Edgar Filing: SVB FINANCIAL GROUP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-15637

SVB FINANCIAL GROUP

(Exact name of registrant as specified in its charter)



Delaware		91-1962278
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



3003 Tasman Drive, Santa Clara, California		95054-1191
(Address of principal executive offices)		(Zip Code)

(408) 654-7400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At October 31, 2015, 51,493,211 shares of the registrant’s common stock ($0.001 par value) were outstanding.

Table of Contents

TABLE OF CONTENTS



		Page
PART I - FINANCIAL INFORMATION		4

Item 1.	Interim Consolidated Financial Statements	4

	Interim Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014	4

	Interim Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2015 and 2014	5

	Interim Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2015 and 2014	6

	Interim Consolidated Statements of Stockholders' Equity (unaudited) for the three and nine months ended September 30, 2015 and 2014	7

	Interim Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014	8

	Notes to Interim Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	94

Item 4.	Controls and Procedures	95

PART II - OTHER INFORMATION		95

Item 1.	Legal Proceedings	96

Item 1A.	Risk Factors	96

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96

Item 3.	Defaults Upon Senior Securities	96

Item 4.	Mine Safety Disclosures	96

Item 5.	Other Information	96

Item 6.	Exhibits	96

SIGNATURES		97

INDEX TO EXHIBITS		98

Table of Contents

Glossary of Acronyms that may be used in this Report

ASC — Accounting Standards Codification

ASU – Accounting Standards Update

EHOP – Employee Home Ownership Program of the Company

EPS – Earnings Per Share

ESOP – Employee Stock Ownership Plan of the Company

ESPP – 1999 Employee Stock Purchase Plan of the Company

FASB – Financial Accounting Standards Board

FDIC – Federal Deposit Insurance Corporation

FHLB – Federal Home Loan Bank

FRB - Federal Reserve Bank

FTE - Full-Time Employee

FTP – Funds Transfer Pricing

GAAP - Accounting principles generally accepted in the United States of America

IASB – International Accounting Standards Board

IPO – Initial Public Offering

IRS – Internal Revenue Service

IT – Information Technology

LIBOR – London Interbank Offered Rate

M&A – Merger and Acquisition

OTTI – Other Than Temporary Impairment

SEC – Securities and Exchange Commission

TDR – Troubled Debt Restructuring

UK – United Kingdom

VIE – Variable Interest Entity

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PART I - FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS



(Dollars in thousands, except par value and share data)	September 30, 2015			December 31, 2014
	(Unaudited)
Assets
Cash and cash equivalents	$	1,674,145		$	1,796,062
Available-for-sale securities, at fair value (cost of $15,167,233 and $13,497,945, respectively)	15,307,661			13,540,655
Held-to-maturity securities, at cost (fair value of $8,367,003 and $7,415,656, respectively)	8,306,526			7,421,042
Non-marketable and other securities (1)	650,555			1,728,140
Total investment securities	24,264,742			22,689,837
Loans, net of unearned income	15,314,580			14,384,276
Allowance for loan losses	(197,507		)	(165,359		)
Net loans	15,117,073			14,218,917
Premises and equipment, net of accumulated depreciation and amortization	94,652			79,845
Accrued interest receivable and other assets (1)	580,370			553,208
Total assets	$	41,730,982		$	39,337,869
Liabilities and total equity
Liabilities:
Noninterest-bearing demand deposits	$	28,658,963		$	24,583,682
Interest-bearing deposits	8,390,454			9,759,817
Total deposits	37,049,417			34,343,499
Short-term borrowings	3,756			7,781
Other liabilities	566,370			483,493
Long-term debt	797,211			451,362
Total liabilities	38,416,754			35,286,135
Commitments and contingencies (Note 13 and Note 16)
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; 51,488,985 shares and 50,924,925 shares outstanding, respectively	51			51
Additional paid-in capital	1,171,649			1,120,350
Retained earnings (1)	1,906,135			1,649,967
Accumulated other comprehensive income	97,064			42,704
Total SVBFG stockholders’ equity	3,174,899			2,813,072
Noncontrolling interests	139,329			1,238,662
Total equity	3,314,228			4,051,734
Total liabilities and total equity	$	41,730,982		$	39,337,869


(1)	Prior period amounts have been revised to reflect the retrospective application of new accounting guidance adopted in the first quarter of 2015 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 1— "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements" under Part I, Item 1 in this report.

