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, 2018
OR
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-15637
SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 91-1962278 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| | |
3003 Tasman Drive, Santa Clara, California | | 95054-1191 |
(Address of principal executive offices) | | (Zip Code) |
(408) 654-7400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At July 31, 2018, 53,213,737 shares of the registrant’s common stock ($0.001 par value) were outstanding.
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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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
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, 2018 |
| December 31, 2017 |
Assets |
|
|
|
|
Cash and cash equivalents |
| $ | 2,712,101 |
|
| $ | 2,923,075 |
|
Available-for-sale securities, at fair value (cost of $9,717,156 and $11,131,008, respectively) |
| 9,593,366 |
|
| 11,120,664 |
|
Held-to-maturity securities, at cost (fair value of $15,493,995 and $12,548,280, respectively) |
| 15,898,263 |
|
| 12,663,455 |
|
Non-marketable and other equity securities |
| 852,505 |
|
| 651,053 |
|
Total investment securities |
| 26,344,134 |
|
| 24,435,172 |
|
Loans, net of unearned income |
| 25,996,192 |
|
| 23,106,316 |
|
Allowance for loan losses |
| (286,709 | ) |
| (255,024 | ) |
Net loans |
| 25,709,483 |
|
| 22,851,292 |
|
Premises and equipment, net of accumulated depreciation and amortization |
| 117,603 |
|
| 128,682 |
|
Accrued interest receivable and other assets |
| 984,424 |
|
| 876,246 |
|
Total assets |
| $ | 55,867,745 |
|
| $ | 51,214,467 |
|
Liabilities and total equity |
|
|
|
|
Liabilities: |
|
|
|
|
Noninterest-bearing demand deposits |
| $ | 40,593,302 |
|
| $ | 36,655,497 |
|
Interest-bearing deposits |
| 8,293,993 |
|
| 7,598,578 |
|
Total deposits |
| 48,887,295 |
|
| 44,254,075 |
|
Short-term borrowings |
| 417,246 |
|
| 1,033,730 |
|
Other liabilities |
| 1,062,391 |
|
| 911,755 |
|
Long-term debt |
| 695,972 |
|
| 695,492 |
|
Total liabilities |
| 51,062,904 |
|
| 46,895,052 |
|
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; 53,210,627 shares and 52,835,188 shares outstanding, respectively |
| 53 |
|
| 53 |
|
Additional paid-in capital |
| 1,346,586 |
|
| 1,314,377 |
|
Retained earnings |
| 3,397,879 |
|
| 2,866,837 |
|
Accumulated other comprehensive loss |
| (86,865 | ) |
| (1,472 | ) |
Total SVBFG stockholders’ equity |
| 4,657,653 |
|
| 4,179,795 |
|
Noncontrolling interests |
| 147,188 |
|
| 139,620 |
|
Total equity |
| 4,804,841 |
|
| 4,319,415 |
|
Total liabilities and total equity |
| $ | 55,867,745 |
|
| $ | 51,214,467 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
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) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
Interest income: |
|
|
|
|
|
|
|
|
Loans |
| $ | 330,298 |
|
| $ | 250,197 |
|
| $ | 627,371 |
|
| $ | 477,538 |
|
Investment securities: |
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|
Taxable |
| 137,150 |
|
| 95,522 |
|
| 261,627 |
|
| 185,325 |
|
Non-taxable |
| 7,666 |
|
| 885 |
|
| 12,758 |
|
| 1,531 |
|
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
| 6,187 |
|
| 7,323 |
|
| 11,943 |
|
| 10,459 |
|
Total interest income |
| 481,301 |
|
| 353,927 |
|
| 913,699 |
|
| 674,853 |
|
Interest expense: |
|
|
|
|
|
|
|
|
Deposits |
| 6,270 |
|
| 2,197 |
|
| 10,367 |
|
| 3,914 |
|
Borrowings |
| 8,588 |
|
| 9,034 |
|
| 17,026 |
|
| 18,250 |
|
Total interest expense |
| 14,858 |
|
| 11,231 |
|
| 27,393 |
|
| 22,164 |
|
Net interest income |
| 466,443 |
|
| 342,696 |
|
| 886,306 |
|
| 652,689 |
|
Provision for credit losses |
| 29,080 |
|
| 15,806 |
|
| 57,052 |
|
| 46,540 |
|
Net interest income after provision for credit losses |
| 437,363 |
|
| 326,890 |
|
| 829,254 |
|
| 606,149 |
|
Noninterest income: |
|
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Gains on investment securities, net |
| 36,114 |
|
| 17,630 |
|
| 45,172 |
|
| 33,600 |
|
Gains on equity warrant assets, net |
| 19,061 |
|
| 10,820 |
|
| 38,252 |
|
| 17,510 |
|
Foreign exchange fees |
| 34,077 |
|
| 26,108 |
|
| 67,904 |
|
| 52,355 |
|
Credit card fees |
| 22,926 |
|
| 18,099 |
|
| 44,618 |
|
| 35,829 |
|
Deposit service charges |
| 18,794 |
|
| 14,563 |
|
| 36,493 |
|
| 28,538 |
