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Oct 24, 2019

SVB Financial Group Announces 2019 Third Quarter Financial Results

Board of Directors authorizes repurchase of up to $350 million of Common Stock

SANTA CLARA, Calif., Oct. 24, 2019 /PRNewswire/ -- SVB Financial Group (NASDAQ: SIVB) today announced financial results for the third quarter ended September 30, 2019.

Consolidated net income available to common stockholders for the third quarter of 2019 was $267.3 million, or $5.15 per diluted common share, compared to $318.0 million, or $6.08 per diluted common share, for the second quarter of 2019 and $274.8 million, or $5.10 per diluted common share, for the third quarter of 2018. Consolidated net income available to common stockholders for the nine months ended September 30, 2019 was $874.0 million, or $16.67 per diluted common share, compared to $707.6 million, or $13.15 per diluted common share, for the comparable 2018 period. For the third quarter of 2019, a net loss attributable to SVB Leerink was $1.4 million, or $0.03 per diluted common share. Net income for the nine months ended September 30, 2019 attributable to SVB Leerink was $8.2 million, or $0.16 per diluted common share.

"We delivered strong performance in the third quarter, driven by excellent balance sheet growth, solid core fee income, stable credit and healthy market gains, all of which reflect the continued health of and robust liquidity available to our clients," said Greg Becker, President and CEO of SVB Financial Group. "While declining short-term rates are pressuring net interest income and net interest margin for now, we believe our focus on execution will enable us to drive continued growth and profitability over the long term, with or without help from interest rates."

Highlights of our third quarter 2019 results (compared to second quarter 2019, unless otherwise noted) included:

  • Average loan balances of $29.8 billion, an increase of $0.4 billion (or 1.4 percent).
  • Period-end loan balances of $31.1 billion, an increase of $1.9 billion (or 6.3 percent).
  • Average fixed income investment securities of $25.1 billion, an increase of $2.0 billion (or 8.7 percent).
  • Period-end fixed income investment securities of $27.3 billion, an increase of $4.5 billion (or 19.6 percent).
  • Average total client funds (on-balance sheet deposits and off-balance sheet client investment funds) increased $7.4 billion (or 5.2 percent) to $150.1 billion.
  • Period-end total client funds increased $8.9 billion (or 6.1 percent) to $156.0 billion.
  • Net interest income (fully taxable equivalent basis) of $523.6 million, a decrease of $8.7 million (or 1.6 percent).
  • Provision for credit losses of $36.5 million, compared to $23.9 million.
  • Net loan charge-offs of $32.9 million, or 44 basis points of average total gross loans (annualized), compared to $16.6 million, or 23 basis points.
  • Net gains on investment securities of $29.8 million, compared to $47.7 million. Non-GAAP net gains on investment securities, net of noncontrolling interests, were $15.2 million, compared to $29.1 million. (See non-GAAP reconciliation under the section "Use of Non-GAAP Financial Measures.")
  • Net gains on equity warrant assets of $37.6 million, compared to $48.3 million.
  • Noninterest income of $294.0 million, a decrease of $39.7 million (or 11.9 percent). Non-GAAP core fee income increased $4.8 million (or 3.1 percent) to $162.2 million. (See non-GAAP reconciliation under the section "Use of Non-GAAP Financial Measures.")
  • Noninterest expense of $391.3 million, an increase of $7.8 million (or 2.0 percent).
  • Effective tax rate of 28.2 percent compared to 27.3 percent.
  • GAAP operating efficiency ratio of 48.04 percent, an increase of 361 basis points. Non-GAAP core operating efficiency ratio of 48.05 percent, an increase of 256 basis points. (See non-GAAP reconciliation under the section "Use of Non-GAAP Financial Measures.")
 

Third Quarter 2019 Summary

(Dollars in millions, except share data, employees and ratios)

 

Three months ended

 

Nine months ended

September 30,
 2019

 

June 30,
 2019

 

March 31,
 2019

 

December 31,
 2018

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Income statement:

                           

Diluted earnings per common share

 

$

5.15

   

$

6.08

   

$

5.44

   

$

4.96

   

$

5.10

   

$

16.67

   

$

13.15

 

Net income available to common stockholders

 

267.3

   

318.0

   

288.7

   

266.3

   

274.8

   

874.0

   

707.6

 

Net interest income

 

520.6

   

529.4

   

512.9

   

514.5

   

493.2

   

1,562.9

   

1,379.5

 

Provision for credit losses

 

36.5

   

23.9

   

28.6

   

13.6

   

17.2

   

89.0

   

74.2

 

Noninterest income

 

294.0

   

333.8

   

280.4

   

186.7

   

210.1

   

908.1

   

558.3

 

Noninterest expense

 

391.3

   

383.5

   

365.7

   

307.6

   

309.4

   

1,140.5

   

880.6

 

Non-GAAP core fee income (1)

 

162.2

   

157.3

   

154.2

   

146.0

   

131.7

   

473.8

   

369.8

 

Non-GAAP core fee income, including investment banking revenue and commissions (1)

 

213.0

   

220.5

   

218.1

   

146.0

   

131.7

   

651.6

   

369.8

 

Non-GAAP noninterest income, net of noncontrolling interests (1)

 

279.4

   

315.0

   

277.1

   

177.9

   

203.4

   

871.6

   

529.1

 

Non-GAAP noninterest expense, net of noncontrolling interests (1)

 

391.2

   

383.4

   

365.3

   

307.4

   

309.3

   

1,139.8

   

880.3

 

Fully taxable equivalent:

                           

Net interest income (1) (2)

 

$

523.6

   

$

532.3

   

$

515.8

   

$

517.4

   

$

496.1

   

$

1,571.7

   

$

1,385.8

 

Net interest margin

 

3.34

%

 

3.68

%

 

3.81

%

 

3.69

%

 

3.62

%

 

3.60

%

 

3.53

%

Balance sheet:

                           

Average total assets

 

$

65,327.7

   

$

60,700.5

   

$

57,528.4

   

$

57,592.3

   

$

56,465.0

   

$

61,214.1

   

$

54,432.7

 

Average loans, net of unearned income

 

29,822.4

   

29,406.6

   

28,388.1

   

27,477.0

   

26,331.4

   

29,211.0

   

25,008.3

 

Average available-for-sale securities

 

10,600.4

   

8,205.3

   

6,870.2

   

8,793.7

   

9,589.9

   

8,572.3

   

10,124.7

 

Average held-to-maturity securities

 

14,534.5

   

14,922.6

   

15,224.0

   

15,691.1

   

15,916.7

   

14,891.2

   

14,764.2

 

Average noninterest-bearing demand deposits

 

39,146.2

   

38,117.9

   

38,222.7

   

40,106.9

   

40,625.8

   

38,499.0

   

39,473.5

 

Average interest-bearing deposits

 

18,088.8

   

14,844.3

   

11,491.5

   

8,980.3

   

8,466.5

   

14,832.4

   

8,260.9

 

Average total deposits

 

57,235.0

   

52,962.2

   

49,714.2

   

49,087.2

   

49,092.2

   

53,331.3

   

47,734.4

 

Average short-term borrowings

 

22.0

   

189.0

   

353.4

   

1,580.0

   

745.2

   

186.9

   

328.4

 

Average long-term debt

 

697.1

   

696.8

   

696.6

   

696.3

   

696.1

   

696.8

   

695.8

 

Period-end total assets

 

68,231.2

   

63,773.7

   

60,160.3

   

56,928.0

   

58,139.7

   

68,231.2

   

58,139.7

 

Period-end loans, net of unearned income

 

31,064.0

   

29,209.6

   

28,850.4

   

28,338.3

   

27,494.9

   

31,064.0

   

27,494.9

 

Period-end available-for-sale securities

 

12,866.9

   

7,940.3

   

6,755.1

   

7,790.0

   

9,087.6

   

12,866.9

   

9,087.6

 

Period-end held-to-maturity securities

 

14,407.1

   

14,868.8

   

