Edgar Filing: SVB FINANCIAL GROUP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2017



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

For the transition period from to .

Commission File Number: 000-15637

SVB FINANCIAL GROUP

(Exact name of registrant as specified in its charter)



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



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

(408) 654-7400

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

At July 31, 2017, 52,693,155 shares of the registrant’s common stock ($0.001 par value) were outstanding.

Table of Contents

TABLE OF CONTENTS



		Page
PART I - FINANCIAL INFORMATION		4

Item 1.	Interim Consolidated Financial Statements	4

	Interim Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (Unaudited)	4

	Interim Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016 (Unaudited)	5

	Interim Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016 (Unaudited)	7

	Interim Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2017 and 2016 (Unaudited)	8

	Interim Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (Unaudited)	9

	Notes to Interim Consolidated Financial Statements (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	94

Item 4.	Controls and Procedures	96

PART II - OTHER INFORMATION		97

Item 1.	Legal Proceedings	98

Item 1A.	Risk Factors	98

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98

Item 3.	Defaults Upon Senior Securities	98

Item 4.	Mine Safety Disclosures	98

Item 5.	Other Information	98

Item 6.	Exhibits	98

SIGNATURES		99

INDEX TO EXHIBITS		100

Table of Contents

Glossary of Acronyms that may be used in this Report

AFS— Available-for-Sale

APIC— Additional Paid-in Capital

ASC— Accounting Standards Codification

ASU— Accounting Standards Update

CET— Common Equity Tier

EHOP— Employee Home Ownership Program of the Company

EPS— Earnings Per Share

ERI— Energy and Resource innovation

ESOP— Employee Stock Ownership Plan of the Company

ESPP— 1999 Employee Stock Purchase Plan of the Company

FASB— Financial Accounting Standards Board

FDIC— Federal Deposit Insurance Corporation

FHLB— Federal Home Loan Bank

FRB— Federal Reserve Bank

FTE— Full-Time Employee

FTP— Funds Transfer Pricing

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

HTM— Held-to-Maturity

IASB— International Accounting Standards Board

IPO— Initial Public Offering

IRS— Internal Revenue Service

IT— Information Technology

LIBOR— London Interbank Offered Rate

M&A— Merger and Acquisition

OTTI— Other Than Temporary Impairment

SEC— Securities and Exchange Commission

SPD-SVB— SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China)

TDR— Troubled Debt Restructuring

UK— United Kingdom

VIE— Variable Interest Entity

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)



(Dollars in thousands, except par value and share data)	June 30, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	3,854,244		$	2,545,750
Available-for-sale securities, at fair value (cost of $12,053,305 and $12,588,783, respectively)	12,071,052			12,620,411
Held-to-maturity securities, at cost (fair value of $9,910,504 and $8,376,138, respectively)	9,938,371			8,426,998
Non-marketable and other securities	630,670			622,552
Total investment securities	22,640,093			21,669,961
Loans, net of unearned income	20,976,466			19,899,944
Allowance for loan losses	(236,496		)	(225,366		)
Net loans	20,739,970			19,674,578
Premises and equipment, net of accumulated depreciation and amortization	121,947			120,683
Accrued interest receivable and other assets	1,044,125			672,688
Total assets	$	48,400,379		$	44,683,660
Liabilities and total equity
Liabilities:
Noninterest-bearing demand deposits	$	35,046,371		$	31,975,457
Interest-bearing deposits	7,418,920			7,004,411
Total deposits	42,465,291			38,979,868
Short-term borrowings	470			512,668
Other liabilities	1,145,154			618,383
Long-term debt	749,429			795,704
Total liabilities	44,360,344			40,906,623
Commitments and contingencies (Note 12 and Note 15)
SVBFG stockholders’ equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.001 par value, 150,000,000 shares authorized; 52,684,159 shares and 52,254,074 shares outstanding, respectively	53			52
Additional paid-in capital	1,283,485			1,242,741
Retained earnings	2,601,007			2,376,331
Accumulated other comprehensive income	14,890			23,430
Total SVBFG stockholders’ equity	3,899,435			3,642,554
Noncontrolling interests	140,600			134,483
Total equity	4,040,035			3,777,037
Total liabilities and total equity	$	48,400,379		$	44,683,660