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 September 30,						Nine months ended September 30,
(Dollars in thousands, except per share amounts)	2015			2014			2015 (2)			2014
Interest income:
Loans	$	174,993		$	153,292		$	507,746		$	449,144
Investment securities:
Taxable	87,609			73,540			253,496			191,384
Non-taxable	707			772			2,220			2,362
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities	1,482			1,722			4,071			5,301
Total interest income	264,791			229,326			767,533			648,191
Interest expense:
Deposits	1,158			2,961			4,283			8,933
Borrowings	8,973			5,800			25,894			17,400
Total interest expense	10,131			8,761			30,177			26,333
Net interest income	254,660			220,565			737,356			621,858
Provision for loan losses	33,403			16,610			66,368			19,051
Net interest income after provision for loan losses	221,257			203,955			670,988			602,807
Noninterest income:
Gains on investment securities, net	18,768			5,644			77,006			172,236
Gains on derivative instruments, net	10,244			26,538			66,290			63,480
Foreign exchange fees	22,995			17,911			63,037			53,035
Credit card fees	14,536			10,909			40,841			31,440
Deposit service charges	12,272			10,126			34,309			29,344
Lending related fees	7,561			6,029			23,746			18,208
Client investment fees	5,683			3,814			15,429			10,751
Letters of credit and standby letters of credit fees	5,341			4,557			15,315			11,507
Other	11,077			(5,361		)	22,315			14,601
Total noninterest income	108,477			80,167			358,288			404,602
Noninterest expense:
Compensation and benefits	109,345			99,932			350,030			302,259
Professional services	21,137			26,081			58,834			68,383
Premises and equipment	12,356			12,631			36,800			36,267
Business development and travel	8,028			10,022			28,904			29,465
Net occupancy	8,548			7,437			24,010			22,436
FDIC and state assessments	6,954			4,587			18,705			13,660
Correspondent bank fees	3,070			3,278			9,775			9,755
Provision for unfunded credit commitments	1,047			2,225			249			5,533
Other (1)	14,270			13,568			42,101			33,355
Total noninterest expense (1)	184,755			179,761			569,408			521,113
Income before income tax expense (1)	144,979			104,361			459,868			486,296
Income tax expense (1)	57,017			40,207			175,057			137,431
Net income before noncontrolling interests (1)	87,962			64,154			284,811			348,865
Net income attributable to noncontrolling interests	(6,229		)	(177		)	(28,419		)	(142,985		)
Net income available to common stockholders (1)	$	81,733		$	63,977		$	256,392		$	205,880
Earnings per common share—basic (1)	$	1.59		$	1.26		$	5.00		$	4.26
Earnings per common share—diluted	1.57			1.24			4.94			4.18


(1)	Prior period amounts have been revised to reflect the retrospective application of new accounting guidance adopted in the first quarter of 2015 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 1— "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements" under Part I, Item 1 in this report.

(2)

Amounts for the nine months ended September 30, 2015, have been revised to reflect the retrospective application of new accounting guidance adopted in the second quarter of 2015 related to our consolidated variable interest entities (ASU 2015-02). Amounts prior to January 1, 2015 have not been revised for the adoption of this guidance. 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 COMPREHENSIVE INCOME (UNAUDITED)



	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Net income before noncontrolling interests (1) (2)	$	87,962		$	64,154		$	284,811		$	348,865
Other comprehensive (loss) income, net of tax:
Change in cumulative translation gains:
Foreign currency translation gains (losses)	(102		)	(2,259		)	2,588			(638		)
Related tax benefit (expense)	87			935			(1,054		)	281
Change in unrealized gains on available-for-sale securities:
Unrealized holding gains (losses)	58,902			(48,724		)	100,468			62,669
Related tax (expense) benefit	(24,200		)	19,716			(41,224		)	(25,292		)
Reclassification adjustment for (gains) losses included in net income	(13		)	990			(2,750		)	17,411
Related tax expense (benefit)	6			(400		)	1,111			(7,030		)
Cumulative-effect adjustment for unrealized gains on securities transferred from available-for-sale to held-to-maturity	—			—			—			37,700
Related tax expense	—			—			—			(15,178		)
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity	(2,565		)	(2,996		)	(7,997		)	(4,043		)
Related tax benefit	1,032			1,206			3,218			1,628
Other comprehensive income (loss), net of tax	33,147			(31,532		)	54,360			67,508
Comprehensive income	121,109			32,622			339,171			416,373
Comprehensive income attributable to noncontrolling interests (2)	(6,229		)	(177		)	(28,419		)	(142,985		)
Comprehensive income attributable to SVBFG	$	114,880		$	32,445		$	310,752		$	273,388


(1)	Prior period amounts have been revised to reflect the retrospective application of new accounting guidance adopted in the first quarter of 2015 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 1— "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements" under Part I, Item 1 in this report.

