currently have a working project team in place and subject matter experts to assist with our review of key interpretive issues and help in our assessment of our existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required. 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. Our preliminary evaluation has resulted in the expectation that this guidance will primarily impact the presentation between investing and operating activities within our statements of cash flows related to distributions and net gains from our nonmarketable and other securities portfolio. We are continuing to evaluate any further impact of this guidance to the presentation of our operating, investing and financing activities within our statements of cash flows.
Reclassifications
Certain prior period amounts, primarily related to the changes to our income statement presentation of net gains on derivative instruments and provision for unfunded credit commitments 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 six months ended June 30, 2017 and 2016 :
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
Income Statement Location
 
2017

2016
 
2017
 
2016
Reclassification adjustment for losses (gains) included in net income
 
Gains on investment securities, net
 
$
123

 
$
(12,328
)
 
$
(485
)
 
$
(11,582
)
Related tax (benefit) expense
 
Income tax expense
 
(50
)
 
5,017

 
198

 
4,713

Total reclassification adjustment for losses (gains) included in net income, net of tax
 
 
 
$
73

 
$
(7,311
)
 
$
(287
)
 
$
(6,869
)

12


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 issuable for stock options and restricted stock units outstanding under our 2006 Equity Incentive Plan and our ESPP. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2017 and 2016 :
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars and shares in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
123,193

 
$
92,964

 
$
224,676

 
$
172,138

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
 
52,537

 
51,831

 
52,441

 
51,739

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and ESPP
 
368

 
238

 
397

 
246

Restricted stock units
 
289

 
118

 
342

 
145

Weighted average common shares outstanding—diluted
 
53,194

 
52,187

 
53,180

 
52,130

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
2.34

 
$
1.79

 
$
4.28

 
$
3.33

Diluted
 
$
2.32

 
$
1.78

 
$
4.22

 
$
3.30


The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation due to the antidilutive effect for the three and six months ended June 30, 2017 and 2016 :
 
 
Three months ended June 30,
 
Six months ended June 30,
(Shares in thousands)
 
2017
 
2016
 
2017
 
2016
Stock options
 
73

 
462

 
36

 
407

Restricted stock units
 

 
143

 

 
88

Total
 
73

 
605

 
36

 
495

3.
Share-Based Compensation
For the three and six months ended June 30, 2017 and 2016 , we recorded share-based compensation and related tax benefits as follows:  
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Share-based compensation expense
 
$
9,892

 
$
7,548

 
$
19,095

 
$
14,425

Income tax benefit related to share-based compensation expense
 
(3,349
)
 
(4,581
)
 
(6,364
)
 
(6,698
)
Unrecognized Compensation Expense
As of June 30, 2017 , unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
 
  Unrecognized  
Expense
 
Weighted Average
Expected
Recognition
  Period - in Years  
Stock options
 
$
12,309

 
2.88
Restricted stock units
 
62,942

 
2.89
Total unrecognized share-based compensation expense
 
$
75,251

 
 

13


Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the six months ended June 30, 2017 :
 
 
Options
 
Weighted
Average
 Exercise Price 
 
Weighted Average Remaining Contractual Life - in Years  
 
Aggregate
  Intrinsic Value  
of In-The-
Money
Options
Outstanding at December 31, 2016
 
1,010,557

 
$
87.24

 
 
 
 
Granted
 
111,855

 
178.16

 
 
 
 
Exercised
 
(196,006
)
 
69.93

 
 
 
 
Forfeited
 
(3,662
)
 
93.88

 
 
 
 
Outstanding at June 30, 2017
 
922,744

 
101.91

 
4.00
 
$
68,457,617

Vested and expected to vest at June 30, 2017
 
893,276

 
100.71

 
3.94
 
67,315,191

Exercisable at June 30, 2017
 
568,202

 
82.89

 
2.95
 
52,783,813

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 $175.79 as of June 30, 2017 . The total intrinsic value of options exercised during the three and six months ended June 30, 2017 was $5.6 million and $22.1 million , compared to $4.6 million and $6.7 million for the comparable 2016 periods, respectively.
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the six months ended June 30, 2017 :
 
 
Shares    
 
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016
 
670,969

 
$
106.64

Granted
 
230,822

 
179.94

Vested
 
(218,336
)
 
102.07

Forfeited
 
(16,078
)
 
117.29

Nonvested at June 30, 2017
 
667,377

 
133.23

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.