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

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands, except per share amounts)	2017			2016			2017			2016
Interest income:
Loans	$	250,197		$	205,287		$	477,538		$	403,229
Investment securities:
Taxable	95,522			86,603			185,325			177,653
Non-taxable	885			575			1,531			1,171
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities	7,323			1,527			10,459			3,597
Total interest income	353,927			293,992			674,853			585,650
Interest expense:
Deposits	2,197			1,261			3,914			2,449
Borrowings	9,034			9,395			18,250			18,444
Total interest expense	11,231			10,656			22,164			20,893
Net interest income	342,696			283,336			652,689			564,757
Provision for credit losses (1)	15,806			36,746			46,540			70,221
Net interest income after provision for credit losses	326,890			246,590			606,149			494,536
Noninterest income:
Gains on investment securities, net	17,630			23,270			33,600			18,586
Gains on equity warrant assets, net (2)	10,820			5,089			17,510			11,695
Foreign exchange fees	26,108			24,088			52,355			51,054
Credit card fees	18,099			15,424			35,829			30,931
Deposit service charges	14,563			13,114			28,538			25,786
Client investment fees	12,982			8,012			22,008			16,007
Lending related fees	8,509			7,802			17,470			15,615
Letters of credit and standby letters of credit fees	7,006			6,014			13,645			11,603
Other (2)	12,811			9,963			25,232			17,633
Total noninterest income	128,528			112,776			246,187			198,910
Noninterest expense:
Compensation and benefits	148,973			115,580			296,149			237,842
Professional services	27,925			25,516			53,344			44,516
Premises and equipment	18,958			16,586			34,816			31,570
Net occupancy	11,126			9,359			22,777			19,394
Business development and travel	11,389			9,327			20,584			21,573
FDIC and state assessments	9,313			6,892			17,995			13,819
Correspondent bank fees	3,163			2,713			6,608			6,365
Other	20,399			13,966			36,606			28,759
Total noninterest expense (1)	251,246			199,939			488,879			403,838
Income before income tax expense	204,172			159,427			363,457			289,608
Income tax expense (3)	71,656			65,047			123,061			118,631
Net income before noncontrolling interests	132,516			94,380			240,396			170,977
Net (income) loss attributable to noncontrolling interests	(9,323		)	(1,416		)	(15,720		)	1,161
Net income available to common stockholders (3)	$	123,193		$	92,964		$	224,676		$	172,138
Earnings per common share—basic (3)	$	2.34		$	1.79		$	4.28		$	3.33
Earnings per common share—diluted (3)	2.32			1.78			4.22			3.30

(1)

Our consolidated statements of income for the three and six months ended June 30, 2016 were modified from prior period's presentation to conform to the current period's presentation, which reflects our provision for loan losses and provision for unfunded credit commitments together as our “provision for credit losses”. In prior periods, our provision for unfunded credit commitments were reported as a component of noninterest expense.

(2)

Our consolidated statements of income for the three and six months ended June 30, 2016 were modified from prior period's presentation to conform to the current period's presentation, which reflects a new line item to separately disclose net gains on equity warrant assets. In prior periods, net gains on equity warrant assets were reported as a component of gains on derivative instruments, net. We removed the line item gains on derivative instruments, net and reclassified all other gains on derivative instruments, net to other noninterest income.

Table of Contents

(3)

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

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

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
Net income before noncontrolling interests	$	132,516		$	94,380		$	240,396		$	170,977
Other comprehensive (loss) income, net of tax:
Change in cumulative translation gains (losses):
Foreign currency translation gains (losses)	1,578			(1,795		)	2,535			(2,049		)
Related tax (expense) benefit	(644		)	731			(1,034		)	835
Change in unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains	(5,639		)	40,937			(13,396		)	211,768
Related tax benefit (expense)	2,500			(16,686		)	5,636			(86,289		)
Reclassification adjustment for losses (gains) included in net income	123			(12,328		)	(485		)	(11,582		)
Related tax (benefit) expense	(50		)	5,017			198			4,713
Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity	(1,566		)	(2,250		)	(3,337		)	(4,817		)
Related tax benefit	630			905			1,343			1,938
Other comprehensive (loss) income, net of tax	(3,068		)	14,531			(8,540		)	114,517
Comprehensive income	129,448			108,911			231,856			285,494
Comprehensive (income) loss attributable to noncontrolling interests	(9,323		)	(1,416		)	(15,720		)	1,161
Comprehensive income attributable to SVBFG	$	120,125		$	107,495		$	216,136		$	286,655