|
Client investment fees |
| 29,452 |
|
| 12,982 |
|
| 52,327 |
|
| 22,008 |
|
Lending related fees |
| 9,528 |
|
| 8,509 |
|
| 20,263 |
|
| 17,470 |
|
Letters of credit and standby letters of credit fees |
| 8,347 |
|
| 7,006 |
|
| 16,529 |
|
| 13,645 |
|
Other |
| 14,390 |
|
| 12,811 |
|
| 26,649 |
|
| 25,232 |
|
Total noninterest income |
| 192,689 |
|
| 128,528 |
|
| 348,207 |
|
| 246,187 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
Compensation and benefits |
| 181,955 |
|
| 148,973 |
|
| 347,761 |
|
| 296,149 |
|
Professional services |
| 46,813 |
|
| 27,925 |
|
| 75,538 |
|
| 53,344 |
|
Premises and equipment |
| 19,173 |
|
| 18,958 |
|
| 37,718 |
|
| 34,816 |
|
Net occupancy |
| 13,288 |
|
| 11,126 |
|
| 26,904 |
|
| 22,777 |
|
Business development and travel |
| 12,095 |
|
| 11,389 |
|
| 23,286 |
|
| 20,584 |
|
FDIC and state assessments |
| 10,326 |
|
| 9,313 |
|
| 19,756 |
|
| 17,995 |
|
Correspondent bank fees |
| 3,277 |
|
| 3,163 |
|
| 6,687 |
|
| 6,608 |
|
Other |
| 18,812 |
|
| 20,399 |
|
| 33,506 |
|
| 36,606 |
|
Total noninterest expense |
| 305,739 |
|
| 251,246 |
|
| 571,156 |
|
| 488,879 |
|
Income before income tax expense |
| 324,313 |
|
| 204,172 |
|
| 606,305 |
|
| 363,457 |
|
Income tax expense |
| 77,287 |
|
| 71,656 |
|
| 151,253 |
|
| 123,061 |
|
Net income before noncontrolling interests |
| 247,026 |
|
| 132,516 |
|
| 455,052 |
|
| 240,396 |
|
Net income attributable to noncontrolling interests |
| (9,228 | ) |
| (9,323 | ) |
| (22,293 | ) |
| (15,720 | ) |
Net income available to common stockholders |
| $ | 237,798 |
|
| $ | 123,193 |
|
| $ | 432,759 |
|
| $ | 224,676 |
|
Earnings per common share—basic |
| $ | 4.48 |
|
| $ | 2.34 |
|
| $ | 8.17 |
|
| $ | 4.28 |
|
Earnings per common share—diluted |
| 4.42 |
|
| 2.32 |
|
| 8.05 |
|
| 4.22 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
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) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
Net income before noncontrolling interests |
| $ | 247,026 |
|
| $ | 132,516 |
|
| $ | 455,052 |
|
| $ | 240,396 |
|
Other comprehensive loss, net of tax: |
| | | |
|
|
|
|
Change in foreign currency cumulative translation gains and losses: |
| | | |
|
|
|
|
Foreign currency translation (losses) gains |
| (5,184 | ) |
| 1,578 |
|
| (2,078 | ) |
| 2,535 |
|
Related tax benefit (expense) |
| 1,433 |
|
| (644 | ) |
| 577 |
|
| (1,034 | ) |
Change in unrealized gains and losses on available-for-sale securities: |
| | | |
|
|
|
|
Unrealized holding losses |
| (15,103 | ) |
| (5,639 | ) |
| (73,130 | ) |
| (13,396 | ) |
Related tax benefit |
| 4,349 |
|
| 2,500 |
|
| 20,275 |
|
| 5,636 |
|
Reclassification adjustment for losses (gains) included in net income (1) |
| — |
|
| 123 |
|
| — |
|
| (485 | ) |
Related tax (benefit) expense (1) |
| — |
|
| (50 | ) |
| — |
|
| 198 |
|
Reclassification of unrealized gains on equity securities to retained earnings for ASU 2016-01 (1) | | — |
| | — |
| | (40,316 | ) | | — |
|
Related tax expense (1) | | — |
| | — |
| | 11,145 |
| | — |
|
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity |
| (932 | ) |
| (1,566 | ) |
| (2,138 | ) |
| (3,337 | ) |
Related tax benefit |
| 258 |
|
| 630 |
|
| 591 |
|
| 1,343 |
|
Reclassification of stranded tax effect to retained earnings for ASU 2018-02 (1) | | — |
| | — |
| | (319 | ) | | — |
|
Other comprehensive loss, net of tax |
| (15,179 | ) |
| (3,068 | ) |
| (85,393 | ) |
| (8,540 | ) |
Comprehensive income |
| 231,847 |
|
| 129,448 |
|
| 369,659 |
|
| 231,856 |
|
Comprehensive income attributable to noncontrolling interests |
| (9,228 | ) |
| (9,323 | ) |
| (22,293 | ) |
| (15,720 | ) |
Comprehensive income attributable to SVBFG |
| $ | 222,619 |
|
| $ | 120,125 |
|
| $ | 347,366 |
|
| $ | 216,136 |
|
| |
(1) | See "Adoption of New Accounting Standards" in 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).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| 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 |
|
|
|
|
|
|
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 |
|
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 holding 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 |
|
Balance at December 31, 2017 |
| 52,835,188 |
| | $ | 53 |
| | $ | 1,314,377 |
| | $ | 2,866,837 |
| | $ | (1,472 | ) | | $ | 4,179,795 |
| | $ | 139,620 |