15,055.3

   

15,487.4

   

15,899.7

   

14,407.1

   

15,899.7

 

Period-end non-marketable and other equity securities

 

1,150.1

   

1,079.7

   

975.0

   

941.1

   

896.2

   

1,150.1

   

896.2

 

Period-end noninterest-bearing demand deposits

 

40,480.6

   

39,331.5

   

39,278.7

   

39,103.4

   

40,473.8

   

40,480.6

   

40,473.8

 

Period-end interest-bearing deposits

 

19,062.3

   

16,279.1

   

13,048.5

   

10,225.5

   

8,122.3

   

19,062.3

   

8,122.3

 

Period-end total deposits

 

59,542.9

   

55,610.5

   

52,327.2

   

49,328.9

   

48,596.1

   

59,542.9

   

48,596.1

 

Period-end short-term borrowings

 

18.9

   

24.3

   

14.5

   

631.4

   

2,631.3

   

18.9

   

2,631.3

 

Period-end long-term debt

 

697.2

   

697.0

   

696.7

   

696.5

   

696.2

   

697.2

   

696.2

 

Off-balance sheet:

                           

Average client investment funds

 

$

92,824.9

   

$

89,651.8

   

$

87,414.3

   

$

85,038.8

   

$

79,560.8

   

$

89,963.6

   

$

71,750.0

 

Period-end client investment funds

 

96,472.3

   

91,495.4

   

88,181.7

   

85,983.8

   

82,085.0

   

96,472.3

   

82,085.0

 

Total unfunded credit commitments

 

22,274.4

   

20,952.1

   

20,267.5

   

18,913.0

   

18,539.5

   

22,274.4

   

18,539.5

 

Earnings ratios:

                           

Return on average assets (annualized) (3)

 

1.62

%

 

2.10

%

 

2.04

%

 

1.83

%

 

1.93

%

 

1.91

%

 

1.74

%

Return on average SVBFG stockholders' equity (annualized) (4)

 

18.27

   

23.29

   

22.16

   

20.61

   

22.46

   

21.16

   

20.56

 

Asset quality ratios:

                           

Allowance for loan losses as a % of total gross loans

 

0.97

%

 

1.03

%

 

1.03

%

 

0.99

%

 

1.03

%

 

0.97

%

 

1.03

%

Allowance for loan losses for performing loans as a % of total gross performing loans

 

0.81

   

0.85

   

0.83

   

0.86

   

0.86

   

0.81

   

0.86

 

Gross loan charge-offs as a % of average total gross loans (annualized)

 

0.49

   

0.36

   

0.13

   

0.28

   

0.33

   

0.33

   

0.26

 

Net loan charge-offs as a % of average total gross loans (annualized)

 

0.44

   

0.23

   

0.11

   

0.20

   

0.30

   

0.26

   

0.22

 

Other ratios:

                           

GAAP operating efficiency ratio (5)

 

48.04

%

 

44.43

%

 

46.10

%

 

43.87

%

 

44.00

%

 

46.15

%

 

45.44

%

Non-GAAP core operating efficiency ratio (1)

 

48.05

   

45.49

   

44.71

   

45.42

   

48.35

   

46.09

   

49.06

 

Total cost of deposits (annualized) (6)

 

0.38

   

0.36

   

0.23

   

0.09

   

0.06

   

0.33

   

0.05

 

SVBFG CET 1 risk-based capital ratio

 

12.71

   

12.92

   

12.89

   

13.41

   

13.28

   

12.71

   

13.28

 

Bank CET 1 risk-based capital ratio

 

11.48

   

12.50

   

12.35

   

12.41

   

11.98

   

11.48

   

11.98

 

SVBFG total risk-based capital ratio

 

13.70

   

13.97

   

13.94

   

14.45

   

14.34

   

13.70

   

14.34

 

Bank total risk-based capital ratio

 

12.36

   

13.44

   

13.29

   

13.32

   

12.91

   

12.36

   

12.91

 

SVBFG tier 1 leverage ratio

 

8.64

   

8.82

   

9.10

   

9.06

   

8.99

   

8.64

   

8.99

 

Bank tier 1 leverage ratio

 

7.48

   

8.17

   

8.38

   

8.10

   

7.82

   

7.48

   

7.82

 

Period-end loans, net of unearned income, to deposits ratio

 

52.17

   

52.53

   

55.13

   

57.45

   

56.58

   

52.17

   

56.58

 

Average loans, net of unearned income, to average deposits ratio

 

52.11

   

55.52

   

57.10

   

55.98

   

53.64

   

54.77

   

52.39

 

Book value per common share (7)

 

$

114.26

   

$

107.72

   

$

102.11

   

$

97.29

   

$

92.48

   

$

114.26

   

$

92.48

 

Other statistics:

                           

Average full-time equivalent ("FTE") employees

 

3,413

   

3,287

   

3,228

   

2,873

   

2,778

   

3,309

   

2,623

 

Period-end full-time equivalent ("FTE") employees

 

3,460

   

3,314

   

3,250

   

2,900

   

2,836

   

3,460

   

2,836

 

______________________

(1)

To supplement our unaudited condensed consolidated financial statements presented in accordance with generally accepted accounting principles in the United States ("GAAP"), we use certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most closely related GAAP measures is provided at the end of this release under the section "Use of Non-GAAP Financial Measures."

(2)

Interest income on non-taxable investments is presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21.0 percent. The taxable equivalent adjustments were $3.0 million for the quarter ended September 30, 2019, $2.9 million for the quarter ended June 30, 2019, $2.9 million for the quarter ended March 31, 2019, $3.0 million for the quarter ended December 31, 2018 and $2.9 million for the quarter ended September 30, 2018. The taxable equivalent adjustments were $8.8 million and $6.2 million for the nine months ended September 30, 2019 and September 30, 2018, respectively.

(3)

Ratio represents annualized consolidated net income available to common stockholders divided by average assets.

(4)

Ratio represents annualized consolidated net income available to common stockholders divided by average SVB Financial Group ("SVBFG") stockholders' equity.

(5)

Ratio is calculated by dividing noninterest expense by total net interest income plus noninterest income.

(6)

Ratio represents annualized total cost of deposits and is calculated by dividing interest expense from deposits by average total deposits.

(7)

Book value per common share is calculated by dividing total SVBFG stockholders' equity by total outstanding common shares.

 

Net Interest Income and Margin

Net interest income, on a fully taxable equivalent basis, was $523.6 million for the third quarter of 2019, compared to $532.3 million for the second quarter of 2019. The $8.7 million decrease from the second quarter of 2019 to the third quarter of 2019, was attributable primarily to the following:

  • A decrease in interest income from loans of $19.8 million to $394.2 million for the third quarter of 2019. The decrease was reflective primarily of $21.7 million in lower interest income earned on gross loans and $4.7 million related to lower loan fees, partially offset by a $4.9 million increase related to $0.4 billion in average loan growth. Overall loan yields decreased 41 basis points to 5.24 percent, driven primarily by an 18 basis point decrease in our gross loan yields reflective primarily of the two 25 basis point decreases in the Federal Funds rate during the third quarter of 2019 as well as by lower LIBOR rates, an 11 basis point decrease due to the continued shift in the mix of our total loan portfolio into our lower yielding private equity/venture capital loans, a six basis point decrease due to a decrease in the level of loan prepayments and a six basis point decrease from the continued compression on our loan yields due to pricing competition,
  • An $8.0 million increase in interest paid on our interest-bearing deposits due to a $3.2 billion increase in average interest-bearing deposits partially offset by decreases in market rates through the third quarter of 2019, partially offset by
  • An increase in interest income from our fixed income investment securities of $15.5 million to $163.7 million for the third quarter of 2019. The increase was reflective primarily of higher average fixed income securities of $2.0 billion during the third quarter of 2019 due to deposit growth, and
  • An increase of $2.5 million in interest income from short-term investment securities reflective primarily of a $1.8 billion increase in average interest-earning cash balances, partially offset by decreases in Federal Funds interest rates.