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

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)



	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income			Total SVBFG Stockholders’ Equity			Noncontrolling Interests			Total Equity
(Dollars in thousands)	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income			Total SVBFG Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2015	51,610,226	$	52	$	1,189,032		$	1,993,646	$	15,404		$	3,198,134		$	135,097		$	3,333,231
Common stock issued under employee benefit plans, net of restricted stock cancellations	372,282	—		6,852			—		—			6,852			—			6,852
Common stock issued under ESOP	43,165	—		4,328			—		—			4,328			—			4,328
Income tax effect from stock options exercised, vesting of restricted stock and other (1)	—	—		(6,587		)	—		—			(6,587		)	—			(6,587		)
Net income (loss)	—	—		—			172,138		—			172,138			(1,161		)	170,977
Capital calls and distributions, net	—	—		—			—		—			—			(5,721		)	(5,721		)
Net change in unrealized gains and losses on AFS securities, net of tax	—	—		—			—		118,610			118,610			—			118,610
Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax	—	—		—			—		(2,879		)	(2,879		)	—			(2,879		)
Foreign currency translation adjustments, net of tax	—	—		—			—		(1,214		)	(1,214		)	—			(1,214		)
Share-based compensation, net	—	—		16,196			—		—			16,196			—			16,196
Balance at June 30, 2016	52,025,673	$	52	$	1,209,821		$	2,165,784	$	129,921		$	3,505,578		$	128,215		$	3,633,793
Balance at December 31, 2016	52,254,074	$	52	$	1,242,741		$	2,376,331	$	23,430		$	3,642,554		$	134,483		$	3,777,037
Common stock issued under employee benefit plans, net of restricted stock cancellations	419,247	1		11,821			—		—			11,822			—			11,822
Common stock issued under ESOP	10,838	—		2,094			—		—			2,094			—			2,094
Income tax effect from stock options exercised, vesting of restricted stock and other (1)	—	—		—			—		—			—			—			—
Net income	—	—		—			224,676		—			224,676			15,720			240,396
Capital calls and distributions, net	—	—		—			—		—			—			(9,603		)	(9,603		)
Net change in unrealized gains and losses on AFS securities, net of tax	—	—		—			—		(8,047		)	(8,047		)	—			(8,047		)
Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax	—	—		—			—		(1,994		)	(1,994		)	—			(1,994		)
Foreign currency translation adjustments, net of tax	—	—		—			—		1,501			1,501			—			1,501
Share-based compensation, net	—	—		26,829			—		—			26,829			—			26,829
Balance at June 30, 2017	52,684,159	$	53	$	1,283,485		$	2,601,007	$	14,890		$	3,899,435		$	140,600		$	4,040,035

(1)