| | $ | 4,319,415 |
|
Cumulative adjustment for ASU 2014-09, net of tax (1) | | — |
| | — |
| | — |
| | (5,802 | ) | | — |
| | (5,802 | ) | | — |
| | (5,802 | ) |
Cumulative adjustment for ASU 2016-01, net of tax (1) | | — |
| | — |
| | — |
| | 103,766 |
| | (29,171 | ) | | 74,595 |
| | — |
| | 74,595 |
|
Reclassification of stranded tax effect for ASU 2018-02 (1) | | — |
| | — |
| | — |
| | 319 |
| | (319 | ) | | — |
| | — |
| | — |
|
Common stock issued under employee benefit plans, net of restricted stock cancellations |
| 365,767 |
| | — |
| | 7,165 |
| | — |
| | — |
|
| 7,165 |
|
| — |
|
| 7,165 |
|
Common stock issued under ESOP |
| 9,672 |
| | — |
| | 2,577 |
| | — |
| | — |
|
| 2,577 |
|
| — |
|
| 2,577 |
|
Net income |
| — |
| | — |
| | — |
| | 432,759 |
| | — |
|
| 432,759 |
|
| 22,293 |
|
| 455,052 |
|
Capital calls and distributions, net |
| — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
| (14,725 | ) |
| (14,725 | ) |
Net change in unrealized gains and losses on AFS securities, net of tax |
| — |
| | — |
| | — |
| | — |
| | (52,855 | ) |
| (52,855 | ) |
| — |
|
| (52,855 | ) |
Amortization of unrealized holding gains on securities transferred from AFS to HTM, net of tax |
| — |
| | — |
| | — |
| | — |
| | (1,547 | ) |
| (1,547 | ) |
| — |
|
| (1,547 | ) |
Foreign currency translation adjustments, net of tax |
| — |
| | — |
| | — |
| | — |
| | (1,501 | ) |
| (1,501 | ) |
| — |
|
| (1,501 | ) |
Share-based compensation, net |
| — |
| | — |
| | 22,467 |
| | — |
| | — |
|
| 22,467 |
|
| — |
|
| 22,467 |
|
Balance at June 30, 2018 |
| 53,210,627 |
|
| $ | 53 |
|
| $ | 1,346,586 |
|
| $ | 3,397,879 |
|
| $ | (86,865 | ) |
| $ | 4,657,653 |
|
| $ | 147,188 |
|
| $ | 4,804,841 |
|
| |
(1) | See "Adoption of New Accounting Standards" in 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).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | | |
|
| Six months ended June 30, |
(Dollars in thousands) |
| 2018 |
| 2017 |
Cash flows from operating activities: |
|
|
|
|
Net income before noncontrolling interests |
| $ | 455,052 |
|
| $ | 240,396 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
Provision for credit losses |
| 57,052 |
|
| 46,540 |
|
Changes in fair values of equity warrant assets, net of proceeds from exercises |
| (24,940 | ) | | (9,053 | ) |
Changes in fair values of derivatives, net |
| (8,768 | ) |
| 8,505 |
|
Gains on investment securities, net (1) |
| (45,172 | ) | | (20,341 | ) |
Distributions of earnings from non-marketable and other equity securities (1) | | 27,409 |
| | 27,214 |
|
Depreciation and amortization |
| 28,902 |
|
| 26,268 |
|
Amortization of premiums and discounts on investment securities, net |
| (478 | ) |
| 1,747 |
|
Amortization of share-based compensation |
| 22,467 |
|
| 19,095 |
|
Amortization of deferred loan fees |
| (65,606 | ) |
| (51,869 | ) |
Deferred income tax benefit |
| (18,594 | ) |
| (9,827 | ) |
Excess tax benefit from exercise of stock options and vesting of restricted shares | | (14,488 | ) | | (13,028 | ) |
Losses from the write-off of premises and equipment | | 7,006 |
| | — |
|
Other gains | | — |
| | (3,858 | ) |
Changes in other assets and liabilities: |
|
|
|
|
Accrued interest receivable and payable, net |
| (28,213 | ) |
| (8,852 | ) |
Accounts receivable and payable, net |
| (10,169 | ) |
| (6,227 | ) |
Income tax receivable and payable, net |
| (21,076 | ) |
| 840 |
|
Accrued compensation |
| (55,814 | ) |
| (51,636 | ) |
Foreign exchange spot contracts, net |
| 68,870 |
|
| 159,607 |
|
Other, net |
| (26,060 | ) |
| 41,200 |
|
Net cash provided by operating activities |
| 347,380 |
|
| 396,721 |
|
Cash flows from investing activities: |
|
|
|
|
Purchases of available-for-sale securities |
| (390,758 | ) |
| (1,174,666 | ) |
Proceeds from sales of available-for-sale securities |
| — |
|
| 5,024 |
|
Proceeds from maturities and paydowns of available-for-sale securities |
| 1,775,568 |
|
| 1,715,291 |
|
Purchases of held-to-maturity securities |
| (4,067,389 | ) |
| (2,298,290 | ) |
Proceeds from maturities and paydowns of held-to-maturity securities |
| 935,820 |
|
| 806,386 |
|
Purchases of non-marketable and other securities |
| (28,099 | ) |
| (9,488 | ) |
Proceeds from sales and distributions of capital of non-marketable and other securities (1) |
| 75,139 |
|
| 23,765 |
|