Net interest margin, on a fully taxable equivalent basis, was 3.34 percent for the third quarter of 2019, compared to 3.68 percent for the second quarter of 2019. Our net interest margin decreased due primarily to a 21 basis point change attributable to a shift in the mix of interest earning assets resulting in a decrease in higher yielding loans and an increase in lower yielding cash and investments as a percentage of total interest earning assets as well as the increase of $3.2 billion in average interest bearing deposits. Our net interest margin also saw a seven basis point decrease from a decline in loan yields reflective of the impact of the two 25 basis point Federal Funds rate cuts during the third quarter of 2019 as well as by lower LIBOR rates. Additionally, lower loan yields from decreased prepayment fees as well as the continued compression on our loan yields due to pricing competition impacted our net interest margin by a total of six basis points.

For the third quarter of 2019, approximately 92 percent, or $27.7 billion, of our average gross loans were variable-rate loans that adjust at prescribed measurement dates. Of our variable-rate loans, approximately 65 percent are tied to prime-lending rates and 35 percent are tied to LIBOR.

Investment Securities

Our investment securities portfolio is comprised of: (i) our available-for-sale ("AFS") and held-to-maturity ("HTM") securities portfolios, each consisting of fixed income investments which are managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and addressing our asset/liability management objectives; and (ii) our non-marketable and other equity securities portfolio, which represents primarily investments managed as part of our funds management business as well as public equity securities held as a result of equity warrant assets exercised. Our total average fixed income investment securities portfolio increased $2.0 billion, or 8.7 percent, to $25.1 billion for the quarter ended September 30, 2019. Our total period-end fixed income investment securities portfolio increased $4.5 billion, or 19.6 percent, to $27.3 billion at September 30, 2019. The weighted-average duration of our fixed income investment securities portfolio was 3.4 years at September 30, 2019 and 3.5 years at June 30, 2019. Our period-end non-marketable and other equity securities portfolio increased $70.3 million to $1.2 billion ($1.0 billion net of noncontrolling interests) at September 30, 2019.

Available-for-Sale Securities

Average AFS securities were $10.6 billion for the third quarter of 2019 compared to $8.2 billion for the second quarter of 2019. Period-end AFS securities were $12.9 billion at September 30, 2019 compared to $7.9 billion at June 30, 2019. The increases in average and period-end AFS security balances from the second quarter of 2019 to the third quarter of 2019 were due to purchases of $5.3 billion of U.S. Treasury securities and agency mortgage backed securities, partially offset by $0.4 billion in portfolio pay downs and maturities. The weighted-average duration of our AFS securities portfolio was 3.2 years at September 30, 2019 and 2.6 years at June 30, 2019.

Held-to-Maturity Securities

Average HTM securities were $14.5 billion for the third quarter of 2019, compared to $14.9 billion for the second quarter of 2019. Period-end HTM securities were $14.4 billion at September 30, 2019 compared to $14.9 billion at June 30, 2019. The decreases in average and period-end HTM security balances from the second quarter of 2019 to the third quarter of 2019 were due primarily to $0.6 billion in portfolio pay downs and maturities, partially offset by $0.1 billion in purchases of municipal bonds. The weighted-average duration of our HTM securities portfolio was 3.6 years at September 30, 2019 and 4.0 years at June 30, 2019.

Non-Marketable and Other Equity Securities

Our non-marketable and other equity securities portfolio increased $0.1 billion to $1.2 billion ($1.0 billion net of noncontrolling interests) at September 30, 2019, compared to $1.1 billion ($0.9 billion net of noncontrolling interests) at June 30, 2019. The increase was primarily attributable to valuation increases in our managed fund of funds investments, an increase in new investments within our qualified housing projects portfolio and an increase in equity securities from exercised equity warrant assets. Reconciliations of our non-GAAP non-marketable and other equity securities, net of noncontrolling interests, are provided under the section "Use of Non-GAAP Financial Measures."

Loans

Average loans (net of unearned income) increased by $0.4 billion to $29.8 billion for the third quarter of 2019, compared to $29.4 billion for the second quarter of 2019. Period-end loans (net of unearned income) increased by $1.9 billion to $31.1 billion at September 30, 2019, compared to $29.2 billion at June 30, 2019. Average and period-end loan growth came primarily from our private equity/venture capital portfolio as well as from our private bank portfolio.

Loans (individually or in the aggregate) to any single client, equal to or greater than $20 million increased to $16.4 billion or 52.6 percent of total gross loans at September 30, 2019, as compared to $14.8 billion or 50.5 percent of total gross loans at June 30, 2019. Further details are provided under the section "Loan Concentrations."

Credit Quality

The following table provides a summary of our allowance for loan losses and our allowance for unfunded credit commitments:

   

Three months ended

 

Nine months ended

(Dollars in thousands, except ratios)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Allowance for loan losses, beginning balance

 

$

301,888

   

$

300,151

   

$

286,709

   

$

280,903

   

$

255,024

 

Provision for loan losses

 

35,985

   

19,148

   

19,436

   

80,954

   

74,088

 

Gross loan charge-offs

 

(36,820)

   

(26,435)

   

(22,205)

   

(72,255)

   

(48,220)

 

Loan recoveries

 

3,888

   

9,820

   

2,164

   

15,133

   

5,878

 

Foreign currency translation adjustments

 

(531)

   

(796)

   

(391)

   

(325)

   

(1,057)

 

Allowance for loan losses, ending balance

 

$

304,410

   

$

301,888

   

$

285,713

   

$

304,410

   

$

285,713

 

Allowance for unfunded credit commitments, beginning balance

 

62,664

   

57,970

   

54,104

   

55,183

   

51,770

 

Provision for (reduction of) unfunded credit commitments

 

551

   

4,798

   

(2,262)

   

8,079

   

138

 

Foreign currency translation adjustments

 

(107)

   

(104)

   

(34)

   

(154)

   

(100)

 

Allowance for unfunded credit commitments, ending balance (1)

 

$

63,108

   

$

62,664

   

$

51,808

   

$

63,108

   

$

51,808

 

Ratios and other information:

                   

Provision for loan losses as a percentage of period-end total gross loans (annualized)

 

0.46

%

 

0.26

%

 

0.28

%

 

0.35

%

 

0.36

%

Gross loan charge-offs as a percentage of average total gross loans (annualized)

 

0.49

   

0.36

   

0.33

   

0.33

   

0.26

 

Net loan charge-offs as a percentage of average total gross loans (annualized)

 

0.44

   

0.23

   

0.30

   

0.26

   

0.22

 

Allowance for loan losses as a percentage of period-end total gross loans

 

0.97

   

1.03

   

1.03

   

0.97

   

1.03

 

Provision for credit losses

 

$

36,536

   

$

23,946

   

$

17,174

   

$

89,033

   

$

74,226

 

Period-end total gross loans

 

31,229,003

   

29,370,403

   

27,668,829

   

31,229,003

   

27,668,829

 

Average total gross loans

 

29,979,522

   

29,568,968

   

26,497,171

   

29,373,264

   

25,165,486

 

Allowance for loan losses for nonaccrual loans

 

53,728

   

53,067

   

49,992

   

53,728

   

49,992

 

Nonaccrual loans

 

104,045

   

96,641

   

115,162

   

104,045

   

115,162

 

______________________

(1)

The "allowance for unfunded credit commitments" is included as a component of "other liabilities."

Our allowance for loan losses increased $2.5 million to $304.4 million due primarily to an increase in our performing loan reserves of $1.9 million and an increase in reserves for nonaccrual loans of $0.6 million. The increase in our performing reserves was due primarily to period-end loan growth of $1.9 billion, mostly offset by a decrease in the qualitative component of our performing loan reserves reflective of the continued shift in the mix in our loan portfolio to our large, high credit quality private equity/venture capital loans during the quarter. The $0.6 million increase in the reserves for nonaccrual loans was driven primarily by one large loan from our software portfolio. As a percentage of total gross loans, our allowance for loan losses decreased six basis points to 0.97 percent at September 30, 2019, compared to 1.03 percent at June 30, 2019. The six basis point decrease was driven primarily by a five basis point decrease in the qualitative component of our performing loan reserves as a percentage of gross loans as mentioned above.

