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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172020
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¨☐ | 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)
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| Delaware | | 91-1962278 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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3003 Tasman Drive, Santa Clara, California | | 95054-1191 |
(Address of principal executive offices) | | (Zip Code) |
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: (408) 654-7400code)
Securities registered pursuant to Section 12(b) of the Act: |
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| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common stock, par value $0.001 per share | | NASDAQ Global SelectSIVB | | The Nasdaq Stock Market LLC |
| Depositary shares, each representing a 1/40th ownership interest in a share of 5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A | | SIVBP | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. x
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. |
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| Large accelerated filer | x | | Accelerated filer | ¨☐ | | |
| Non-accelerated filer | ¨ | (Do not check if a smaller reporting company)
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| 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
The aggregate market value of the voting and non-voting common equity securities held by non-affiliates of the registrant as of June 30, 2017,2020, the last business day of the registrant's most recently completed second fiscal quarter, based upon the closing price of its common stock on such date, on the NASDAQ Global Select Market was $9,261,347,942.$10,704,636,319.
At January 31, 2018, 52,874,1882021, 51,949,900 shares of the registrant’s common stock ($0.001 par value) were outstanding. |
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| Documents Incorporated by Reference | Parts of Form 10-K Into Which Incorporated |
Definitive proxy statement for the Company's 20182021 Annual Meeting of Stockholders to be filed within 120 days of the end of the fiscal year ended December 31, 20172020 | Part III |
TABLE OF CONTENTS
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| PART I. | Item 1. | | |
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| Item 1A. | | |
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| Item 1B. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| PART II. | Item 5. | | |
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| Item 6. | | |
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| Item 7. | | |
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| Item 7A. | | |
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| Item 8. | | |
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| Item 9. | | |
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| Item 9A. | | |
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| Item 9B. | | |
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| PART III. | Item 10. | | |
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| Item 11. | | |
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| Item 12. | | |
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| Item 13. | | |
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| Item 14. | | |
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| PART IV. | Item 15. | | |
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| Item 16. | |
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Glossary of Frequently-used Acronyms in this Report
ACL — Allowance for Credit Losses
AFS— Available-for-Sale
AICPA— American Institute of Certified Public Accountants
AFS— Available-for-Sale
ASC— Accounting Standards Codification
ASU— Accounting Standards Update
CET—CECL — Current Expected Credit Losses
CET 1 — Common Equity Tier 1
DBO—DFPI— California Department of Business Oversight - Division of Financial InstitutionsProtection and Innovation
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
FINRA— Financial Industry Regulatory Authority
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
IFRS— International Financial Reporting Standards
IPO— Initial Public Offering
IRS— Internal Revenue Service
IT— Information Technology
LIBOR— London Interbank Offered Rate
M&A— MergerMergers and AcquisitionAcquisitions
OTTI—OTTI — Other Than Temporary Impairment
PPP — Paycheck Protection Program
SEC— Securities and Exchange Commission
SPD-SVB— SPD Silicon Valley Bank Co. Ltd. (the Bank's joint venture bank in China)
SVBIF— SVB India Finance Private Limited (the Bank's non-banking financial company in India)
TDR— Troubled Debt Restructuring
UK—U.K. — United Kingdom
VIE— Variable Interest Entity
Forward-Looking Statements
This Annual Report on Form 10-K, including in particular “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of this report, contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, management has in the past and may in the future make forward-looking statements to analysts, investors, representatives of the media and others. Forward-looking statements are statements that are not historical facts and represent only our beliefs regarding future events. Broadly speaking, forward-looking statements include, but are not limited to, the following:
•Financial projections, including with respect to our net interest income, noninterest income, earnings per share, noninterest expenses (including professional services, compliance, compensation and other costs), cash flows, balance sheet positions, capital expenditures, deposit growth, liquidity and capitalization or other financial items;
•Descriptions of our strategic initiatives, plans or objectives for future operations, including pending sales or acquisitions;acquisitions, including the announced planned acquisition of Boston Private Financial Holdings, Inc. ("Boston Private");
•Forecasts of private equity and venture capital funding and investment levels;
•Forecasts of future interest rates, economic performance, and income from investments;
•Forecasts of expected levels of provisions for loan losses, loan growth, loan mix, loan yields and client funds;
•The outlook on our clients' performance;
•The potential effects of the COVID-19 pandemic; and
•Descriptions of assumptions underlying or relating to any of the foregoing.