(2)

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 (Loss)			Total SVBFG Stockholders’ Equity			Noncontrolling Interests			Total Equity
(Dollars in thousands)	Shares	Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total SVBFG Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2013 (As Reported)	45,800,418	$	46	$	624,256	$	1,390,732		$	(48,764	)	$	1,966,270		$	1,113,058		$	3,079,328
Cumulative effective of adopting ASU 2014-01 (1)	—	—		—		(4,635		)	—			(4,635		)	—			(4,635		)
Balance at December 31, 2013 (As Revised)	45,800,418	$	46	$	624,256	$	1,386,097		$	(48,764	)	$	1,961,635		$	1,113,058		$	3,074,693
Common stock issued under employee benefit plans, net of restricted stock cancellations	504,766	—		13,878		—			—			13,878			—			13,878
Common stock issued under ESOP	30,762	—		3,890		—			—			3,890			—			3,890
Income tax benefit from stock options exercised, vesting of restricted stock and other	—	—		7,973		—			—			7,973			—			7,973
Net income (1)	—	—		—		205,880			—			205,880			142,985			348,865
Capital calls and distributions, net	—	—		—		—			—			—			(37,984		)	(37,984		)
Net change in unrealized gains and losses on available-for-sale securities, net of tax	—	—		—		—			47,758			47,758			—			47,758
Cumulative-effect for unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax	—	—		—		—			22,522			22,522			—			22,522
Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax	—	—		—		—			(2,415		)	(2,415		)	—			(2,415		)
Foreign currency translation adjustments, net of tax	—	—		—		—			(357		)	(357		)	—			(357		)
Common stock issued in public offering	4,485,000	5		434,861		—			—			434,866			—			434,866
Share-based compensation expense	—	—		22,479		—			—			22,479			$	—		22,479
Balance at September 30, 2014 (1)	50,820,946	$	51	$	1,107,337	$	1,591,977		$	18,744		$	2,718,109		$	1,218,059		$	3,936,168
Balance at December 31, 2014 (1)	50,924,925	$	51	$	1,120,350	$	1,649,967		$	42,704		$	2,813,072		$	1,238,662		$	4,051,734
Common stock issued under employee benefit plans, net of restricted stock cancellations	536,635	—		14,712		—			—			14,712			—			14,712
Common stock issued under ESOP	27,425	—		3,512		—			—			3,512			—			3,512
Income tax benefit from stock options exercised, vesting of restricted stock and other	—	—		10,813		—			—			10,813			—			10,813
Deconsolidation of noncontrolling interest	—	—		—		—			—			—			(1,069,437		)	(1,069,437		)
Net income	—	—		—		256,392			—			256,392			28,419			284,811
Capital calls and distributions, net	—	—		—		—			—			—			(58,315		)	(58,315		)
Net change in unrealized gains and losses on available-for-sale securities, net of tax	—	—		—		—			57,605			57,605			—			57,605
Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax	—	—		—		—			(4,779		)	(4,779		)	—			(4,779		)
Foreign currency translation adjustments, net of tax	—	—		—		—			1,534			1,534			—			1,534
Share-based compensation expense	—	—		22,262		—			—			22,262			—			22,262
Other, net	—	—		—		(224		)	—			(224		)	—			(224		)
Balance at September 30, 2015	51,488,985	$	51	$	1,171,649	$	1,906,135		$	97,064		$	3,174,899		$	139,329		$	3,314,228


(1)	Prior period amounts have been revised to reflect the retrospective application of new accounting guidance adopted in the first quarter of 2015 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 1— "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements" under Part I, Item 1 in this report.

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)