Our provision for credit losses was $36.5 million for the third quarter of 2019, consisting of the following:

  • A provision for loan losses of $36.0 million, driven primarily by $19.1 million for net new nonaccrual loans, $18.3 million for charge-offs not specifically reserved for and $15.2 million in additional reserves for period-end loan growth, partially offset by a decrease of $13.0 million for the qualitative component of our performing loans as described above and by recoveries of $3.9 million, and
  • A provision for unfunded credit commitments of $0.5 million, driven primarily by growth in unfunded credit commitments of $1.3 billion, offset mostly by a decrease related to the continued shift in the mix of our unfunded credit facilities to our large, high credit quality private equity/venture capital clients.

Gross loan charge-offs were $36.8 million for the third quarter of 2019, of which $18.3 million was not specifically reserved for at June 30, 2019. Gross loan charge-offs were primarily driven by a $9.4 million charge-off for one mid-stage life science/healthcare portfolio client and $7.6 million for one later stage software client, both of which were previously included in our nonaccrual loan portfolio. The remaining charge-offs came primarily from our early-stage and mid-stage clients.

Nonaccrual loans were $104.0 million at September 30, 2019, compared to $96.6 million at June 30, 2019. Our nonaccrual loan balance increased $7.4 million primarily driven by $53.6 million in new nonaccrual loans, mostly offset by $23.7 million in charge-offs and $22.5 million in repayments. New nonaccrual loans were primarily driven by $37.3 million for one large software client. Charge-offs were primarily driven by $9.4 million for one mid-stage life sciences/healthcare client and $6.8 million for one late stage software client. The $22.5 million in repayments were primarily driven by our Growth stage clients. Nonaccrual loans as a percentage of total gross loans remained relatively flat at 0.34 percent for the third quarter of 2019 compared to 0.33 percent for the second quarter of 2019.

The allowance for loan losses for nonaccrual loans increased $0.6 million to $53.7 million in the third quarter of 2019. The increase was due primarily to new nonaccrual loans, mostly offset by charge-offs and repayments as noted above.

CECL Adoption

Effective January 1, 2020, we will adopt the new accounting standard update (ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) ("ASU 2016-13"), which amends the incurred loss impairment methodology under current GAAP with a methodology that reflects a current expected credit loss ("CECL") measurement to estimate the allowance for credit losses over the contractual life of the financial assets.

During the fourth quarter of 2019, we will continue to finalize our CECL models and related documentation, processes, validation, controls and credit loss estimates. However, based on our analyses to date, utilizing our loan and unfunded credit commitment portfolio composition at September 30, 2019 and the current economic environment, we currently estimate the day 1 combined impact of CECL on our allowance for loan losses and allowance for unfunded credit commitments to be an increase (on a pre-tax basis) of approximately $25 million to $60 million upon adoption of ASU 2016-13 on January 1, 2020 or approximately 7% to 16% of our total combined allowance compared to our reported amount at September 30, 2019. Additionally, based on the credit quality of our existing debt securities portfolio, we do not expect a material allowance for our held-to-maturity and available-for-sale debt security portfolios. The final amounts will be determined and recognized as a day 1 cumulative adjustment to equity on an after tax basis as of January 1, 2020.

The actual amount recorded on January 1, 2020 may be different than the current estimates provided above as the adjustment amounts for our allowance for loan losses and our allowance for unfunded credit commitments will depend on a variety of factors as of the date of adoption, including the size and composition of our loan and unfunded credit commitment portfolios, the portfolios' credit quality, current and forecasted economic conditions, and management adjustments. In addition, the actual adjustment amount to our allowances will be subject to any necessary changes to our models, methodology, and assumptions, or other adjustments.

Client Funds

Our total client funds consist of both on-balance sheet deposits and off-balance sheet client investment funds. Average total client funds were $150.1 billion for the third quarter of 2019, compared to $142.6 billion for the second quarter of 2019, an increase of $7.4 billion, or 5.2 percent. Period-end total client funds were $156.0 billion at September 30, 2019, compared to $147.1 billion at June 30, 2019, an increase of $8.9 billion, or 6.1 percent.

Average off-balance sheet client investment funds were $92.8 billion for the third quarter of 2019, compared to $89.7 billion for the second quarter of 2019. Average on-balance sheet deposits were $57.2 billion for the third quarter of 2019 and $53.0 billion for the second quarter of 2019. Period-end off-balance sheet client investment funds were $96.5 billion at September 30, 2019, compared to $91.5 billion at June 30, 2019. Period-end on-balance sheet deposits were $59.5 billion at September 30, 2019, compared to $55.6 billion at June 30, 2019.

The increases in our average and period-end total client funds from the second quarter of 2019 to the third quarter of 2019 were reflective of growth in both on-balance sheet deposits and off-balance sheet client investment funds across all portfolio segments. The leading contributor was our technology client portfolio attributable primarily to a healthy equity funding environment and exit markets for our clients, as well as continued healthy new client acquisition.

In addition, we saw a continued shift in the mix of our on-balance sheet deposits with growth in our interest-bearing deposits reflective of our deposit growth initiatives and continued strong liquidity of our clients. Average noninterest-bearing demand deposits as a percentage of total average on-balance sheet deposits decreased to 68 percent for the third quarter of 2019, compared to 72 percent in the second quarter of 2019, with a corresponding increase in average interest-bearing deposits to 32 percent, compared to 28 percent.

Noninterest Income

Noninterest income was $294.0 million for the third quarter of 2019, compared to $333.8 million for the second quarter of 2019. Non-GAAP noninterest income, net of noncontrolling interests was $279.4 million for the third quarter of 2019, compared to $315.0 million for the second quarter of 2019. (See reconciliations of non-GAAP measures used under the section "Use of Non-GAAP Financial Measures.")

The decrease of $39.8 million ($35.6 million net of noncontrolling interests) in noninterest income from the second quarter of 2019 to the third quarter of 2019 was attributable primarily to lower net gains on investment securities and equity warrant assets as well as lower investment banking revenue, partially offset by an increase in our core fee income. Items impacting noninterest income for the third quarter of 2019 were as follows:

Net gains on investment securities

Net gains on investment securities were $29.8 million for the third quarter of 2019, compared to $47.7 million for the second quarter of 2019. Net of noncontrolling interests, non-GAAP net gains on investment securities were $15.2 million for the third quarter of 2019, compared to net gains of $29.1 million for the second quarter of 2019. Non-GAAP net gains, net of noncontrolling interests, of $15.2 million for the third quarter of 2019 were driven by the following:

  • Gains of $12.5 million from managed funds of funds portfolio, related primarily to net unrealized valuation increases in the private and public company investments held by the funds in the portfolio,
  • Gains of $8.0 million from our strategic and other investments, comprised primarily of net unrealized valuation increases in private companies held in our strategic venture capital funds, and
  • Gains of $5.5 million from our managed direct venture funds, related primarily to net unrealized valuation increases in investments held by the funds in the portfolio, partially offset by
  • Losses of $11.5 million from our public equity securities investments, primarily driven by unrealized losses driven by a decline in value of public equity securities held.