You can identify thesethis and other forward-looking statements by the use of words such as “becoming,” “may,” “will,” “should,” "could," "“could,”“would," ”“predict,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “assume,” “seek,” “expect,” “plan,” “intend,” and the negative of such words or comparable terminology. Forward-looking statements are neither historical facts nor assurances of future performance.
Although we believe that the expectations reflected in theseour forward-looking statements are reasonable, we have based these expectations on our current beliefs as well as our assumptions, and such expectations may not prove to be incorrect.correct. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management’s forward-looking statements. Important factors that could cause our actual results and financial condition to differ from the expectations stated in the forward-looking statements include, among others:
•Market and economic conditions including(including the interest rate environment,general condition of the capital and equity markets, and IPO, M&A and financing activity levels) and the associated impact on us;us (including effects on client demand for our commercial and investment banking and other financial services, as well as on the valuations of our investments);
•The credit profileCOVID-19 pandemic and its effects on the economic and business environments in which we operate;
•The impact of changes in the U.S. presidential administration and the U.S. Congress on the economic environment, capital markets and regulatory landscape, including monetary, tax and other trade policies;
•Changes in the volume and credit quality of our loan portfolio andloans as well as volatility of our levels of nonperforming assets and charge-offs;
•The impact of changes in interest rates or market levels or factors affecting or affected by them, especially on our loan and investment portfolios;
•The adequacy of our allowance for loancredit losses and the need to make provisions for loancredit losses for any period;
The borrowing needs of our clients;
•The sufficiency of our capital and liquidity positions;provisions;
The•Changes in the levels of our loans, deposits and client investment fund balances;
The•Changes in the performance or equity valuations of funds or companies in which we have invested or hold derivative instruments or equity warrant assets;
•Variations from our portfolio investmentsexpectations as well as the general conditionto factors impacting our cost structure
•Changes in our assessment of the public and private equity and mergers and acquisitions markets and their impact on our investments, including equity warrant assets, venture capital and private equity funds and direct equity investments;
Our overall investment plans and strategies as well as the realization, timing, valuation and performance of our equitycreditworthiness or other investments;
The levels of public offerings, mergers and acquisitions and venture capital investment activityliquidity of our clients that may impactor unanticipated effects of credit concentration risks which create or exacerbate deterioration of such creditworthiness or liquidity;
•Variations from our expectations as to factors impacting the borrowing needstiming and level of our clients;employee share-based transactions;
•The occurrence of fraudulent activity, including breaches of our information security or cyber security-related incidents;
•Business disruptions and interruptions due to natural disasters and other external events;
•The impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
Expansion•The expansion of our business internationally;internationally, and the impact of international market and economic events on us;
•The effectiveness of our risk management framework and quantitative models;
•The impact of governmental policy, legal requirements and regulations including Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), regulations promulgated by the Board of Governors of the Federal Reserve System (the "Federal Reserve"), and other regulatory requirements;
The impact of lawsuits and claims, as well as legal or regulatory proceedings;
The impact of changes in accounting standards and tax laws, including the expected impact of the Tax Cuts and Jobs Act (the "TCJ Act");
The levels of equity capital available to our client or portfolio companies;
The effectiveness of our risk management framework and quantitative models;
•Our ability to maintain or increase our market share, including through successfully implementing our business strategy and undertaking new business initiatives;initiatives, including through the integration of Boston Private;
•An inability to complete the acquisition of Boston Private, or changes in the current anticipated timeframe, terms or manner of such acquisition;
•The occurrence of any event change or other circumstance that could give rise to the right of one or both parties to terminate the merger agreement between us and Boston Private;
•Greater than expected costs or other difficulties related to the integration of our business and that of Boston Private;
•Variations from our expectations as to the amount and timing of business opportunities, growth prospects and cost savings associated with completing the acquisition of Boston Private;
•The inability to retain existing Boston Private clients and employees following the closing of the Boston Private acquisition;
•Unfavorable resolution of legal proceedings or claims, as well as legal or regulatory proceedings or governmental actions;
•Variations from our expectations as to factors impacting our estimate of our full-year effective tax rate;
•Changes in applicable accounting standards and tax laws;
•Regulatory or legal changes or their impact on us; and
•Other factors as discussed in “Risk Factors” under Part I, Item 1A of this report.
The operating and economic environment has continued to be impacted by the COVID-19 pandemic, which has created major economic and financial disruptions that have adversely affected, and may continue to adversely affect, certain of our business, operations, financial performance and prospects. Even after the COVID-19 pandemic subsides, it is possible that the U.S. and other major economies will experience or continue to experience a prolonged recession, which could materially and adversely affect our business, operations, financial performance and prospects. Statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.