	Nine months ended September 30,
(Dollars in thousands)	2015			2014
Cash flows from operating activities:
Net income before noncontrolling interests (1)	$	284,811		$	348,865
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	66,368			19,051
Provision for unfunded credit commitments	249			5,533
Changes in fair values of derivatives, net	(42,295		)	2,028
Gains on investment securities, net	(77,006		)	(172,236		)
Depreciation and amortization (1)	28,504			29,273
Amortization of premiums and discounts on investment securities, net	14,659			18,700
Amortization of share-based compensation	24,174			22,285
Amortization of deferred loan fees	(64,275		)	(59,550		)
Pre-tax net gain on SVBIF sale transaction	(1,287		)	—
Deferred income tax expense (benefit)	3,131			(18,916		)
Changes in other assets and liabilities:
Accrued interest receivable and payable, net	(6,312		)	(17,488		)
Accounts receivable and payable, net	(13,159		)	(12,890		)
Income tax payable and receivable, net (1)	(29,398		)	(14,234		)
Accrued compensation	(7,702		)	(24,241		)
Foreign exchange spot contracts, net	7,522			97,357
Other, net	57,445			12,837
Net cash provided by operating activities	245,429			236,374
Cash flows from investing activities:
Purchases of available-for-sale securities	(2,911,486		)	(8,060,750		)
Proceeds from sales of available-for-sale securities	7,762			26,926
Proceeds from maturities and pay downs of available-for-sale securities	1,238,950			1,352,369
Purchases of held-to-maturity securities	(2,057,030		)	(1,577,634		)
Proceeds from maturities and pay downs of held-to-maturity securities	1,153,363			327,913
Purchases of non-marketable and other securities (cost and equity method accounting)	(15,856		)	(47,923		)
Proceeds from sales and distributions of non-marketable and other securities (cost and equity method accounting)	79,575			47,478
Purchases of non-marketable and other securities (fair value accounting)	(5,611		)	(182,247		)
Proceeds from sales and distributions of non-marketable and other securities (fair value accounting)	77,289			264,389
Net increase in loans	(911,694		)	(1,103,447		)
Proceeds from recoveries of charged-off loans	5,119			5,313
Effect of deconsolidation of noncontrolling interest	15,995			—
Purchases of premises and equipment	(37,465		)	(29,332		)
Net proceeds from SVBIF sale transaction (2)	39,284			—
Net cash used for investing activities	(3,321,805		)	(8,976,945		)
Cash flows from financing activities:
Net increase in deposits	2,626,379			8,650,156
Net (decrease) increase in short-term borrowings	(4,025		)	1,550
Net distributions to noncontrolling interests	(58,315		)	(37,984		)
Tax benefit from stock exercises	10,813			7,973
Proceeds from issuance of common stock, ESPP, and ESOP	18,224			17,768
Net proceeds from public equity offering	—			434,866
Proceeds from issuance of 3.50% Senior Notes	346,431			—
Net cash provided by financing activities	2,939,507			9,074,329
Net (decrease) increase in cash and cash equivalents	(136,869		)	333,758
Cash and cash equivalents at beginning of period (1) (2)	1,811,014			1,538,779
Cash and cash equivalents at end of period (1)	$	1,674,145		$	1,872,537
Supplemental disclosures:
Cash paid during the period for:
Interest	$	62,129		$	30,259
Income taxes	182,479			154,746
Noncash items during the period:
Changes in unrealized gains and losses on available-for-sale securities, net of tax	$	57,605		$	47,758
Distributions of stock from investments	24,778			21,385
Transfers from available-for-sale securities to held-to-maturity	—			5,418,572


(1)	Cash flows for the nine months ended September 30, 2015 were revised to reflect the adoption of ASU 2015-02 as of January 1, 2015 and cash flows for the nine months ended September 30, 2014 were revised to reflect the retrospective application of our adoption of ASU 2014-01.


(2)	Cash and cash equivalents at December 31, 2014 included $15.0 million recognized in assets held-for-sale in conjunction with the SVBIF Sale Transaction. On April 13, 2015 we received net proceeds of $39.3 million consisting of the sales price of $48.6 million less $9.3 million of cash and cash equivalents held by SVBIF that were sold.

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

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SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS


1.	Basis of Presentation

SVB Financial Group is a diversified financial services company, as well as a bank holding company and financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services to support our clients of all sizes and stages throughout their life cycles. In these notes to our consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 2015 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, 2014 (“2014 Form 10-K”).

The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include measurements of fair value, the valuation of non-marketable securities, the valuation of equity warrant assets, the adequacy of the allowance for loan losses and reserve for unfunded credit commitments, and the recognition and measurement of income tax assets and liabilities.

Principles of Consolidation and Presentation

Prior to April 1, 2015, the Company’s consolidated financial statements included the accounts of SVB Financial Group and entities in which we had a controlling interest. The determination of whether we had controlling interest was based on consolidation principles prescribed by ASC Topic 810 and whether the controlling interest in an entity was a voting interest entity or a variable interest entity (“VIE”). However, during the three months ended June 30, 2015, we early adopted the provisions of ASU 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02)(see "Adoption of New Accounting Standards" below), which simplifies consolidation accounting by reducing the number of consolidation models and changing various aspects of current GAAP, including certain consolidation criteria for variable interest entities. The new guidance eliminates the presumption that a general partner of a limited partnership arrangement should consolidate a limited partnership. The amendments to ASC Topic 810 in ASU 2015-02 modify the evaluation of whether limited partnerships and similar entities are VIEs or voting entities. With these changes, we determined that the majority of our investments in limited partnership arrangements are VIEs under the new guidance while these entities were typically voting interest entities under the prior guidance.