Net increase in loans |
| (2,855,537 | ) |
| (1,066,056 | ) |
Purchases of premises and equipment |
| (14,851 | ) |
| (21,496 | ) |
Net cash used for investing activities |
| (4,570,107 | ) |
| (2,019,530 | ) |
Cash flows from financing activities: |
|
|
|
|
Net increase in deposits |
| 4,633,220 |
|
| 3,485,423 |
|
Net decrease in short-term borrowings |
| (616,484 | ) |
| (512,198 | ) |
Principal payments of long-term debt | | — |
| | (46,235 | ) |
(Distributions to noncontrolling interests), net of contributions from noncontrolling interests |
| (14,725 | ) |
| (9,603 | ) |
Proceeds from issuance of common stock, ESPP and ESOP |
| 9,742 |
|
| 13,916 |
|
Net cash provided by financing activities |
| 4,011,753 |
|
| 2,931,303 |
|
Net (decrease) increase in cash and cash equivalents |
| (210,974 | ) |
| 1,308,494 |
|
Cash and cash equivalents at beginning of period |
| 2,923,075 |
|
| 2,545,750 |
|
Cash and cash equivalents at end of period |
| $ | 2,712,101 |
|
| $ | 3,854,244 |
|
Supplemental disclosures: |
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest |
| $ | 27,730 |
|
| $ | 22,293 |
|
Income taxes |
| 193,682 |
|
| 137,371 |
|
Noncash items during the period: |
|
|
|
|
Changes in unrealized gains and losses on available-for-sale securities, net of tax |
| $ | (52,855 | ) |
| $ | (8,047 | ) |
Distributions of stock from investments |
| 3,136 |
|
| 2,514 |
|
| |
(1) | During the first quarter of 2018 we adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This guidance was adopted on a retrospective basis and impacted the presentation between investing and operating activities related to distributions and net gains from our nonmarketable and other securities portfolio. 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).
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 2018 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, 2017 (“2017 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 2017 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 and other equity 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 based on our ownership percentage.
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.
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 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. The guidance requires that revenue from contracts with customers be recognized when transfer of control over goods or services is passed to customers in the amount of consideration expected to be received. Subsequent Accounting Standard Updates have been issued clarifying the original pronouncement (ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20).
On January 1, 2018, we adopted the new accounting standard ASU 2014-09, Revenue from Contracts with Customers and all the related amendments ("new revenue standard", "ASC 606" or "ASU 2014-09") using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. We elected to apply the practical expedient which allows us to expense costs related to obtaining contracts as incurred because the amortization period would have been one year or less. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
We completed a comprehensive scoping exercise to determine the revenue streams that are within the scope of this guidance. The scope of this guidance explicitly excludes net interest income, including interest income earned from our loan and fixed income securities portfolios, as well as certain other noninterest income earned from our lending-, investment- and derivative-related activities. Based on our completed assessment, we did not identify any material changes to the timing or the amounts of our revenue recognition, however, we identified a change in the timing of recognizing fund management fees in other noninterest income for a portion of our SVB Capital funds. Fund management fees for these certain SVB Capital funds will now be recognized at the time of distribution which typically occurs later in the life of the fund than had been previously recognized. The cumulative adjustment to retained earnings associated with this change was $5.8 million, net of tax, with an immaterial impact to our net income on an ongoing basis. The impact to net income as a result of applying the new revenue standard were decreases of $0.3 million and $0.9 million for the three and six months ended June 30, 2018, respectively.