Accordingly, you are cautioned not to place undue reliance on forward-looking statements. We urge investors to consider all of these factors, among others, carefully in evaluating the forward-looking statements contained in this Annual Report on Form 10-K. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We assume no obligation and do not intend to revise or update any forward-looking statements contained in this Annual Report on Form 10-K, except as required by law.
PART I.
ITEM 1.BUSINESS
General
SVB Financial Group ("SVB Financial") 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 diverse set of banking and financial products and services to clients across the United States, as well as in key international innovation markets. For more than 35 years, we have been dedicated to helping support entrepreneurs and clients of all sizes and stages throughout their life cycles, primarily in the technology, life science/healthcare, private equity/venture capital and premium wine industries.
We offer commercial and private banking products and services through our principal subsidiary, Silicon Valley Bank (the “Bank”), which is a California state-chartered bank founded in 1983 and a member of the Federal Reserve System. The Bank and its subsidiaries also offer asset management, private wealth management and other investment services. In addition, through SVB Financial's other subsidiaries and divisions, we offer investment banking services and non-banking products and services, such as funds management venture capital and private equity investment. In addition, weM&A advisory services. We focus on cultivating strong relationships with firms within the private equity and venture capital community worldwide, many of which are also our clients and may invest in our corporate clients.
As of December 31, 2017,2020, on a consolidated basis, we had total assets of $51.2$115.5 billion,, total investment securities of $24.4$49.3 billion,, total loans, netamortized cost, of unearned income, of $23.1$45.2 billion,, total deposits of $44.3$102.0 billion and total SVB Financial stockholders' equity of $4.2 billion.$8.2 billion.
Headquartered in Santa Clara, CA, we operate in key innovation markets in the United States and around the world. Our corporate office is located at 3003 Tasman Drive, Santa Clara, California 95054, and our telephone number is (408) 654-7400.
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 the Bank. When we refer to “SVB Financial” or the “Parent” we are referring only to our parent company entity, SVB Financial Group (not including subsidiaries).
Business Overview
For reporting purposes, SVB Financial Group has threefour operating segments for which we report financial information in this report: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Capital.Leerink.
Global Commercial Bank
Our Global Commercial Bank segment is comprised of results primarily from our Commercial Bank, our Global Fund Banking (formerly Private EquityEquity) Division, SVB Wine SVB Analytics and our Debt Fund Investments, each as further described below.
Commercial Bank. Our Commercial Bank products and services are provided by the Bank and its subsidiaries to commercial clients primarily in the technology and life science/healthcare and private equity/venture capital industries. The Bank provides solutions to the financial needs of commercial clients through credit, treasury management, foreign exchange, trade finance and other financial products and services. We broadly serve clients within the U.S., as well as non-U.S. clients in key international innovation markets.
Through ourThe Bank offers commercial clients a full range of credit products and services, the Bank extends loans and other credit facilities to commercial clients. In particular, credit products and services includesolutions including traditional term loans, equipment loans, asset-based loans, revolving lines of credit, accounts-receivable-based lines of credit,warehouse facilities, recurring revenue facilities, mezzanine lending, acquisition finance facilities, corporate working capital call lines of creditfacilities, and credit cards.card programs. These loans may be secured by clients' assets or future cash flows or may be unsecured.
The Bank's treasury management products and services include a wide range of deposits and receivables,receivable services, payments and cash management solutions accessible through our expanding online and mobile banking platforms. Deposit products include business and analysis checking accounts, money market accounts, multi-currency accounts, in-country bank accounts and sweep accounts. In connection with deposit services, the Bank provides receivables services, which include merchant services, remote capture, lockbox, electronic deposit capture, and fraud control services. Payment and cash management products and services include wire transfer and automated clearing house payment services to enable clients to transfer funds more quickly, as well as business bill pay, business credit and debit cards, account analysis and disbursement services.
The Bank's foreign exchange and trade finance products and services help to facilitate clients' global finance and business needs. These products and services include foreign exchange services that help commercial clients to manage their foreign currency needs and risks through the purchase and sale of currencies in the spot market as well as with currency
swaps and hedges on the global inter-bank market.hedges. The Bank also offers letters of credit, including export, import and standby letters of credit, to enable clients to ship and receive goods globally.