ASU 2015-02 provided a single model for evaluating VIE entities for consolidation. VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. We assess VIEs to determine if we are the primary beneficiary of a VIE. A primary beneficiary is defined as a variable interest holder that has a controlling financial interest. A controlling financial interest requires both: (a) power to direct the activities that most significantly impact the VIE’s economic performance, and (b) obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. Under this analysis, we evaluate kick-out rights and other participating rights which could provide us a controlling financial interest. The primary beneficiary of a VIE is required to consolidate the VIE.

ASU 2015-02 also changed how we evaluate fees paid to managers of our limited partnership investments. Under the new guidance, we exclude those fee arrangements that are not deemed to be variable interests from the analysis of our interests in our investments in VIEs and the determination of a primary beneficiary, if any.

Our consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate voting entities in which we have control through voting interests. We determine whether we have a controlling financial interest in a VIE by determining if we have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and whether we have significant variable interests. Generally, we have significant variable

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interests if our commitments to a limited partnership investment represent a significant amount of the total commitments to the entity. We also evaluate the impact of related parties on our determination of variable interests in our consolidation conclusions. We consolidate VIEs in which we are the primary beneficiary based on a controlling financial interest. If we are not the primary beneficiary of a VIE, we record our pro-rata interests or our cost basis in the VIE, as appropriate, based on other accounting guidance within GAAP.

All significant intercompany accounts and transactions with consolidated entities have been eliminated. We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide.

Adoption of New Accounting Standards

In May 2015, the FASB issued a new accounting standard (ASU 2015-07, Fair Value Measurement (Topic 820)), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The standard is required to be applied retrospectively to all periods presented. The guidance will be effective for fiscal years beginning after December 15, 2015, with early adoption permitted. We early adopted this guidance in the second quarter of 2015. The adoption of this guidance impacts our fair value disclosures and has no impact on our financial position, results of operations or stockholders' equity.

In April 2015, the FASB issued a new accounting standard (ASU 2015-03, Interest- Imputation of Interest (Subtopic 835-30), which simplifies the presentation of debt issuance costs. The guidance will be effective for annual and quarterly periods beginning on January 1, 2016, with early adoption permitted. We early adopted this guidance in the third quarter of 2015 using the retrospective method, which required the restatement of prior period results. The adoption of this guidance impacted our statement of financial position, but had no impact on our results of operations or retained earnings. We reclassified $5.1 million and $2.1 million of debt issuance costs from other assets to a direct deduction from the carrying amounts of long-term debt for the periods ended September 30, 2015, and December 31, 2014, respectively.

In February 2015, the FASB issued a new accounting standard, ASU 2015-02, which amends the consolidation requirement for certain legal entities. As outlined above in "Principles of Consolidation and Presentation", we early adopted this guidance in the second quarter of 2015 using the modified retrospective method, which results in an effective date of adoption of January 1, 2015 and will not require the restatement of prior period results. The adoption of this guidance impacted our statement of financial position and results of operations, but had no impact on retained earnings, SVBFG stockholders' equity or net income as investments that were consolidated in previous reporting periods are now deconsolidated and no new investments were consolidated. Refer to Note 4—”Variable Interest Entities” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details regarding our assessment of the adoption of this guidance.

In January 2014, the FASB issued a new accounting standard (ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects), which is effective for us for interim and annual reporting periods beginning after December 15, 2014. The standard is required to be applied retrospectively, with an adjustment to retained earnings in the earliest period presented. The ASU is applicable to our portfolio of low income housing tax credit ("LIHTC") partnership interests. We adopted this guidance in the first quarter of 2015.

For prior periods, pursuant to ASU 2014-01, (i) amortization expense related to our low income housing tax credits was reclassified from Other noninterest expense to Income tax expense, (ii) additional amortization, net of the associated tax benefits, was recognized in Income tax expense as a result of our adoption of the proportional amortization method and (iii) net deferred tax assets, related to our low income housing tax investments, were written-off. The cumulative effect to retained earnings as of January 1, 2015 of adopting this guidance was a reduction of $4.7 million, inclusive of a $4.6 million reduction to retained earnings as of January 1, 2014. Our previously reported net income and diluted earnings per share for the three and nine months ended September 30, 2014 were not materially impacted by the adoption of ASU 2014-01.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new accounting standard (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. This guidance will be effective on a retrospective basis beginning on January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or stockholders' equity.