The following tables provide a summary of non-GAAP net gains (losses) on investment securities, net of noncontrolling interests, for the three months ended September 30, 2019 and June 30, 2019, respectively:

   

Three months ended September 30, 2019

(Dollars in thousands)

 

Managed
Funds of
Funds

 

Managed
Direct
Venture
Funds

 

Public
Equity
Securities

 

Sales of
AFS Debt
Securities

 

Debt

Funds

 

Strategic

and Other

Investments

 

SVB
Leerink

 

Total

GAAP gains (losses) on investment securities, net

 

$

22,223

   

$

9,668

   

$

(11,488)

   

$

   

$

187

   

$

8,035

   

$

1,224

   

$

29,849

 

Less: income attributable to noncontrolling interests, including carried interest allocation

 

9,676

   

4,138

   

   

   

   

   

826

   

14,640

 

Non-GAAP gains (losses) on investment securities, net of noncontrolling interests

 

$

12,547

   

$

5,530

   

$

(11,488)

   

$

   

$

187

   

$

8,035

   

$

398

   

$

15,209

 

 

   

Three months ended June 30, 2019

(Dollars in thousands)

 

Managed

Funds of
Funds

 

Managed
Direct
Venture
Funds

 

Public
Equity
Securities

 

Sales of
AFS Debt
Securities

 

Debt

Funds

 

Strategic

and Other

Investments

 

SVB
Leerink

 

Total

GAAP gains (losses) on investment securities, net

 

$

32,335

   

$

4,101

   

$

444

   

$

(275)

   

$

1,342

   

$

7,311

   

$

2,440

   

$

47,698

 

Less: income attributable to noncontrolling interests, including carried interest allocation

 

16,852

   

1,711

   

   

   

   

   

35

   

18,598

 

Non-GAAP gains (losses) on investment securities, net of noncontrolling interests

 

$

15,483

   

$

2,390

   

$

444

   

$

(275)

   

$

1,342

   

$

7,311

   

$

2,405

   

$

29,100

 

Net gains on equity warrant assets

Net gains on equity warrant assets were $37.6 million for the third quarter of 2019, compared to $48.3 million for the second quarter of 2019. Net gains on equity warrant assets for the third quarter of 2019 were attributable primarily to net gains from exercises of $30.0 million driven by healthy gains from IPO activity and $8.0 million of valuation increases in our private company warrant portfolio driven by healthy funding rounds.

At September 30, 2019, we held warrants in 2,227 companies with a total fair value of $149.1 million. Warrants in 15 companies each had fair values greater than $1.0 million and collectively represented $43.7 million, or 29.3 percent, of the fair value of the total warrant portfolio at September 30, 2019.

The following table provides a summary of our net gains on equity warrant assets:

   

Three months ended

 

Nine months ended

(Dollars in thousands)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Equity warrant assets:

                   

Gains on exercises, net

 

$

30,047

   

$

40,226

   

$

18,287

   

$

90,357

   

$

42,808

 

Terminations

 

(481)

   

(1,045)

   

(1,432)

   

(2,931)

   

(3,158)

 

Changes in fair value, net

 

7,995

   

9,166

   

17,286

   

19,787

   

32,743

 

Total net gains on equity warrant assets

 

$

37,561

   

$

48,347

   

$

34,141

   

$

107,213

   

$

72,393

 

The gains (or losses) from investment securities from our nonmarketable and other equity securities portfolio as well as our equity warrant assets resulting from changes in valuations (fair values) are currently unrealized, and the extent to which such gains (or losses) will become realized is subject to a variety of factors, including among other things, performance of the underlying portfolio companies, investor demand for IPOs, fluctuations in the underlying valuation of these companies, levels of M&A activity, and legal and contractual restrictions on our ability to sell the underlying securities.

Non-GAAP core fee income including investment banking revenue and commissions

Non-GAAP core fee income (client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees and letters of credit and standby letters of credit fees) increased $4.8 million to $162.2 million for the third quarter of 2019, compared to $157.3 million for the second quarter of 2019. Non-GAAP core fee income including investment banking revenue and commissions decreased $7.5 million to $213.0 million for the third quarter of 2019, compared to $220.5 million for the second quarter of 2019.

The following table provides a summary of our non-GAAP core fee income:

   

Three months ended

 

Nine months ended

(Dollars in thousands)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Non-GAAP core fee income:

                   

Client investment fees

 

$

46,679

   

$

45,744

   

$

36,265

   

$

136,905

   

$

88,592

 

Foreign exchange fees

 

40,309

   

38,506

   

32,656

   

116,863

   

100,560

 

Credit card fees

 

30,158

   

28,790

   

24,121

   

86,431

   

68,739

 

Deposit service charges

 

22,482

   

22,075

   

19,588

   

65,496

   

56,081

 

Lending related fees

 

11,707

   

11,213

   

10,675

   

36,857

   

30,938

 

Letters of credit and standby letters of credit fees

 

10,842

   

11,009

   

8,409

   

31,205

   

24,938

 

Total Non-GAAP core fee income

 

$

162,177

   

$

157,337

   

$

131,714

   

$

473,757

   

$

369,848

 

Investment banking revenue

 

38,516

   

48,694

   

   

137,005

   

 

Commissions

 

12,275

   

14,429

   

   

40,812

   

 

Total Non-GAAP core fee income including investment banking revenue and commissions

 

$

212,968

   

$

220,460

   

$

131,714

   

$

651,574

   

$

369,848

 

Non-GAAP core fee income increased from the second quarter of 2019 to the third quarter of 2019 reflective of an increase across a majority of our core fee income areas led primarily by increases in foreign exchange fees, credit card fees and client investment fees. Foreign exchange fees increased $1.8 million driven by increased trade volumes due to continued increase in the number of clients actively managing currency exposures. Credit card fees increased $1.4 million due primarily to an increase in net interchange fees. Client investment fees increased $0.9 million driven by higher fees reflective of the increases in client investment fund balances.

Non-GAAP core fee income including investment banking revenue and commissions decreased from the second quarter of 2019 to the third quarter of 2019 primarily due to a decrease in investment banking revenue attributable to a decrease in the levels of exit activity in the life science/healthcare IPO market during the third quarter of 2019 compared to the second quarter of 2019. Investment banking revenue was $38.5 million, driven by $31.0 million from public equity underwriting fees, $5.2 million from M&A transactions and $2.3 million from private placements for the third quarter of 2019.

Reconciliations of our non-GAAP noninterest income, non-GAAP net gains on investment securities and non-GAAP core fee income are provided under the section "Use of Non-GAAP Financial Measures."

Noninterest Expense

Noninterest expense was $391.3 million for the third quarter of 2019, compared to $383.5 million for the second quarter of 2019. The increase of $7.8 million in noninterest expense consisted primarily of an increase in our professional services expense partially offset by a decrease in total compensation and benefits expense in the third quarter of 2019 compared to the second quarter of 2019.

Professional services expense increased $14.4 million, reflective of increased consulting fees during the third quarter of 2019 associated with increased project spend to support our global digital banking, and continued global infrastructure, initiatives.

The following table provides a summary of our compensation and benefits expense:

   

Three months ended

 

Nine months ended

(Dollars in thousands, except employees)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Compensation and benefits:

                   

Salaries and wages

 

$

109,473

   

$

105,799

   

$

84,962

   

$

316,472

   

$

234,832

 

Incentive compensation plans

 

59,602

   

71,492

   

55,531

   

200,483

   

150,393

 

Employee stock ownership plan ("ESOP")

 

884

   

1,084

   

1,844

   

3,131

   

4,997

 

Other employee incentives and benefits (1)

 

63,881

   

64,797

   

53,100

   

194,987

   

152,976

 

Total compensation and benefits

 

$

233,840

   

$

243,172

   

$

195,437

   

$

715,073

   

$

543,198

 

Period-end full-time equivalent employees

 

3,460

   

3,314

   

2,836

   

3,460

   

2,836

 

Average full-time equivalent employees

 

3,413

   

3,287

   

2,778

   

3,309

   

2,623

 

______________________

(1)

Other employee incentives and benefits expense includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), warrant incentive and retention plans, agency fees and other employee-related expenses.

The $9.3 million decrease in total compensation and benefits expense consists primarily of the following:

  • A decrease of $11.9 million in incentive compensation plans expense attributable primarily to a decrease in our incentive accruals as a result of our 2019 full-year projected financial performance, partially offset by
  • An increase of $3.7 million in salaries and wages, reflective primarily of an increase in the number of average full-time equivalent employees ("FTE") by 126 to 3,413 FTEs as well as one additional working day of the third quarter of 2019 as compared to the second quarter of 2019.