The Bank and its subsidiaries also offer a variety of investment services and solutions to its clients that enable them to more effectively manage their assets. For example, through its registered investment advisory subsidiary, SVB Asset Management, the Bank offers discretionary investment advisory services based on its clients' investment policies, strategies and objectives. The Bank also offers investment solutions through our repurchase agreement program.
Global Fund Banking (formerly Private EquityEquity) Division. Our Private EquityGlobal Fund Banking Division provides banking products and services primarily to our global private equity and venture capital clients.
SVB Wine. SVB Wine provides banking products and services to our premium wine industry clients, including vineyard development loans.
SVB Analytics. SVB Analytics, Inc. ("SVB Analytics") previously provided equity valuation services to companies and private equity/venture capital firms and currently provides research for investors and companies in the innovation economy. In September 2017, SVB Analytics sold its equity valuation services business.
Debt Fund Investments. Debt Fund Investments is comprised of our investments in debt funds in which we are a strategic investor: (i) funds managed by Gold Hill Capital, which provide secured debt to private companies of all stages, and (ii) funds managed by Partners for Growth LLC, which provide secured debt primarily to mid-stage and late-stage companies.
SVB Private Bank
SVB Private Bank is the private banking and wealth management division of the Bank whichand provides a rangebroad array of personal financial solutions for consumers. Ourits clients, which are primarily private equity/venture capital professionals and executive leaders and senior investment professionals in the innovation economy. SVB Private Bank, which includes SVB Wealth Advisory, a registered investment advisor and broker-dealer subsidiary of the innovation companies they support. We offerBank, offers a customized suite ofapproach to private wealth management and private banking services, including mortgages, home equity lines of credit, restricted stock purchase loans, capital call lines of credit and other secured and unsecured lending products. We also help our private banking clients meet their cash management needs by providing deposit account products and services, including checking, money market, certificates of deposit accounts, online banking, credit cards and other personalized banking services. SVB Private Bank also includes SVB Wealth Advisory, an investment advisory subsidiary of the Bank, which provides private wealth management services to individual clients.
On January 4, 2021, SVBFG, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boston Private Financial Holdings, Inc., a Massachusetts corporation (“Boston Private”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Boston Private will merge with and into SVBFG, with SVBFG continuing as the surviving entity in the transaction. Following the transaction, Boston Private’s wholly owned subsidiary, Boston Private Bank & Trust Company, will merge with and into the Bank (the “Bank Merger”), with Silicon Valley Bank continuing as the surviving entity in the Bank Merger. Boston Private provides a full spectrum of wealth, trust, and private banking services dedicated to helping clients simplify and strengthen their financial positions. The transaction has been unanimously approved by both companies' Boards of Directors and is expected to close in mid-2021, subject to the satisfaction of customary closing conditions, including receipt of customary regulatory approvals and approval by the shareholders of Boston Private. As the transaction was not signed, and did not close, as of December 31, 2020, results for Boston Private are not included in this report.
SVB Capital
SVB Capital is the venture capital investment arm of SVB Financial Group, which focuses primarily on funds management. SVB Capital manages over $3.0$6.8 billion of funds on behalf of third party limited partner investors and, on a more limited basis, SVB Financial Group. 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.funds, and more recently (as a result of an acquisition from WestRiver Group in December 2020), debt funds that provide lending and other financing solutions. SVB Capital generates income for the Company primarily through investment returns (including carried interest) and management fees. See Note 2-2—“Summary of Significant Accounting Policies-Principles of Consolidation and Presentation”Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.report for additional details.
SVB Leerink
SVB Leerink is an investment bank specializing in equity and convertible capital markets, M&A, equity research and sales and trading for growth- and innovation-minded healthcare and life science companies and operates as a wholly-owned subsidiary of SVB Financial. SVB Leerink provides investment banking services across all subsectors of healthcare including biotechnology, pharmaceuticals, medical devices, diagnostic and life science tools, healthcare services and digital health. SVB Leerink focuses on two primary lines of business: (i) investment banking focused on providing companies with capital-raising
services, financial advice on mergers and acquisitions, sales and trading services and equity research, and (ii) sponsorship of private investment funds.
For more information about our threefour operating segments, including financial information and results of operations, see “Management's Discussion and Analysis of Financial Condition and Results of Operations-Operating Segment Results” under Part II, Item 7 of this report, and Note 22—24—“Segment Reporting” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Revenue Sources
Our total revenue is comprised of our net interest income and noninterest income. Net interest income on a fully taxable equivalent basis and noninterest income for the year ended December 31, 20172020 were $1.4$2.17 billion and $557 million,$1.84 billion, respectively.