14


The following table presents the carrying amounts and classification of significant variable interests in consolidated and unconsolidated VIEs as of June 30, 2017 and December 31, 2016 :
(Dollars in thousands)
 
Consolidated VIEs
 
Unconsolidated VIEs
 
Maximum Exposure to Loss in Unconsolidated VIEs
June 30, 2017:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,440

 
$

 
$

Non-marketable and other securities (1)
 
194,543

 
323,426

 
323,426

Accrued interest receivable and other assets
 
142

 

 

Total assets
 
$
202,125

 
$
323,426

 
$
323,426

Liabilities:
 
 
 
 
 
 
Other liabilities (1)
 
604

 
86,545

 

Total liabilities
 
$
604

 
$
86,545

 
$

December 31, 2016:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
11,469

 
$

 
$

Non-marketable and other securities (1)
 
196,140

 
314,810

 
314,810

Accrued interest receivable and other assets
 
294

 

 

Total assets
 
$
207,903

 
$
314,810

 
$
314,810

Liabilities:
 
 
 
 
 
 
Other liabilities (1)
 
517

 
58,095

 

Total liabilities
 
$
517

 
$
58,095

 
$

 
 
(1)
Included in our unconsolidated non-marketable and other securities portfolio at June 30, 2017 and December 31, 2016 are investments in qualified affordable housing projects of $140.4 million and $112.4 million , respectively, and related unfunded credit commitments of $86.5 million and $58.1 million , respectively.

Non-marketable and other securities
Our non-marketable and other securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), 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 funds management business of SVB Financial Group, which focuses primarily on venture capital investments. 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 four 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 only 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. 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 .

15


As of June 30, 2017 , our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $201.5 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $323.4 million .
5.
Cash and Cash Equivalents
The following table details our cash and cash equivalents at June 30, 2017 and December 31, 2016 :
(Dollars in thousands)
 
June 30, 2017

December 31, 2016
Cash and due from banks (1)
 
$
3,658,927

 
$
2,476,588

Securities purchased under agreements to resell (2)
 
192,421

 
64,028

Other short-term investment securities
 
2,896

 
5,134

Total cash and cash equivalents
 
$
3,854,244

 
$
2,545,750

 
 
(1)
At June 30, 2017 and December 31, 2016 , $1.8 billion and $1.1 billion , 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 $1.2 billion and $721 million , respectively.
(2)
At June 30, 2017 and December 31, 2016 , securities purchased und er agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $196 million an d $66 million , respectively. None of these securities were sold or repledged as of June 30, 2017 and December 31, 2016 .
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 June 30, 2017 and December 31, 2016 are as follows:
 
 
June 30, 2017
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
7,785,838

 
$
19,443

 
$
(3,599
)
 
$
7,801,682

U.S. agency debentures
 
1,917,475

 
11,355

 
(1,577
)
 
1,927,253

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
1,925,216

 
3,885

 
(13,820
)
 
1,915,281

Agency-issued collateralized mortgage obligations—variable rate
 
418,173

 
1,361

 
(147
)
 
419,387

Equity securities
 
6,603

 
1,495

 
(649
)
 
7,449

Total available-for-sale securities
 
$
12,053,305

 
$
37,539

 
$
(19,792
)
 
$
12,071,052


 
 
December 31, 2016
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
8,880,358

 
$
30,323

 
$
(1,190
)
 
$
8,909,491

U.S. agency debentures
 
2,065,535

 
14,443

 
(1,603
)
 
2,078,375

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
1,163,017

 
3,046

 
(13,398
)
 
1,152,665

Agency-issued collateralized mortgage obligations—variable rate
 
474,238

 
685

 
(640
)
 
474,283

Equity securities
 
5,635

 
748

 
(786
)
 
5,597

Total available-for-sale securities
 
$
12,588,783

 
$
49,245

 
$
(17,617
)
 