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

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

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Six months ended June 30,
(Dollars in thousands)	2017			2016
Cash flows from operating activities:
Net income before noncontrolling interests	$	240,396		$	170,977
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	46,540			70,221
Changes in fair values of equity warrant assets, net of proceeds from exercises	(9,053		)	(1,803		)
Changes in fair values of derivatives, net	8,505			(1,636		)
Gains on investment securities, net	(33,600		)	(18,586		)
Depreciation and amortization	26,268			23,768
Amortization of premiums and discounts on investment securities, net	1,747			7,923
Amortization of share-based compensation	19,095			14,425
Amortization of deferred loan fees	(51,869		)	(46,896		)
Deferred income tax benefit	(9,827		)	(6,374		)
Excess tax benefit from exercise of stock options and vesting of restricted shares (1)	(13,028		)	—
Changes in other assets and liabilities:
Accrued interest receivable and payable, net	(8,852		)	232
Accounts receivable and payable, net	(6,227		)	(2,598		)
Income tax receivable and payable, net	840			(32,915		)
Accrued compensation	(51,636		)	(79,858		)
Foreign exchange spot contracts, net	159,607			53,870
Other, net	41,172			(8,683		)
Net cash provided by operating activities	360,078			142,067
Cash flows from investing activities:
Purchases of available-for-sale securities	(1,174,666		)	—
Proceeds from sales of available-for-sale securities	5,024			2,878,272
Proceeds from maturities and pay downs of available-for-sale securities	1,715,291			660,464
Purchases of held-to-maturity securities	(2,298,290		)	(140,641		)
Proceeds from maturities and pay downs of held-to-maturity securities	806,386			743,117
Purchases of non-marketable and other securities	(9,435		)	(31,239		)
Proceeds from sales and distributions of non-marketable and other securities	60,355			28,064
Net increase in loans	(1,066,056		)	(2,085,829		)
Purchases of premises and equipment	(21,496		)	(24,057		)
Net cash (used for) provided by investing activities	(1,982,887		)	2,028,151
Cash flows from financing activities:
Net increase (decrease) in deposits	3,485,423			(1,546,209		)
Net decrease in short-term borrowings	(512,198		)	(271,681		)
Principal payments of long-term debt	(46,235		)	—
(Distributions to noncontrolling interests), net of contributions from noncontrolling interests	(9,603		)	(5,721		)
Tax effect from stock exercises (1)	—			(6,587		)
Proceeds from issuance of common stock, ESPP and ESOP	13,916			11,180
Net cash provided by (used for) financing activities	2,931,303			(1,819,018		)
Net increase in cash and cash equivalents	1,308,494			351,200
Cash and cash equivalents at beginning of period	2,545,750			1,503,257
Cash and cash equivalents at end of period	$	3,854,244		$	1,854,457
Supplemental disclosures:
Cash paid during the period for:
Interest	$	22,293		$	20,942
Income taxes	137,371			157,825
Noncash items during the period:
Changes in unrealized gains and losses on available-for-sale securities, net of tax	$	(8,047	)	$	118,610
Distributions of stock from investments	2,514			265


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

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

Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	Basis of Presentation

SVB Financial Group is a diversified financial services company, as well as a bank holding company and a financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services to support our clients of all sizes and stages throughout their life cycles. In these notes to our consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group (not including subsidiaries).

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of results to be expected for any future periods. These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”).

The accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data—Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2016 Form 10-K.

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

Principles of Consolidation and Presentation

Our consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate voting entities in which we have control through voting interests or entities through which we have a controlling financial interest in a variable interest entity (“VIE”). We determine whether we have a controlling financial interest in a VIE by determining if we have: (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses, or (c) the right to receive the expected returns of the entity. Generally, we have significant variable interests if our commitments to a limited partnership investment represent a significant amount of the total commitments to the entity. We also evaluate the impact of related parties on our determination of variable interests in our consolidation conclusions. We consolidate VIEs in which we are the primary beneficiary based on a controlling financial interest. If we are not the primary beneficiary of a VIE, we record our pro-rata interests or our cost basis in the VIE, as appropriate, based on other accounting guidance within GAAP.

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

We also evaluate fees paid to managers of our limited partnership investments. We exclude those fee arrangements that are not deemed to be variable interests from the analysis of our interests in our investments in VIEs and the determination of a primary beneficiary, if any. Fee arrangements based on terms that are customary and commensurate with the services provided are deemed not to be variable interests and are, therefore, excluded.

Table of Contents

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

Adoption of New Accounting Standards

In March 2016, the FASB issued a new accounting standard update (ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718)), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the ASU, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement in the period when the awards vest or are settled. The guidance also permits an entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We adopted this guidance on January 1, 2017 and elected to estimate the number of awards that are expected to vest which, is consistent with the previous accounting guidance. In addition, we also elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method.