The timing of revenue recognition may differ from the timing of cash settlements or invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, and unearned revenue when revenue is recognized subsequent to receipt of consideration. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. During the three and six months ended June 30, 2018, changes in our contract assets, contract liabilities and receivables were not material. Additionally, revenues recognized during the three and six months ended June 30, 2018 that were included in the corresponding contract liability balance at the beginning of the period were not material.
The cumulative effect of the changes to our consolidated balance sheets at January 1, 2018, for the adoption of the new revenue standard were as follows:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Balance at December 31, 2017 | | Adjustments Due to Adoption of ASC 606 | | Balance at January 1, 2018 |
Accrued interest receivable and other assets: | | | | | | |
Accounts receivable | | $ | 55,946 |
| | $ | (34,340 | ) | | $ | 21,606 |
|
Other liabilities: | | | | | | |
Deferred revenue | | 27,057 |
| | (26,321 | ) | | 736 |
|
Current taxes payable | | 4,675 |
| | (2,217 | ) | | 2,458 |
|
Stockholders' Equity: | | | | | | |
Retained earnings | | 2,866,837 |
| | (5,802 | ) | | 2,861,035 |
|
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated balance sheets at June 30, 2018 and our statements of income for the three and six months ended June 30, 2018, were as follows:
|
| | | | | | | | | | | | |
| | June 30, 2018 |
(Dollars in thousands) | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change Higher/(Lower) |
Accrued interest receivable and other assets: | | | | | | |
Accounts receivable | | $ | 57,740 |
| | $ | 97,584 |
| | $ | (39,844 | ) |
Other liabilities: | | | | | | |
Deferred fees | | 479 |
| | 29,964 |
| | (29,485 | ) |
Current taxes payable (receivable) | | 1,616 |
| | (924 | ) | | 2,540 |
|
Stockholders' Equity: | | | | | | |
Retained earnings | | 3,397,879 |
| | 3,403,357 |
| | (5,478 | ) |
|
| | | | | | | | | | | | |
| | Three months ended June 30, 2018 |
(Dollars in thousands) | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change Higher/(Lower) |
Other noninterest income: | | | | | | |
Fund management fees | | $ | 5,929 |
| | $ | 6,308 |
| | $ | (379 | ) |
Income tax expense | | 77,287 |
| | 77,380 |
| | (93 | ) |
| | | | | | |
Net Income available to common stockholders | | 237,798 |
| | 238,084 |
| | (286 | ) |
Diluted earnings per share | | 4.42 |
| | 4.43 |
| | (0.01 | ) |
|
| | | | | | | | | | | | |
| | Six months ended June 30, 2018 |
(Dollars in thousands) | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change Higher/(Lower) |
Other noninterest income: | | | | | | |
Fund management fees | | $ | 11,665 |
| | $ | 12,914 |
| | $ | (1,249 | ) |
Income tax expense | | 151,253 |
| | 151,577 |
| | (324 | ) |
| | | | | | |
Net Income available to common stockholders | | 432,759 |
| | 433,684 |
| | (925 | ) |
Diluted earnings per share | | 8.05 |
| | 8.07 |
| | (0.02 | ) |
In February 2018, the FASB issued a new accounting standard update (ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU "2018-02")) to address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from H.R.1, known as the Tax Cuts and Jobs Act (the "TCJ Act"). ASU 2018-02 changed current accounting whereby an entity may elect to reclassify the stranded tax effect from AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJ Act (or portion thereof) is recorded. ASU 2018-02 is effective for periods beginning after December 15, 2018 and early adoption is permitted. We have elected to early adopt ASU 2018-02 and reclassified approximately $0.3 million from accumulated other comprehensive income to retained earnings within our consolidated statements of stockholders' equity in the first quarter of 2018.
On January 1, 2018, we adopted the new accounting standard update ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825), which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This guidance requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. We adopted this guidance using the modified retrospective method and our equity investments carried at cost with readily determinable fair values were re-measured at fair value and the difference between cost and fair value was recorded as a cumulative-effect adjustment to opening retained earnings as of January 1, 2018. The adjustment to opening retained earnings for these investments was $74.6 million, net of tax, with subsequent changes in the fair value of these equity securities recorded as unrealized gains or losses in our consolidated statements of income. Additionally, in accordance with this guidance, net unrealized gains of $29.2 million, net
of tax, included in accumulated other comprehensive income on January 1, 2018, related to our previously reported available-for-sale equity securities, were reclassified as an adjustment to retained earnings. Subsequent changes in the fair value of these equity securities were recorded as unrealized gains or losses in our consolidated statements of income. Furthermore, for purposes of disclosing the fair value of loans carried at amortized cost, our valuation methodology was updated to conform to an “exit price” concept as required by the standard update, resulting in an immaterial change in the fair value.
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. We adopted the new accounting standard, specifically as it relates to distributions from our equity method investments, on January 1, 2018. We elected to adopt the nature of distribution approach and applied the guidance retrospectively. The new guidance had an immaterial impact on 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.