$
12,620,411


16


The following tables summarize our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months, or 12 months or longer as of June 30, 2017 and December 31, 2016 :
 
 
June 30, 2017
 
 
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
 
$
2,724,519

 
$
(3,599
)
 
$

 
$

 
$
2,724,519

 
$
(3,599
)
U.S. agency debentures
 
762,920

 
(1,577
)
 

 

 
762,920

 
(1,577
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
851,825

 
(7,849
)
 
201,986

 
(5,971
)
 
1,053,811

 
(13,820
)
Agency-issued collateralized mortgage obligations—variable rate
 
6,185

 
(14
)
 
69,706

 
(133
)
 
75,891

 
(147
)
Equity securities
 
3,561

 
(649
)
 

 

 
3,561

 
(649
)
Total temporarily impaired securities (1)
 
$
4,349,010

 
$
(13,688
)
 
$
271,692

 
$
(6,104
)
 
$
4,620,702

 
$
(19,792
)
 
 
(1)
As of June 30, 2017 , we identified a total of 184 investments that were in unrealized loss positions, of which 44 investments totaling $271.7 million with unrealized losses of $6.1 million have been in an impaired position for a period of time greater than 12 months. As of June 30, 2017 , we do not intend to sell any impaired fixed income investment securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis. Based on our analysis as of June 30, 2017 , 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.
 
 
December 31, 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:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
879,255

 
$
(1,190
)
 
$

 
$

 
$
879,255

 
$
(1,190
)
U.S. agency debentures
 
513,198

 
(1,603
)
 

 

 
513,198

 
(1,603
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
635,566

 
(6,704
)
 
227,480

 
(6,694
)
 
863,046

 
(13,398
)
Agency-issued collateralized mortgage obligations—variable rate
 
258,325

 
(613
)
 
6,068

 
(27
)
 
264,393

 
(640
)
Equity securities
 
3,693

 
(786
)
 

 

 
3,693

 
(786
)
Total temporarily impaired securities (1)
 
$
2,290,037

 
$
(10,896
)
 
$
233,548

 
$
(6,721
)
 
$
2,523,585

 
$
(17,617
)
 
 
(1)
As of December 31, 2016 , we identified a total of 174 investments that were in unrealized loss positions, of which 20 investments totaling $233.5 million with unrealized losses of $6.7 million have been in an impaired position for a period of time greater than 12 months.

17


The following table summarizes the fixed income securities, carried at fair value, classified as available-for-sale as of June 30, 2017 by the remaining contractual principal maturities. 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.
 
 
June 30, 2017
(Dollars in thousands)
 
Total
 
One Year
or Less
 
After One
Year to
Five Years
 
After Five
Years to
Ten Years
 
After
Ten Years
U.S. Treasury securities
 
$
7,801,682

 
$
2,144,571

 
$
5,657,111

 
$

 
$

U.S. agency debentures
 
1,927,253

 
424,613

 
1,502,640

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations fixed rate
 
1,915,281

 

 

 
554,866

 
1,360,415

Agency-issued collateralized mortgage obligations variable rate
 
419,387

 

 

 

 
419,387

Total
 
$
12,063,603

 
$
2,569,184

 
$
7,159,751

 
$
554,866

 
$
1,779,802

Held-to-Maturity Securities

The components of our held-to-maturity investment securities portfolio at June 30, 2017 and December 31, 2016 are as follows:
 
 
June 30, 2017
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Held-to-maturity securities, at cost:
 
 
 
 
 
 
 
 
U.S. agency debentures (1)
 
$
641,191

 
$
7,553

 
$
(1,291
)
 
$
647,453

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
4,170,585

 
12,047

 
(14,619
)
 
4,168,013

Agency-issued collateralized mortgage obligations—fixed rate
 
3,240,643

 
853

 
(26,227
)
 
3,215,269

Agency-issued collateralized mortgage obligations—variable rate
 
283,519

 
581

 
(57
)
 
284,043

Agency-issued commercial mortgage-backed securities
 
1,386,455

 
2,507

 
(9,267
)