In August 2014, the FASB issued a new accounting standard (ASU 2014-15, Going Concern (Topic 205-40)), which requires management to evaluate for each annual and interim reporting period whether there is substantial doubt about an entity's ability to continue as a going concern. The guidance will be effective for annual and quarterly periods beginning on or after December 15, 2016, with early adoption permitted. We are currently developing processes and controls to adopt this guidance by the

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adoption deadline and do not expect the adoption of this guidance to have a material impact on our financial position, results of operations or stockholders' equity.

Reclassifications

Certain prior period amounts, including amounts related to the adoption of ASU 2014-01, ASU 2015-02 and ASU 2015-03, have been reclassified to conform to current period presentations.


2.	Stockholders’ Equity and EPS

Accumulated Other Comprehensive Income

The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2015 and 2014:



		Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	Income Statement Location	2015			2014			2015			2014
Reclassification adjustment for (gains) losses included in net income	Gains (losses) on investment securities, net	$	(13	)	$	990		$	(2,750	)	$	17,411
Related tax expense (benefit)	Income tax expense	6			(400		)	1,111			(7,030		)
Total reclassification adjustment for (gains) losses included in net income, net of tax		$	(7	)	$	590		$	(1,639	)	$	10,381

EPS

Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options and restricted stock units outstanding under our equity incentive plans and our ESPP. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and nine months ended September 30, 2015 and 2014:



	Three months ended September 30,				Nine months ended September 30,
(Dollars and shares in thousands, except per share amounts)	2015		2014		2015		2014
Numerator:
Net income available to common stockholders (1)	$	81,733	$	63,977	$	256,392	$	205,880
Denominator:
Weighted average common shares outstanding-basic	51,479		50,752		51,254		48,281
Weighted average effect of dilutive securities:
Stock options and ESPP	382		534		411		580
Restricted stock units	187		285		213		339
Denominator for diluted calculation	52,048		51,571		51,878		49,200
Earnings per common share:
Basic (1)	$	1.59	$	1.26	$	5.00	$	4.26
Diluted	$	1.57	$	1.24	$	4.94	$	4.18


(1)	Prior period amounts have been revised to reflect the retrospective application of new accounting guidance adopted in the first quarter of 2015 related to our investments in qualified affordable housing projects (ASU 2014-01). See Note 1— "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements" under Part I, Item 1 in this report.

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The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation as they were deemed to be antidilutive for the three and nine months ended September 30, 2015 and 2014:



	Three months ended September 30,		Nine months ended September 30,
(Shares in thousands)	2015	2014	2015	2014
Stock options	142	241	169	140
Restricted stock units	1	1	—	2
Total	143	242	169	142


3.	Share-Based Compensation

For the three and nine months ended September 30, 2015 and 2014, we recorded share-based compensation and related tax benefits as follows:



	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Share-based compensation expense	$	8,188		$	7,520		$	24,174		$	22,285
Income tax benefit related to share-based compensation expense	(3,051		)	(2,676		)	(8,381		)	(7,351		)

Unrecognized Compensation Expense

As of September 30, 2015, unrecognized share-based compensation expense was as follows:



(Dollars in thousands)	Unrecognized Expense		Average Expected Recognition Period - in Years
Stock options	$	12,756	2.45
Restricted stock units	41,726		2.64
Total unrecognized share-based compensation expense	$	54,482

Share-Based Payment Award Activity

The table below provides stock option information related to the 2006 Equity Incentive Plan for the nine months ended September 30, 2015:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life in Years	Aggregate Intrinsic Value of In-The- Money Options
Outstanding at December 31, 2014	1,394,888		$	66.03
Granted	122,120		129.30
Exercised	(311,575	)	51.34
Forfeited	(22,008	)	84.40
Expired	(1,520	)	48.76
Outstanding at September 30, 2015	1,181,905		76.12		4.00	$	48,295,069
Vested and expected to vest at September 30, 2015	1,145,732		75.24		3.95	47,717,566
Exercisable at September 30, 2015	656,191		60.34		3.01	36,230,256

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $115.54 as of September 30, 2015. The total intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $2.2 million and $24.0 million, respectively, compared to $7.7 million and $18.4 million for the comparable 2014 periods.

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The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the nine months ended September 30, 2015:



	Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2014	614,666		$	79.92
Granted	231,205		129.22
Vested	(211,652	)	74.02
Forfeited	(19,292	)	88.51
Nonvested at September 30, 2015	614,927		101.01


4.	Variable Interest Entities

Our involvement with VIEs includes our investments in venture capital and private equity funds, debt funds, private and public portfolio companies and our investments in qualified affordable housing projects.