Income Tax Expense

Our effective tax rate was 28.2 percent for the third quarter of 2019, compared to 27.3 percent for the second quarter of 2019. Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and net income attributable to noncontrolling interests. The increase in our effective tax rate was primarily due to a decrease in excess tax benefits received from stock compensation expense reflective primarily of a lower number of stock options exercised and restricted stock units vested during the third quarter as compared to the second quarter. Our annual share based compensation grants occur in the second quarter of each year.

Noncontrolling Interests

Included in net income is income and expense related to noncontrolling interests. The relevant amounts allocated to investors in our consolidated subsidiaries, other than us, are reflected under "Net Income Attributable to Noncontrolling Interests" in our statements of income. The following table provides a summary of net income attributable to noncontrolling interests:

   

Three months ended

 

Nine months ended

(Dollars in thousands)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Net interest income (1)

 

$

(14)

   

$

(16)

   

$

(10)

   

$

(41)

   

$

(29)

 

Noninterest income (1)

 

(4,910)

   

(12,406)

   

(2,749)

   

(19,586)

   

(20,127)

 

Noninterest expense (1)

 

145

   

168

   

154

   

692

   

349

 

Carried interest allocation (2)

 

(9,658)

   

(6,330)

   

(3,943)

   

(16,966)

   

(9,034)

 

Net income attributable to noncontrolling interests

 

$

(14,437)

   

$

(18,584)

   

$

(6,548)

   

$

(35,901)

   

$

(28,841)

 

______________________

(1)

Represents noncontrolling interests' share in net interest income, noninterest income and noninterest expense.

(2)

Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds.

Net income attributable to noncontrolling interests was $14.4 million for the third quarter of 2019, compared to $18.6 million for the second quarter of 2019. Net income attributable to noncontrolling interests of $14.4 million for the third quarter of 2019 was primarily a result of net gains on investment securities (including carried interest allocation) from our managed funds of funds and our managed direct venture funds portfolios, related primarily to net unrealized valuation increases for private and public company investments held by the funds in the portfolio.

SVBFG Stockholders' Equity

Total SVBFG stockholders' equity increased by $0.3 billion to $5.9 billion at September 30, 2019, compared to $5.6 billion at June 30, 2019, primarily due to net income of $267.3 million and an increase in accumulated other comprehensive income of $54.9 million. The $54.9 million net increase in accumulated other comprehensive income was reflective primarily of a $69.7 million ($50.3 million net of tax) increase in the fair value of our AFS securities portfolio driven by decreases in period-end market interest rates.

Stock Repurchase Programs

On July 1, 2019, we repurchased and retired 25,562 shares of our common stock totaling $5.7 million which represented the completion of our $500 million stock repurchase program originally announced on November 13, 2018.

On October 24, 2019, our Board of Directors authorized a new stock repurchase program that enables us to repurchase up to $350 million of our outstanding common stock. This program expires on October 29, 2020.

Under the stock repurchase program, we may, from time to time and on or before the program's expiration date, repurchase shares of our outstanding common stock in the open market, in privately-negotiated transactions, or otherwise, subject to applicable laws and regulations. The extent to which we repurchases our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by us. We may, in our discretion, begin, suspend or terminate repurchases at any time prior to the program's expiration, without any prior notice. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit shares to be repurchased when we might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. We expect to finance repurchases under the program with available cash balances.

Capital Ratios

Our regulatory risk-based capital ratios for both SVB Financial Group and Silicon Valley Bank (the "Bank") decreased as of September 30, 2019, compared to the same ratios as of June 30, 2019, primarily as a result of a proportionally higher increase in our risk-weighted assets relative to the increase in our capital for the third quarter of 2019. The increase in risk weighed-weighted assets was due primarily to loan growth and the increase in our fixed income investment securities driven by deposit growth during the third quarter of 2019. The increase in capital was due primarily to net income.

The tier 1 leverage ratios for both SVB Financial Group and the Bank decreased as of September 30, 2019, compared to June 30, 2019, primarily as a result of a proportionally higher increase in our average assets relative to our tier 1 capital. The increase in our average assets were due primarily to increases in our fixed income investment securities, cash and cash equivalents as well as loan growth. The increase in tier 1 capital was due primarily to net income.

Overall, decreases to the Bank's risk-based capital ratios were inclusive of a $336.0 million cash dividend paid by the Bank to our bank holding company, SVB Financial Group, during the third quarter of 2019.

All of our reported capital ratios remain above the levels considered to be "well capitalized" under applicable banking regulations. See the "SVB Financial and Bank Capital Ratios" section, at the end of this release, for details.

Outlook for the Year Ending December 31, 2019 and Preliminary 2020 Outlook for Selected Items

Our outlook for the year ending December 31, 2019 and our preliminary outlook for selected items for the year ending December 31, 2020, is provided below on a GAAP basis, unless otherwise noted. We have provided our current outlook for the expected full year results of our significant forecasted activities. Except for the items noted below, we do not provide an outlook for certain items (such as gains or losses from warrants and investment securities) where the timing or financial impact are uncertain and/or subject to market or other conditions beyond our control (such as the level of IPO, M&A or general financing activity), or for potential unusual or non-recurring items. Also, as a result of our acquisition of SVB Leerink, we have included guidance for core fee income including investment banking revenue and commissions and noninterest expense inclusive of SVB Leerink's expected full year results as part of the Company. The outlook and the underlying assumptions presented below are, by their nature, forward-looking statements and are subject to substantial risks and uncertainties, which are discussed below under the section "Forward-Looking Statements."

For the full year ending December 31, 2019, compared to our full year 2018 results, we currently expect the following outlook: (Note that the outlook below includes: (i) the expected impact of the July 31, 2019 and September 18, 2019 decreases of the target Federal Funds rate by the Federal Reserve of 25 basis points each as well as the decreases in the 1- and 3- month LIBOR rates through September 30, 2019, and no assumptions about any further Federal Funds or LIBOR rate changes during 2019, and (ii) management updates to certain 2019 outlook metrics we previously disclosed on July 25, 2019.)

 

Current full year 2019 outlook compared to 2018 results (as of October 24, 2019)

Change in outlook compared to outlook reported as of July 25, 2019

Average loan balances

Increase at a percentage rate in the

mid-teens

No change from previous outlook

Average deposit balances

Increase at a percentage rate in the

low teens

Outlook increased to low teens from previous outlook of low double digits

Net interest income (1)

Increase at a percentage rate in the

low double digits

Outlook decreased to low double digits from previous outlook of low teens

Net interest margin (1)

Between 3.50% and 3.60%

Outlook decreased to between 3.50% and 3.60% from previous outlook of between 3.60% and 3.70%

Allowance for loan losses for total gross performing loans as a percentage of total gross performing loans

Comparable to 2018 levels

No change from previous outlook

Net loan charge-offs

Between 0.20% and 0.40%

of average total gross loans

No change from previous outlook

Nonperforming loans as a percentage of total gross loans

Between 0.30% and 0.50%

of total gross loans

No change from previous outlook

Core fee income (client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees and letters of credit fees) (2)

Increase at a percentage rate in the

low twenties

No change from previous outlook

Noninterest expense (excluding expenses related to noncontrolling interests) (3) (4)

Increase at a percentage rate in the

low teens

No change from previous outlook

Effective tax rate (5)

Between 26.0% and 28.0%

No change from previous outlook

 

Current full year 2019 outlook compared to 2018 results, including expected results of SVB Leerink reflective of the completed acquisition on January 4, 2019

Change in outlook compared to outlook reported as of July 25, 2019

Core fee income (client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees and letters of credit fees) including investment banking revenue and commissions (2) (6)

Increase at a percentage rate in the high sixties

Outlook decreased to high sixties from previous outlook of low seventies

Noninterest expense (excluding expenses related to noncontrolling interests) including SVB Leerink's noninterest expenses (3) (4) (6)

Increase at a percentage rate in the mid-thirties

No change from previous outlook

Preliminary 2020 Outlook for Selected Items

Our preliminary full year 2020 outlook for selected items provided below is based on various management assumptions, including: (a) no changes in the Federal Reserve or LIBOR rates, and (b) no material deterioration in the overall economy. For the full year ending December 31, 2020, compared to our full year ending December 31, 2019, expected results, we currently expect the following:

  • average loan balance growth in the low teens,
  • average deposit balance growth in the low double digits,
  • net interest income(1) growth in the low single digits,
  • net interest margin(1) between 3.20% and 3.30%,
  • net loan charge-offs between 0.20% and 0.40% of average total gross loans,
  • core fee income(2) growth in the low teens,
  • core fee income including investment banking revenue and commissions(2)(6) growth in the low teens,
  • noninterest expense(3)(4) (excluding expenses related to noncontrolling interests) growth in the high single digits, and
  • noninterest expense including SVB Leerink's noninterest expenses(3)(4)(6) growth in the high single digits.