In November 2016, the FASB issued a new accounting standard update (ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash), which requires that a statement of cash flows explains the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. Previous to the update, there had been some diversity in practice. Given that we had already classified restricted cash such as cash reserves at the Federal Reserve as part of cash and cash equivalents on the cash flow statement, the update had no impact on how we were already reporting and presenting our statement of cash flows.
Recent Accounting Pronouncements
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 corresponding lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. There were further amendments, including practical expedients, with the issuance of ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” in January 2018. In July 2018 the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements", which provides us with the option to apply the new leasing standard to all open leases as of the adoption date, on a prospective basis. This guidance will be effective on January 1, 2019, with early adoption permitted. We plan to adopt the lease accounting guidance on January 1, 2019, on a prospective basis. We intend to elect a "package of expedients" which will result in continuing to account for existing leases for which the commencement date is before January 1, 2019, in accordance with Leases (Topic 840) throughout the lease term, including periods after adoption of the new guidance. We expect the adoption of this standard to have an impact of less than one percent of total assets and liabilities on our consolidated balance sheets reflective of the recognition of right-of-use assets and related lease liabilities associated predominantly with noncancelable operating leases. In addition, we do not expect the adoption of this guidance to have a material impact on our consolidated statements of income.
In June 2016, the FASB issued a new accounting standard update (ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), which amends the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses over the life of the loan 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 project team in place and subject matter experts to assist with our review of key interpretive issues and the 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.
Reclassifications
Certain prior period amounts, primarily related to the adoption of new accounting guidance, 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, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended June 30, | | Six months ended June 30, |
(Dollars in thousands) | | Income Statement Location | | 2018 |
| 2017 | | 2018 | | 2017 |
Reclassification adjustment for losses (gains) included in net income (1) | | Gains on investment securities, net | | $ | — |
| | $ | 123 |
| | $ | — |
| | $ | (485 | ) |
Related tax (benefit) expense (1) | | Income tax expense | | — |
| | (50 | ) | | — |
| | 198 |
|
Total reclassification adjustment for losses (gains) included in net income, net of tax (1) | | | | $ | — |
| | $ | 73 |
| | $ | — |
| | $ | (287 | ) |
| |
(1) | See "Adoption of New Accounting Standards" in 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. |
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, 2018 and 2017:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(Dollars and shares in thousands, except per share amounts) | | 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | | |
Net income available to common stockholders | | $ | 237,798 |
| | $ | 123,193 |
| | $ | 432,759 |
| | $ | 224,676 |
|
Denominator: | | | | | | | | |
Weighted average common shares outstanding—basic | | 53,064 |
| | 52,537 |
| | 52,974 |
| | 52,441 |
|
Weighted average effect of dilutive securities: | | | | | | | | |
Stock options and ESPP | | 400 |
| | 368 |
| | 408 |
| | 397 |
|
Restricted stock units | | 312 |
| | 289 |
| | 350 |
| | 342 |
|
Weighted average common shares outstanding—diluted | | 53,776 |
| | 53,194 |
| | 53,732 |
| | 53,180 |
|
Earnings per common share: | | | | | | | | |
Basic | | $ | 4.48 |
| | $ | 2.34 |
| | $ | 8.17 |
| | $ | 4.28 |
|
Diluted | | 4.42 |
| | 2.32 |
| | 8.05 |
| | 4.22 |
|
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, 2018 and 2017:
|
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(Shares in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Stock options | | 58 |
| | 73 |
| | 33 |
| | 36 |
|
Restricted stock units | | 113 |
| | — |
| | 59 |
| | — |
|
Total | | 171 |
| | 73 |
| | 92 |
| | 36 |
|
| |
3. | Share-Based Compensation |
For the three and six months ended June 30, 2018 and 2017, we recorded share-based compensation and related tax benefits as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(Dollars in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Share-based compensation expense | | $ | 11,944 |
| | $ | 9,892 |
| | $ | 22,467 |
| | $ | 19,095 |
|
Income tax benefit related to share-based compensation expense | | (2,743 | ) | | (3,349 | ) | | (5,060 | ) | | (6,364 | ) |
Unrecognized Compensation Expense
As of June 30, 2018, unrecognized share-based compensation expense was as follows:
|
| | | | | | |
(Dollars in thousands) | | Unrecognized Expense | | Weighted Average Expected Recognition Period - in Years |
Stock options | | $ | 15,039 |
| | 3.10 |
Restricted stock units | | 81,376 |
| | 2.91 |
Total unrecognized share-based compensation expense | | $ | 96,415 |
| | |
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, 2018:
|
| | | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life - in Years | | Aggregate Intrinsic Value of In-The- Money Options |
Outstanding at December 31, 2017 | | 808,049 |
| | $ | 105.68 |
| | | | |
Granted | | 87,352 |
| | 305.22 |
| | | | |
Exercised | | (156,580 | ) | | 84.83 |
| | | | |
Forfeited | | (1,926 | ) | | 130.69 |
| | | | |
Expired | | (2,337 | ) | | 60.37 |
| | | | |
Outstanding at June 30, 2018 | | 734,558 |
| | 133.93 |
| | 3.92 | | $ | 115,185,279 |
|
Vested and expected to vest at June 30, 2018 | | 710,108 |
| | 131.27 |
| | 3.85 | | 113,119,954 |
|
Exercisable at June 30, 2018 | | 449,728 |
| | 97.80 |
| | 2.82 | | 85,881,104 |
|
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 $288.76 as of June 30, 2018. The total intrinsic value of options exercised during the three and six months ended June 30, 2018 was $21.6 million and $31.0 million, respectively, compared to $5.6 million and $22.1 million for the comparable 2017 periods.