Previously, tax effects resulting from changes in the Company's share price subsequent to grant date of share-based compensation awards were recorded through additional paid-in capital in stockholders' equity at the time of vesting and exercise. The adoption of the amended accounting guidance resulted in a $7.0 million and $13.1 million reduction of income tax expense (that previously would have been reflected as additional paid-in capital), or a benefit of $0.13 and $0.25 per diluted common share, for the three and six months ended June 30, 2017, respectively. We expect the impact of this amendment will vary period to period depending on the volatility of the Company's stock price and the timing of vesting and/or settlement of awards.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new accounting standard update (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. In March 2016, the FASB issued a new accounting standard update (ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)), which further clarifies ASU 2014-09 by providing implementation guidance on principal versus agent evaluation. In April 2016, the FASB issued a new accounting standard update (ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing), which amends the new revenue recognition guidance on accounting for licenses of intellectual property and identifying performance obligations. These amendments will be effective January 1, 2018, either on a full retrospective approach or a modified retrospective approach. This guidance is not applicable to financial instruments (i.e. loans and fixed income securities) and as such, is not expected to impact a majority of our revenue, which is primarily net interest income. Our initial assessment has identified our credit card products and our carried interest allocations from our venture capital investments as revenue sources most likely to be impacted by the new guidance. We continue to evaluate the impact of this guidance to our noninterest income, on our presentation and disclosures and on timing of revenue recognition.

In January 2016, the FASB issued a new accounting standard update (ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)), which will significantly change the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities. This guidance will be effective on January 1, 2018, on a prospective basis with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption for our cost method venture capital and private equity fund investments with readily determinable fair values. Our cost method venture capital and private equity fund investments that do not have readily determinable fair values will be carried at cost, minus impairment, if any, and remeasured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The actual adjustment to opening retained earnings will depend upon the fair value of our investments at the adoption date.

In February 2016, the FASB issued a new accounting standard update (ASU 2016-02, Leases (Topic 842)), which will require for all operating leases the recognition of a right-of-use asset and a lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. This guidance will be effective on January 1, 2019, on a modified retrospective basis, with early adoption permitted. We plan to adopt the lease accounting guidance in the first quarter of 2019 and are currently evaluating the impact this guidance will have on our consolidated financial statements by reviewing our existing lease contracts and service contracts that may include embedded leases. We expect to recognize right-of-use assets and related lease liabilities associated predominantly with noncancelable operating leases included in the table of minimum future payments in the amount of $217 million as disclosed in Note 18 of our 2016 Form 10-K.

In June 2016, the FASB issued a new accounting standard update (ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), which amends the incurred loss impairment methodology in

Table of Contents

current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance will be effective January 1, 2020, on a modified retrospective approach, with early adoption permitted, but not before January 1, 2019. We currently have a working project team in place and subject matter experts to assist with our review of key interpretive issues and help in our assessment of our existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required. We are currently evaluating the impact this guidance will have on our financial position, results of operation and stockholders’ equity.

In August 2016, the FASB issued a new accounting standard update (ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments), which clarifies the guidance on eight specific cash flow issues. This guidance will be effective January 1, 2018 on a full retrospective approach, with early adoption permitted. Our preliminary evaluation has resulted in the expectation that this guidance will primarily impact the presentation between investing and operating activities within our statements of cash flows related to distributions and net gains from our nonmarketable and other securities portfolio. We are continuing to evaluate any further impact of this guidance to the presentation of our operating, investing and financing activities within our statements of cash flows.

Reclassifications

Certain prior period amounts, primarily related to the changes to our income statement presentation of net gains on derivative instruments and provision for unfunded credit commitments have been reclassified to conform to current period presentations.


2.	Stockholders’ Equity and EPS

Accumulated Other Comprehensive Income

The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2017 and 2016:



		Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	Income Statement Location	2017			2016			2017			2016
Reclassification adjustment for losses (gains) included in net income	Gains on investment securities, net	$	123		$	(12,328	)	$	(485	)	$	(11,582	)
Related tax (benefit) expense	Income tax expense	(50		)	5,017			198			4,713
Total reclassification adjustment for losses (gains) included in net income, net of tax		$	73		$	(7,311	)	$	(287	)	$	(6,869	)

Table of Contents

EPS

Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issuable for stock options and restricted stock units outstanding under our 2006 Equity Incentive Plan and our ESPP. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2017 and 2016:



	Three months ended June 30,				Six months ended June 30,
(Dollars and shares in thousands, except per share amounts)	2017		2016		2017		2016
Numerator:
Net income available to common stockholders	$	123,193	$	92,964	$	224,676	$	172,138
Denominator:
Weighted average common shares outstanding—basic	52,537		51,831		52,441		51,739
Weighted average effect of dilutive securities:
Stock options and ESPP	368		238		397		246
Restricted stock units	289		118		342		145
Weighted average common shares outstanding—diluted	53,194		52,187		53,180		52,130
Earnings per common share:
Basic	$	2.34	$	1.79	$	4.28	$	3.33
Diluted	$	2.32	$	1.78	$	4.22	$	3.30

The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation due to the antidilutive effect for the three and six months ended June 30, 2017 and 2016:



	Three months ended June 30,		Six months ended June 30,
(Shares in thousands)	2017	2016	2017	2016
Stock options	73	462	36	407
Restricted stock units	—	143	—	88
Total	73	605	36	495


3.	Share-Based Compensation

For the three and six months ended June 30, 2017 and 2016, we recorded share-based compensation and related tax benefits as follows:



	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
Share-based compensation expense	$	9,892		$	7,548		$	19,095		$	14,425
Income tax benefit related to share-based compensation expense	(3,349		)	(4,581		)	(6,364		)	(6,698		)

Unrecognized Compensation Expense

As of June 30, 2017, unrecognized share-based compensation expense was as follows:



(Dollars in thousands)	Unrecognized Expense		Weighted Average Expected Recognition Period - in Years
Stock options	$	12,309	2.88
Restricted stock units	62,942		2.89
Total unrecognized share-based compensation expense	$	75,251

Table of Contents

Share-Based Payment Award Activity

The table below provides stock option information related to the 2006 Equity Incentive Plan for the six months ended June 30, 2017:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life - in Years	Aggregate Intrinsic Value of In-The- Money Options
Outstanding at December 31, 2016	1,010,557		$	87.24
Granted	111,855		178.16
Exercised	(196,006	)	69.93
Forfeited	(3,662	)	93.88
Outstanding at June 30, 2017	922,744		101.91		4.00	$	68,457,617
Vested and expected to vest at June 30, 2017	893,276		100.71		3.94	67,315,191
Exercisable at June 30, 2017	568,202		82.89		2.95	52,783,813

The aggregate intrinsic value of outstanding options shown in the table above represents the pre-tax intrinsic value based on our closing stock price of $175.79 as of June 30, 2017. The total intrinsic value of options exercised during the three and six months ended June 30, 2017 was $5.6 million and $22.1 million, compared to $4.6 million and $6.7 million for the comparable 2016 periods, respectively.

The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the six months ended June 30, 2017:



	Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2016	670,969		$	106.64
Granted	230,822		179.94
Vested	(218,336	)	102.07
Forfeited	(16,078	)	117.29
Nonvested at June 30, 2017	667,377		133.23


4.	Variable Interest Entities

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

Table of Contents

The following table presents the carrying amounts and classification of significant variable interests in consolidated and unconsolidated VIEs as of June 30, 2017 and December 31, 2016:



(Dollars in thousands)	Consolidated VIEs		Unconsolidated VIEs		Maximum Exposure to Loss in Unconsolidated VIEs
June 30, 2017:
Assets:
Cash and cash equivalents	$	7,440	$	—	$	—
Non-marketable and other securities (1)	194,543		323,426		323,426
Accrued interest receivable and other assets	142		—		—
Total assets	$	202,125	$	323,426	$	323,426
Liabilities:
Other liabilities (1)	604		86,545		—
Total liabilities	$	604	$	86,545	$	—
December 31, 2016:
Assets:
Cash and cash equivalents	$	11,469	$	—	$	—
Non-marketable and other securities (1)	196,140		314,810		314,810
Accrued interest receivable and other assets	294		—		—
Total assets	$	207,903	$	314,810	$	314,810
Liabilities:
Other liabilities (1)	517		58,095		—
Total liabilities	$	517	$	58,095	$	—


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

Non-marketable and other securities

Our non-marketable and other securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies and investments in qualified affordable housing projects. A majority of these investments are through third party funds held by SVB Financial in which we do not have controlling or significant variable interests. These investments represent our unconsolidated VIEs in the table above. Our non-marketable and other securities portfolio also includes investments from SVB Capital. SVB Capital is the funds management business of SVB Financial Group, which focuses primarily on venture capital investments. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. We have a controlling and significant variable interest in four of these SVB Capital funds and consolidate these funds for financial reporting purposes.