Our 2020 outlook is preliminary and subject to change.

______________________

(1)

Our outlook for net interest income and net interest margin is based primarily on management's current forecast of average deposit and loan balances and deployment of surplus cash into investment securities. Such forecasts are subject to change, and actual results may differ, based on market conditions, actual prepayment rates and other factors described under the section "Forward-Looking Statements" below.

(2)

Core fee income is a non-GAAP measure, which represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control. As we are unable to quantify such line items that would be required to be included in the comparable GAAP financial measure for the future period presented without unreasonable efforts, no reconciliation for the outlook of non-GAAP core fee income to GAAP noninterest income for fiscal 2019 is included in this release, as we believe such reconciliation would imply a degree of precision that would be confusing or misleading to investors. See "Use of Non-GAAP Financial Measures" at the end of this release for further information regarding the calculation and limitations of this measure.

(3)

Noninterest expense (excluding expenses related to noncontrolling interests) is a non-GAAP measure, which represents noninterest expense, but excludes expenses attributable to noncontrolling interests. As we are unable to quantify such line items that would be required to be included in the comparable GAAP financial measure for the future period presented without unreasonable efforts, no reconciliation for the outlook of non-GAAP noninterest expense (excluding expenses related to noncontrolling interests) to GAAP noninterest expense for fiscal 2019 is included in this release, as we believe such reconciliation would imply a degree of precision that would be confusing or misleading to investors. See "Use of Non-GAAP Financial Measures" at the end of this release for further information regarding the calculation and limitations of this measure.

(4)

Our outlook for noninterest expense is partly based on management's current forecast of performance-based incentive compensation expenses. Such forecasts are subject to change, and actual results may differ, based on our performance relative to our internal performance targets.

(5)

Our outlook for our effective tax rate is based on management's current assumptions with respect to, among other things, the Company's earnings, state income tax levels, tax deductions and estimated performance-based compensation activity.

(6)

Investment banking revenue, commissions, and noninterest expense consists of revenue and expenses attributable entirely to SVB Leerink.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. Forward-looking statements are statements that are not historical facts, such as forecasts of our future financial results and condition, expectations for our operations and business, and our underlying assumptions of such forecasts and expectations. In addition, forward-looking statements generally can be identified by the use of such words as "becoming," "may," "will," "should," "could," "would," "predict," "potential," "continue," "anticipate," "believe," "estimate," "assume," "seek," "expect," "plan," "intend," the negative of such words or comparable terminology. In this release, including our CEO's statement and in the sections "New Accounting Guidance" and "Outlook for the Year Ending December 31, 2019 and Preliminary 2020 Outlook for Selected Items", we make forward-looking statements discussing management's expectations for 2019 and 2020 about, among other things, economic conditions; opportunities in the market; the outlook on our clients' performance; our financial, credit, and business performance, including potential investment gains; loan growth, loan mix and loan yields; expense levels; our expected effective tax rate; accounting impact; and financial results (and the components of such results), including the performance results of SVB Leerink for certain quarters in, and for the full years 2019 and 2020.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we have based these expectations on our current beliefs as well as our assumptions, and such expectations may not prove to be correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside our control. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management's forward-looking statements. Important factors that could cause our actual results and financial condition to differ from the expectations stated in the forward-looking statements include, among others:

  • market and economic conditions (including the general condition of the capital and equity markets, and IPO, M&A and financing activity levels) and the associated impact on us (including effects on client demand for our commercial and investment banking and other financial services, as well as on the valuations of our investments);
  • changes in the volume and credit quality of our loans as well as volatility of our levels of nonperforming assets and charge-offs;
  • the impact of changes in interest rates or market levels or factors affecting or affected by them, especially on our loan and investment portfolios;
  • changes in the levels of our loans, deposits and client investment fund balances;
  • changes in the performance or equity valuations of funds or companies in which we have invested or hold derivative instruments or equity warrant assets;
  • variations from our expectations as to factors impacting our cost structure;
  • changes in our assessment of the creditworthiness or liquidity of our clients or unanticipated effects of credit concentration risks which create or exacerbate deterioration of such creditworthiness or liquidity;
  • variations from our expectations as to factors impacting the timing and level of employee share-based transactions;
  • variations from our expectations as to factors impacting our estimate of our full-year effective tax rate;
  • changes in applicable accounting standards and tax laws; and
  • regulatory or legal changes or their impact on us.

For additional information about these and other factors, please refer to our public reports filed with the U.S. Securities and Exchange Commission, including under the caption "Risk Factors" in our most recent Annual Report filed on Form 10-K. The forward-looking statements included in this release are made only as of the date of this release. We do not intend, and undertake no obligation, to update these forward-looking statements.

Earnings Conference Call

On Thursday, October 24, 2019, we will host a conference call at 3:00 p.m. (Pacific Time) to discuss the financial results for the quarter ended September 30, 2019. The conference call can be accessed by dialing (888) 771-4371 or (847) 585-4405, and entering the confirmation number "48814272".  A live webcast of the audio portion of the call can be accessed on the Investor Relations section of our website at www.svb.com. A replay of the conference call will be available beginning at approximately 5:30 p.m. (Pacific Time) on Thursday, October 24, 2019, through 9:59 p.m. (Pacific Time) on Sunday, November 24, 2019, and may be accessed by dialing (888) 843-7419 or (630) 652-3042 and entering the passcode "48814272#". A replay of the audio webcast will also be available on www.svb.com for 12 months beginning on October 24, 2019.

About SVB Financial Group

For more than 35 years, SVB Financial Group (NASDAQ: SIVB) and its subsidiaries have helped innovative companies and their investors move bold ideas forward, fast. SVB Financial Group's businesses, including Silicon Valley Bank, offer commercial, investment and private banking, asset management, private wealth management, brokerage and investment services and funds management services to companies in the technology, life science and healthcare, private equity and venture capital, and premium wine industries. Headquartered in Santa Clara, California, SVB Financial Group operates in centers of innovation around the world. Learn more at www.svb.com.

SVB Financial Group is the holding company for all business units and groups © 2019 SVB Financial Group. All rights reserved. SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, SVB LEERINK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group.