The following table presents the carrying amounts and classification of significant variable interests in consolidated and unconsolidated VIEs as of September 30, 2015:



(Dollars in thousands)	Consolidated VIEs		Unconsolidated VIEs (1)		Maximum Exposure to Loss in Unconsolidated VIEs
September 30, 2015:
Assets:
Cash and cash equivalents	$	18,769	$	—	$	—
Non-marketable and other securities (2)	204,555		341,065		341,065
Accrued interest receivable and other assets	375		—		—
Total assets	$	223,699	$	341,065	$	341,065
Liabilities:
Other liabilities	421		—		—
Accrued expenses and other liabilities (2)	—		65,305		—
Total liabilities	$	421	$	65,305	$	—

(1)

During the second quarter of 2015 we adopted ASU 2015-02 and certain previously consolidated VIEs are no longer included in our Consolidated Balance Sheet. We applied the accounting guidance as of the beginning of the fiscal year of adoption, January 1, 2015. Upon adoption, we deconsolidated 16 entities, which reduced our total assets and total equity (which includes total SVBFG stockholders' equity plus noncontrolling interests) by $1.1 billion and $1.2 billion, respectively, primarily as a result of the reduction of our non-marketable and other securities and noncontrolling interests, respectively. SVB Financial continues to consolidate its interest in five SVB Capital funds that meet the new consolidated criteria.


(2)	Included in our non-marketable and other securities portfolio are investments in qualified affordable housing projects of $125.5 million and related unfunded commitments of $65.3 million.

Non-marketable and other securities

Our non-marketable and other securities portfolio primarily represents investments in venture capital and private equity funds, debt funds, private and public portfolio companies and investments in qualified affordable housing projects. A majority of these investments are through third party funds held by SVB Financial in which we do not have controlling or significant variable interests. These investments represent our unconsolidated VIEs in the table above. Our non-marketable and other securities portfolio also includes investments from SVB Capital. SVB Capital is the venture capital investment arm of SVB Financial, which focuses primarily on funds management. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. We have a controlling and significant variable interest in five of these SVB Capital funds and consolidate these funds for financial reporting purposes.

All investments are generally nonredeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. Subject to applicable regulatory requirements, including the

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Volcker Rule, we also make commitments to invest in venture capital and private equity funds, but are not obligated to fund commitments beyond our initial investment. For additional details, see Note 13—"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 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. We have not consolidated these investments in accordance with the new guidelines in ASU 2015-02. For additional information on our investments in qualified affordable housing projects see Note 6—“Investment Securities" of the "Notes to Interim Consolidated Financial Statements" under Part I, Item 1 of this report.

As of September 30, 2015, our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $223.3 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $341.1 million.


5.	Cash and Cash Equivalents

The following table details our cash and cash equivalents at September 30, 2015 and December 31, 2014:



(Dollars in thousands)	September 30, 2015		December 31, 2014
Cash and due from banks (1)	$	1,454,538	$	1,694,329
Securities purchased under agreements to resell (2)	214,484		95,611
Other short-term investment securities	5,123		6,122
Total cash and cash equivalents	$	1,674,145	$	1,796,062


(1)	At September 30, 2015 and December 31, 2014, $639 million and $861 million, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $429 million and $440 million, respectively.


(2)	At September 30, 2015 and December 31, 2014, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $219 million and $98 million, respectively. None of these securities received as collateral were sold or pledged as of September 30, 2015 or December 31, 2014.


6.	Investment Securities

Our investment securities portfolio consists of i) an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest-earning investment securities, and ii) a non-marketable and other securities portfolio, which primarily represents investments managed as part of our funds management business.

Available-for-Sale Securities

The components of our available-for-sale investment securities portfolio at September 30, 2015 and December 31, 2014 are as follows:



	September 30, 2015
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value
Available-for-sale securities, at fair value:
U.S. treasury securities	$	10,103,580	$	93,458	$	(13	)	$	10,197,025
U.S. agency debentures	2,902,479		40,502		(13		)	2,942,968
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	1,513,691		10,652		(6,641		)	1,517,702
Agency-issued collateralized mortgage obligations—variable rate	641,057		4,231		—			645,288
Equity securities	6,426		216		(1,964		)	4,678
Total available-for-sale securities	$	15,167,233	$	149,059	$	(8,631	)	$	15,307,661

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	December 31, 2014
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value
Available-for-sale securities, at fair value:
U.S. treasury securities	$	7,289,135	$	17,524	$	(4,386	)	$	7,302,273
U.S. agency debentures	3,540,055		30,478		(8,977		)	$	3,561,556
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	1,884,450		14,851		(14,458		)	1,884,843
Agency-issued collateralized mortgage obligations—variable rate	779,103		5,372		—			784,475
Equity securities	5,202		2,628		(322		)	7,508
Total available-for-sale securities	$	13,497,945	$	70,853	$	(28,143	)	$	13,540,655