All investments are generally nonredeemable and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. Subject to applicable regulatory requirements, including the Volcker Rule, we also make commitments to invest in venture capital and private equity funds. For additional details, see Note 12—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.

The Bank also has variable interests in low income housing tax credit funds, in connection with fulfilling its responsibilities under the Community Reinvestment Act (“CRA”), that are designed to generate a return primarily through the realization of federal tax credits. These investments are typically limited partnerships in which the general partner, other than the Bank, holds the power over significant activities of the VIE; therefore, these investments are not consolidated. For additional information on our investments in qualified affordable housing projects see Note 6—“Investment Securities" of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.

Table of Contents

As of June 30, 2017, our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $201.5 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $323.4 million.


5.	Cash and Cash Equivalents

The following table details our cash and cash equivalents at June 30, 2017 and December 31, 2016:



(Dollars in thousands)	June 30, 2017		December 31, 2016
Cash and due from banks (1)	$	3,658,927	$	2,476,588
Securities purchased under agreements to resell (2)	192,421		64,028
Other short-term investment securities	2,896		5,134
Total cash and cash equivalents	$	3,854,244	$	2,545,750


(1)	At June 30, 2017 and December 31, 2016, $1.8 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $1.2 billion and $721 million, respectively.


(2)	At June 30, 2017 and December 31, 2016, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $196 million and $66 million, respectively. None of these securities were sold or repledged as of June 30, 2017 and December 31, 2016.


6.	Investment Securities

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

Available-for-Sale Securities

The components of our available-for-sale investment securities portfolio at June 30, 2017 and December 31, 2016 are as follows:



	June 30, 2017
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value
Available-for-sale securities, at fair value:
U.S. Treasury securities	$	7,785,838	$	19,443	$	(3,599	)	$	7,801,682
U.S. agency debentures	1,917,475		11,355		(1,577		)	1,927,253
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	1,925,216		3,885		(13,820		)	1,915,281
Agency-issued collateralized mortgage obligations—variable rate	418,173		1,361		(147		)	419,387
Equity securities	6,603		1,495		(649		)	7,449
Total available-for-sale securities	$	12,053,305	$	37,539	$	(19,792	)	$	12,071,052



	December 31, 2016
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Carrying Value
Available-for-sale securities, at fair value:
U.S. Treasury securities	$	8,880,358	$	30,323	$	(1,190	)	$	8,909,491
U.S. agency debentures	2,065,535		14,443		(1,603		)	2,078,375
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	1,163,017		3,046		(13,398		)	1,152,665
Agency-issued collateralized mortgage obligations—variable rate	474,238		685		(640		)	474,283
Equity securities	5,635		748		(786		)	5,597
Total available-for-sale securities	$	12,588,783	$	49,245	$	(17,617	)	$	12,620,411

Table of Contents

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



	June 30, 2017
	Less than 12 months					12 months or longer					Total
(Dollars in thousands)	Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses
Available-for-sale securities:
U.S. Treasury securities	$	2,724,519	$	(3,599	)	$	—	$	—		$	2,724,519	$	(3,599	)
U.S. agency debentures	762,920		(1,577		)	—		—			762,920		(1,577		)
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	851,825		(7,849		)	201,986		(5,971		)	1,053,811		(13,820		)
Agency-issued collateralized mortgage obligations—variable rate	6,185		(14		)	69,706		(133		)	75,891		(147		)
Equity securities	3,561		(649		)	—		—			3,561		(649		)
Total temporarily impaired securities (1)	$	4,349,010	$	(13,688	)	$	271,692	$	(6,104	)	$	4,620,702	$	(19,792	)

(1)

As of June 30, 2017, we identified a total of 184 investments that were in unrealized loss positions, of which 44 investments totaling $271.7 million with unrealized losses of $6.1 million have been in an impaired position for a period of time greater than 12 months. As of June 30, 2017, we do not intend to sell any impaired fixed income investment securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis. Based on our analysis as of June 30, 2017, we deem all impairments to be temporary, and therefore changes in value for our temporarily impaired securities as of the same date are included in other comprehensive income. Market valuations and impairment analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis.