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the six months ended June 30, 2018:
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Nonvested at December 31, 2017 | | 637,667 |
| | $ | 135.86 |
|
Granted | | 185,292 |
| | 301.56 |
|
Vested | | (206,997 | ) | | 130.29 |
|
Forfeited | | (21,028 | ) | | 148.43 |
|
Nonvested at June 30, 2018 | | 594,934 |
| | 188.96 |
|
| |
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 June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Consolidated VIEs | | Unconsolidated VIEs | | Maximum Exposure to Loss in Unconsolidated VIEs |
June 30, 2018: | | | | | | |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 4,113 |
| | $ | — |
| | $ | — |
|
Non-marketable and other equity securities (1) | | 208,275 |
| | 529,429 |
| | 529,429 |
|
Accrued interest receivable and other assets | | 397 |
| | — |
| | — |
|
Total assets | | $ | 212,785 |
| | $ | 529,429 |
| | $ | 529,429 |
|
Liabilities: | | | | | | |
Other liabilities (1) | | 765 |
| | 161,113 |
| | — |
|
Total liabilities | | $ | 765 |
| | $ | 161,113 |
| | $ | — |
|
December 31, 2017: | | | | | | |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 6,674 |
| | $ | — |
| | $ | — |
|
Non-marketable and other equity securities (1) | | 190,562 |
| | 346,097 |
| | 346,097 |
|
Accrued interest receivable and other assets | | 365 |
| | — |
| | — |
|
Total assets | | $ | 197,601 |
| | $ | 346,097 |
| | $ | 346,097 |
|
Liabilities: | | | | | | |
Other liabilities (1) | | 990 |
| | 100,891 |
| | — |
|
Total liabilities | | $ | 990 |
| | $ | 100,891 |
| | $ | — |
|
| |
(1) | Included in our unconsolidated non-marketable and other equity securities portfolio at June 30, 2018 and December 31, 2017 are investments in qualified affordable housing projects of $251.5 million and $174.2 million, respectively, and related other liabilities consisting of unfunded credit commitments of $161.1 million and $100.9 million, respectively. |
Non-marketable and other equity securities
Our non-marketable and other equity 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 equity 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 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, in connection with fulfilling its responsibilities under the Community Reinvestment Act (“CRA”), that are designed to generate a return primarily through the realization of federal tax credits. These investments are typically limited partnerships in which the general partner, other than the Bank, holds the power over significant activities of the VIE; therefore, these investments are not consolidated. For additional information on our investments in qualified affordable housing projects see Note 6—“Investment Securities" of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
As of June 30, 2018, our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $212.0 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $529.4 million.
| |
5. | Cash and Cash Equivalents |
The following table details our cash and cash equivalents at June 30, 2018 and December 31, 2017:
|
| | | | | | | | |
(Dollars in thousands) | | June 30, 2018 |
| December 31, 2017 |
Cash and due from banks (1) | | $ | 2,670,473 |
| | $ | 2,672,290 |
|
Securities purchased under agreements to resell (2) | | 37,379 |
| | 247,876 |
|
Other short-term investment securities | | 4,249 |
| | 2,909 |
|
Total cash and cash equivalents | | $ | 2,712,101 |
| | $ | 2,923,075 |
|
| |
(1) | At June 30, 2018 and December 31, 2017, $645.8 million and $624.0 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 $1.0 billion and $1.1 billion, respectively. |
| |
(2) | At June 30, 2018 and December 31, 2017, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $38.1 million and $252.8 million, respectively. None of these securities were sold or repledged as of June 30, 2018 and December 31, 2017. |
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 equity securities portfolio, which primarily represents investments managed as part of our funds management business as well as public equity securities held as a result of equity warrant assets exercised.