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
   

Three months ended

 

Nine months ended

(Dollars in thousands, except share data)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

 

September 30,
 2019

 

September 30,
 2018

Interest income:

                   

Loans

 

$

394,246

   

$

414,077

   

$

352,353

   

$

1,202,467

   

$

979,724

 

Investment securities:

                   

  Taxable

 

149,656

   

134,395

   

142,075

   

410,768

   

403,702

 

  Non-taxable

 

11,123

   

10,931

   

10,748

   

32,991

   

23,506

 

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

 

28,867

   

26,364

   

8,137

   

74,447

   

20,080

 

Total interest income

 

583,892

   

585,767

   

513,313

   

1,720,673

   

1,427,012

 

Interest expense:

                   

Deposits

 

55,106

   

47,150

   

8,042

   

130,163

   

18,409

 

Borrowings

 

8,142

   

9,214

   

12,049

   

27,577

   

29,075

 

Total interest expense

 

63,248

   

56,364

   

20,091

   

157,740

   

47,484

 

Net interest income

 

520,644

   

529,403

   

493,222

   

1,562,933

   

1,379,528

 

Provision for credit losses

 

36,536

   

23,946

   

17,174

   

89,033

   

74,226

 

Net interest income after provision for credit losses

 

484,108

   

505,457

   

476,048

   

1,473,900

   

1,305,302

 

Noninterest income:

                   

Gains on investment securities, net

 

29,849

   

47,698

   

32,193

   

106,575

   

77,365

 

Gains on equity warrant assets, net

 

37,561

   

48,347

   

34,141

   

107,213

   

72,393

 

Client investment fees

 

46,679

   

45,744

   

36,265

   

136,905

   

88,592

 

Foreign exchange fees

 

40,309

   

38,506

   

32,656

   

116,863

   

100,560

 

Credit card fees

 

30,158

   

28,790

   

24,121

   

86,431

   

68,739

 

Deposit service charges

 

22,482

   

22,075

   

19,588

   

65,496

   

56,081

 

Lending related fees

 

11,707

   

11,213

   

10,675

   

36,857

   

30,938

 

Letters of credit and standby letters of credit fees

 

10,842

   

11,009

   

8,409

   

31,205

   

24,938

 

Investment banking revenue

 

38,516

   

48,694

   

   

137,005

   

 

Commissions

 

12,275

   

14,429

   

   

40,812

   

 

Other

 

13,631

   

17,245

   

12,022

   

42,773

   

38,671

 

Total noninterest income

 

294,009

   

333,750

   

210,070

   

908,135

   

558,277

 

Noninterest expense:

                   

Compensation and benefits

 

233,840

   

243,172

   

195,437

   

715,073

   

543,198

 

Professional services

 

55,202

   

40,830

   

36,542

   

133,018

   

112,080

 

Premises and equipment

 

26,775

   

23,911

   

19,858

   

72,386

   

57,576

 

Net occupancy

 

16,981

   

16,687

   

13,694

   

49,716

   

40,598

 

Business development and travel

 

19,539

   

17,022

   

12,712

   

51,915

   

35,998

 

FDIC and state assessments

 

4,881

   

4,483

   

9,550

   

13,343

   

29,306

 

Other

 

34,106

   

37,417

   

21,652

   

105,059

   

61,845

 

Total noninterest expense

 

391,324

   

383,522

   

309,445

   

1,140,510

   

880,601

 

Income before income tax expense

 

386,793

   

455,685

   

376,673

   

1,241,525

   

982,978

 

Income tax expense

 

105,075

   

119,114

   

95,308

   

331,624

   

246,561

 

Net income before noncontrolling interests

 

281,718

   

336,571

   

281,365

   

909,901

   

736,417

 

Net income attributable to noncontrolling interests

 

(14,437)

   

(18,584)

   

(6,548)

   

(35,901)

   

(28,841)

 

Net income available to common stockholders

 

$

267,281

   

$

317,987

   

$

274,817

   

$

874,000

   

$

707,576

 

Earnings per common share—basic

 

$

5.19

   

$

6.12

   

$

5.16

   

$

16.80

   

$

13.33

 

Earnings per common share—diluted

 

5.15

   

6.08

   

5.10

   

16.67

   

13.15

 

Weighted average common shares outstanding—basic

 

51,544,807

   

51,954,761

   

53,235,090

   

52,025,112

   

53,062,082

 

Weighted average common shares outstanding—diluted

 

51,858,470

   

52,336,178

   

53,918,973

   

52,430,806

   

53,799,827

 
 

 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in thousands, except par value and share data)

 

September 30,
 2019

 

June 30,
 2019

 

September 30,
 2018

Assets:

           

Cash and cash equivalents

 

$

6,946,196

   

$

9,020,925

   

$

3,819,141

 

Available-for-sale securities, at fair value (cost $12,699,542, $7,842,667 and $9,236,301, respectively)

 

12,866,857

   

7,940,322

   

9,087,609

 

Held-to-maturity securities, at cost (fair value $14,698,802, $15,064,962 and $15,372,238, respectively)

 

14,407,078

   

14,868,761

   

15,899,726

 

Non-marketable and other equity securities

 

1,150,094

   

1,079,749

   

896,249

 

Investment securities

 

28,424,029

   

23,888,832

   

25,883,584

 

Loans, net of unearned income

 

31,063,994

   

29,209,573

   

27,494,915

 

Allowance for loan losses

 

(304,410)

   

(301,888)

   

(285,713)

 

Net loans

 

30,759,584

   

28,907,685

   

27,209,202

 

Premises and equipment, net of accumulated depreciation and amortization

 

146,713

   

141,888

   

121,890

 

Goodwill

 

137,823

   

137,823

   

 

Other intangible assets, net

 

52,288

   

55,158

   

 

Lease right-of-use assets

 

178,532

   

156,347

   

 

Accrued interest receivable and other assets

 

1,586,068

   

1,465,081

   

1,105,917

 

Total assets

 

$

68,231,233

   

$

63,773,739

   

$

58,139,734

 

Liabilities and total equity:

           

Liabilities:

           

Noninterest-bearing demand deposits

 

$

40,480,610

   

$

39,331,489

   

$

40,473,774

 

Interest-bearing deposits

 

19,062,264

   

16,279,051

   

8,122,337

 

Total deposits

 

59,542,874

   

55,610,540

   

48,596,111

 

Short-term borrowings

 

18,898

   

24,252

   

2,631,252

 

Lease liabilities

 

192,543

   

195,326

   

 

Other liabilities

 

1,731,222

   

1,540,476

   

1,146,109

 

Long-term debt

 

697,227

   

696,970

   

696,217

 

Total liabilities

 

62,182,764

   

58,067,564

   

53,069,689

 

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; 51,555,831 shares, 51,561,719 shares and 53,250,255 shares issued and outstanding, respectively

 

52

   

52

   

53

 

Additional paid-in capital

 

1,441,730

   

1,421,565

   

1,360,030

 

Retained earnings

 

4,312,745

   

4,051,194

   

3,672,696

 

Accumulated other comprehensive income (loss)

 

136,153

   

81,232

   

(108,410)

 

Total SVBFG stockholders' equity

 

5,890,680

   

5,554,043

   

4,924,369

 

Noncontrolling interests

 

157,789

   

152,132

   

145,676

 

Total equity

 

6,048,469

   

5,706,175

   

5,070,045

 

Total liabilities and total equity

 

$

68,231,233

   

$

63,773,739

   

$

58,139,734

 

 

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM AVERAGE BALANCES, RATES AND YIELDS

(Unaudited)

 
   

Three months ended

   

September 30, 2019

 

June 30, 2019

 

September 30, 2018

(Dollars in thousands, except yield/rate and ratios)

 

Average

Balance

 

Interest

Income/

Expense

 

Yield/

Rate

 

Average
Balance

 

Interest
Income/
Expense

 

Yield/
Rate

 

Average
Balance

 

Interest
Income/
Expense

 

Yield/
Rate

Interest-earning assets:

                                   

Federal reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1)

 

$

7,193,195

   

$

28,867

   

1.59

%

 

$

5,405,899

   

$

26,364

   

1.96

%

 

$

2,548,271

   

$

8,137

   

1.27

%

Investment securities: (2)

                                   

Available-for-sale securities:

                                   

Taxable

 

10,600,449

   

62,121

   

2.32

   

8,205,333

   

45,347

   

2.22

   

9,589,917

   

46,684

   

1.93

 

Held-to-maturity securities:

                                   

Taxable

 

12,922,438

   

87,535

   

2.69

   

13,350,533

   

89,048

   

2.68

   

14,385,027

   

95,391

   

2.63

 

Non-taxable (3)

 

1,612,067