The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months and 12 months or longer as of September 30, 2015:



	September 30, 2015
	Less than 12 months					12 months or longer					Total
(Dollars in thousands)	Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses
Available-for-sale securities:
U.S. treasury securities	$	51,576	$	(13	)	$	—	$	—		$	51,576	$	(13	)
U.S. agency debentures	17,424		(13		)	—		—			17,424		(13		)
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	230,141		(465		)	396,781		(6,176		)	626,922		(6,641		)
Equity securities	3,222		(1,964		)						3,222		(1,964		)
Total temporarily impaired securities: (1)	$	302,363	$	(2,455	)	$	396,781	$	(6,176	)	$	699,144	$	(8,631	)

(1)

As of September 30, 2015, we identified a total of 43 investments that were in unrealized loss positions, of which 18 investments totaling $396.8 million with unrealized losses of $6.2 million have been in an impaired position for a period of time greater than 12 months. As of September 30, 2015, we do not intend to sell any impaired fixed income investment securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis. Based on our analysis as of September 30, 2015, we deem all impairments to be temporary, and therefore changes in value for our temporarily impaired securities as of the same date are included in other comprehensive income. Market valuations and impairment analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis.

The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months and 12 months or longer as of December 31, 2014:



	December 31, 2014
	Less than 12 months					12 months or longer					Total
(Dollars in thousands)	Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses
Available-for-sale securities:
U.S. treasury securities	$	2,297,895	$	(4,386	)	$	—	$	—		$	2,297,895	$	(4,386	)
U.S. agency debentures	249,266		(489		)	507,385		(8,488		)	756,651		(8,977		)
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	662,092		(3,104		)	453,801		(11,354		)	1,115,893		(14,458		)
Equity securities	568		(322		)	—		—			568		(322		)
Total temporarily impaired securities (1):	$	3,209,821	$	(8,301	)	$	961,186	$	(19,842	)	$	4,171,007	$	(28,143	)

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(1)	As of December 31, 2014, we identified a total of 115 investments that were in unrealized loss positions, of which 33 investments totaling $961.2 million with unrealized losses of $19.8 million have been in an impaired position for a period of time greater than 12 months.

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The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income investment securities classified as available-for-sale as of September 30, 2015. The weighted average yield is computed using the amortized cost of fixed income investment securities, which are reported at fair value. For U.S. treasury securities and U.S. Agency debentures, the expected maturity is the actual contractual maturity of the notes. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower rate environments.



	September 30, 2015
	Total				One Year or Less				After One Year to Five Years				After Five Years to Ten Years				After Ten Years
(Dollars in thousands)	Carrying Value		Weighted- Average Yield		Carrying Value		Weighted- Average Yield		Carrying Value		Weighted- Average Yield		Carrying Value		Weighted- Average Yield		Carrying Value		Weighted- Average Yield
U.S. treasury securities	$	10,197,025	1.16	%	$	953,659	0.45	%	$	8,806,490	1.20	%	$	436,876	1.75	%	$	—	—	%
U.S. agency debentures	2,942,968		1.63		821,073		1.73		1,971,243		1.53		150,652		2.49		—		—
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations - fixed rate	1,517,702		1.96		—		—		—		—		570,403		2.50		947,299		1.65
Agency-issued collateralized mortgage obligations - variable rate	645,288		0.71		—		—		—		—		—		—		645,288		0.71
Total	$	15,302,983	1.31		$	1,774,732	1.04		$	10,777,733	1.26		$	1,157,931	2.21		$	1,592,587	1.27

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Held-to-Maturity Securities

The components of our held-to-maturity investment securities portfolio at September 30, 2015 and December 31, 2014 are as follows:



	September 30, 2015
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Held-to-maturity securities, at cost:
U.S. agency debentures (1)	$	545,753	$	11,923	$	—		$	557,676
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	2,457,328		18,925		(1,005		)	2,475,248
Agency-issued collateralized mortgage obligations—fixed rate	4,045,172		24,146		(5,372		)	4,063,946
Agency-issued collateralized mortgage obligations—variable rate	109,478		577		—			110,055
Agency-issued commercial mortgage-backed securities	1,073,160		12,449		(309		)	1,085,300
Municipal bonds and notes	75,635		36		(893		)	74,778
Total held-to-maturity securities	$	8,306,526	$	68,056	$	(7,579	)	$	8,367,003


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

December 31, 2014

(Dollars in thousands)

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair Value

Held-to-maturity securities, at cost:

U.S. agency debentures (1)

405,899