	December 31, 2016
	Less than 12 months					12 months or longer					Total
(Dollars in thousands)	Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses
Available-for-sale securities:
U.S. Treasury securities	$	879,255	$	(1,190	)	$	—	$	—		$	879,255	$	(1,190	)
U.S. agency debentures	513,198		(1,603		)	—		—			513,198		(1,603		)
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	635,566		(6,704		)	227,480		(6,694		)	863,046		(13,398		)
Agency-issued collateralized mortgage obligations—variable rate	258,325		(613		)	6,068		(27		)	264,393		(640		)
Equity securities	3,693		(786		)	—		—			3,693		(786		)
Total temporarily impaired securities (1)	$	2,290,037	$	(10,896	)	$	233,548	$	(6,721	)	$	2,523,585	$	(17,617	)


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

Table of Contents

The following table summarizes the fixed income securities, carried at fair value, classified as available-for-sale as of June 30, 2017 by the remaining contractual principal maturities. For U.S. Treasury securities and U.S. agency debentures, the expected maturity is the actual contractual maturity of the notes. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower rate environments.



	June 30, 2017
(Dollars in thousands)	Total		One Year or Less		After One Year to Five Years		After Five Years to Ten Years		After Ten Years
U.S. Treasury securities	$	7,801,682	$	2,144,571	$	5,657,111	$	—	$	—
U.S. agency debentures	1,927,253		424,613		1,502,640		—		—
Residential mortgage-backed securities:
Agency-issued collateralized mortgage obligations—fixed rate	1,915,281		—		—		554,866		1,360,415
Agency-issued collateralized mortgage obligations—variable rate	419,387		—		—		—		419,387
Total	$	12,063,603	$	2,569,184	$	7,159,751	$	554,866	$	1,779,802

Held-to-Maturity Securities

The components of our held-to-maturity investment securities portfolio at June 30, 2017 and December 31, 2016 are as follows:



	June 30, 2017
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Held-to-maturity securities, at cost:
U.S. agency debentures (1)	$	641,191	$	7,553	$	(1,291	)	$	647,453
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	4,170,585		12,047		(14,619		)	4,168,013
Agency-issued collateralized mortgage obligations—fixed rate	3,240,643		853		(26,227		)	3,215,269
Agency-issued collateralized mortgage obligations—variable rate	283,519		581		(57		)	284,043
Agency-issued commercial mortgage-backed securities	1,386,455		2,507		(9,267		)	1,379,695
Municipal bonds and notes	215,978		1,451		(1,398		)	216,031
Total held-to-maturity securities	$	9,938,371	$	24,992	$	(52,859	)	$	9,910,504


(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, 2016
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Held-to-maturity securities, at cost:
U.S. agency debentures (1)	$	622,445	$	7,840	$	(1,198	)	$	629,087
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	2,896,179		6,919		(24,526		)	2,878,572
Agency-issued collateralized mortgage obligations—fixed rate	3,362,598		788		(31,274		)	3,332,112
Agency-issued collateralized mortgage obligations—variable rate	312,665		176		(1,339		)	311,502
Agency-issued commercial mortgage-backed securities	1,151,363		1,237		(7,638		)	1,144,962
Municipal bonds and notes	81,748		8		(1,853		)	79,903
Total held-to-maturity securities	$	8,426,998	$	16,968	$	(67,828	)	$	8,376,138


(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.

Table of Contents

The following tables summarize our unrealized losses on our held-to-maturity securities portfolio into categories of less than 12 months and 12 months or longer as of June 30, 2017 and December 31, 2016:



	June 30, 2017
	Less than 12 months					12 months or longer					Total
(Dollars in thousands)	Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses			Fair Value of Investments		Unrealized Losses
Held-to-maturity securities:
U.S. agency debentures	$	63,160	$	(1,291	)	$	—	$	—		$	63,160	$	(1,291	)
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	2,242,392		(13,972		)	20,690		(647		)	2,263,082		(14,619		)
Agency-issued collateralized mortgage obligations—fixed rate	2,719,351		(21,887		)	201,313		(4,340		)	2,920,664		(26,227		)
Agency-issued collateralized mortgage obligations—variable rate	—		—