Available-for-Sale Securities
The components of our available-for-sale investment securities portfolio at June 30, 2018 and December 31, 2017 are as follows:
|
| | | | | | | | | | | | | | | | |
| | June 30, 2018 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Carrying Value |
Available-for-sale securities, at fair value: | | | | | | | | |
U.S. Treasury securities | | $ | 5,782,879 |
| | $ | 4,186 |
| | $ | (53,995 | ) | | $ | 5,733,070 |
|
U.S. agency debentures | | 1,495,657 |
| | — |
| | (9,793 | ) | | 1,485,864 |
|
Residential mortgage-backed securities: | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 2,103,572 |
| | 39 |
| | (65,477 | ) | | 2,038,134 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 335,048 |
| | 1,376 |
| | (126 | ) | | 336,298 |
|
Total available-for-sale securities | | $ | 9,717,156 |
| | $ | 5,601 |
| | $ | (129,391 | ) | | $ | 9,593,366 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Carrying Value |
Available-for-sale securities, at fair value: | | | | | | | | |
U.S. Treasury securities | | $ | 6,865,068 |
| | $ | 1,113 |
| | $ | (25,679 | ) | | $ | 6,840,502 |
|
U.S. agency debentures | | 1,569,195 |
| | 3,569 |
| | (5,636 | ) | | 1,567,128 |
|
Residential mortgage-backed securities: | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 2,292,311 |
| | 258 |
| | (25,534 | ) | | 2,267,035 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 372,481 |
| | 1,375 |
| | (126 | ) | | 373,730 |
|
Equity securities | | 31,953 |
| | 40,525 |
| | (209 | ) | | 72,269 |
|
Total available-for-sale securities | | $ | 11,131,008 |
| | $ | 46,840 |
| | $ | (57,184 | ) | | $ | 11,120,664 |
|
The following table summarizes sale activity of available-for-sale securities during the three and six months ended June 30, 2018 and 2017 as recorded in the line item “Gains on investment securities, net”, a component of noninterest income:
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(Dollars in thousands) | | 2018 |
| 2017 | | 2018 | | 2017 |
Sales proceeds | | $ | — |
| | $ | 2,946 |
| | $ | — |
| | $ | 5,024 |
|
Net realized gains and losses: | | | | | |
| |
|
Gross realized gains | | — |
| | 418 |
| | — |
| | 1,093 |
|
Gross realized losses | | — |
| | (541 | ) | | — |
| | (608 | ) |
Net realized (losses) gains | | $ | — |
| | $ | (123 | ) | | $ | — |
| | $ | 485 |
|
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, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
| | 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 | | $ | 4,492,009 |
| | $ | (48,430 | ) | | $ | 845,938 |
| | $ | (5,565 | ) | | $ | 5,337,947 |
| | $ | (53,995 | ) |
U.S. agency debentures | | 1,027,612 |
| | (3,984 | ) | | 458,252 |
| | (5,809 | ) | | 1,485,864 |
| | (9,793 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 1,857,591 |
| | (60,030 | ) | | 166,002 |
| | (5,447 | ) | | 2,023,593 |
| | (65,477 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | 19,068 |
| | (9 | ) | | 46,057 |
| | (117 | ) | | 65,125 |
| | (126 | ) |
Total temporarily impaired securities (1) | | $ | 7,396,280 |
| | $ | (112,453 | ) | | $ | 1,516,249 |
| | $ | (16,938 | ) | | $ | 8,912,529 |
| | $ | (129,391 | ) |
| |
(1) | As of June 30, 2018, we identified a total of 264 investments that were in unrealized loss positions, of which 64 investments totaling $1.5 billion with unrealized losses of $16.9 million have been in an impaired position for a period of time greater than 12 months. As of June 30, 2018, we do not intend to sell any of our impaired 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, 2018, 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, 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 | | $ | 5,968,914 |
| | $ | (23,397 | ) | | $ | 323,966 |
| | $ | (2,282 | ) | | $ | 6,292,880 |
| | $ | (25,679 | ) |
U.S. agency debentures | | 736,541 |
| | (2,289 | ) | | 336,196 |
| | (3,347 | ) | | 1,072,737 |
| | (5,636 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 2,193,277 |
| | (25,534 | ) | | — |
| | — |
| | 2,193,277 |
| | (25,534 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | 13,843 |
| | (3 | ) | | 53,186 |
| | (123 | ) | | 67,029 |
| | (126 | ) |
Equity securities | | 624 |
| | (209 | ) | | — |
| | — |
| | 624 |
| | (209 | ) |
Total temporarily impaired securities (1) | | $ | 8,913,199 |
| | $ | (51,432 | ) | | $ | 713,348 |
| | $ | (5,752 | ) | | $ | 9,626,547 |
| | $ | (57,184 | ) |
| |
(1) | As of December 31, 2017, we identified a total of 268 investments that were in unrealized loss positions, of which 46 investments totaling $713.3 million with unrealized losses of $5.8 million have been in an impaired position for a period of time greater than 12 months. |
The following table summarizes the fixed income securities, carried at fair value, classified as available-for-sale as of June 30, 2018 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 interest rate environments.
|
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 |
(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 | | $ | 5,733,070 |
| | $ | 2,037,522 |
| | $ | 3,349,925 |
| | $ | 345,623 |
| | $ | — |
|
U.S. agency debentures | | 1,485,864 |
| | 555,737 |
| | 930,127 |
| | — |
| | — |
|
Residential mortgage-backed securities: | | | | | | |