Net interest income accounts for the major portion of our earnings. It is comprised primarily of income generated from interest rate spread differences between the interest rates received on interest-earning assets, such as loans extended to clients and securities held in our fixed income securities portfolio, and the interest rates paid by us on interest-bearing liabilities, such as deposits and borrowings. Our deposits are largely obtained from commercial clients within our technology, life science/healthcare and private equity/venture capital industry sectors. We also obtain deposits from the premium wine industry commercial clients and from our SVB Private Bank clients. Other than our Private Bank clients, we do not obtain deposits from retail or consumer banking sources.
Noninterest income is primarily income generated from our fee-based services and gains on our investments and derivative securities. We offer a wide range of fee-based financial services to our clients, including global commercial banking, private banking and other business services. We generally refer to revenues generated by such fee-based services as our "core fee income"income," (a non-GAAP measure) which is comprised of our client investment fees, foreign exchange fees, credit card fees, deposit service charges, credit card fees, lending related fees, client investment fees and letters of credit and standby letters of credit fees. In addition, through SVB Leerink, we offer investment banking and M&A advisory services. We generally refer to our core fee income plus revenues generated by these investment banking and M&A advisory services as “core fee income plus SVB Leerink revenue.” We believe our ability to integrate and cross-sell our diverse financial services to our clients is a strength of our business model. Additionally, we hold available-for-sale, held-to-maturity, non-marketable and marketable investment securities. Subject to applicable regulatory requirements, we manage and invest in private equity/venture
capital funds that invest directly in privately-held companies, as well as funds that invest in other private equity/venture capital funds. Gains on these investments are reported in our consolidated statements of income and include noncontrolling interests. We also recognize gains from warrants to acquire stock in client companies, which we obtain in connection with negotiating credit facilities and certain other services. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Noninterest Income-Gains on Investment Securities, Net” - and "-Gains"Gains on Equity Warrant Assets, Net" under Part II, Item 7 of this report.
We derive substantially all of our revenue from U.S. clients.We derived less than 10 percent of our total revenues from foreign clients for each of 2017, 20162020, 2019 and 2015.2018.
Client NichesIndustries
We provide products and services to serve the needs of our clients in each of the nichesindustries described below. We serve our commercial company clients throughout their life cycles, beginning with the emerging, start-up stage"emerging" or "early-stage" and progressing through later stages as their needs mature and expand, primarily in the technology and life science/healthcare industries. We also serve other targeted client nichesindustries --- private equity and venture capital firms, premium wine and private banking/wealth management.
Technology and Life Science/Healthcare
We serve a variety of clients in the technology and life science/healthcare industries. Our technology clients tend to be in the industries of:of frontier tech and hardware (such as semiconductors, communications, data, storage and electronics); enterprise and consumer software/internet (such as infrastructure software, applications, software services, digital content and advertising technology), fintech and energy and resource innovation ("ERI"). Because of the diverse nature of ERI products and services, ERI-related loans are reported under our hardware, software/internet, life science/healthcare and other commercial loan categories, as applicable, for loan-related reporting. Our life science/healthcare clients primarily tend to be in the industries of biotechnology, medical devices, healthcare information technology and healthcare services. A key component of our technology and life science/healthcare business strategy is to develop relationships with clients at an early stage and offer them banking services that will continue to meet their needs as they mature and expand. We serve these clients primarily through three practices:
•Our SVB Accelerator practice focuses on serving our “emerging” or “early-stage” clients. These clients are generally privately-held companies in the start-up or early stages of their life cycles and funded by friends and family, “seed”
or “angel” investors or have gone through an initial round of venture capital financing. They are typically engaged primarily in research and development activities and may have brought only a few products or services to market, if any. SVB Accelerator clients tend to have annual revenues below $5 million, and many are pre-revenue companies.
•Our SVB Growth practice serves our “mid-stage” and “late-stage”“later-stage” clients. These clients are generally privately-held companies in the intermediate or later stages of their life cycles, and are often dependent on venture capital for funding. However, some of these clients are in the more advanced stages of their life cycles and may be publicly-held or poised to become publicly-held. Our SVB Growth clients generally have a more established product or service offering in the market and may be in a period of expansion. SVB Growth clients tend to have annual revenues between $5 million and $75 million.
•Our SVB Corporate Finance practice primarily serves our large corporate clients, which are more mature and established companies. These clients are generally publicly-held or large privately-held companies and have a more sophisticated product or service offering in the market. SVB Corporate Finance clients tend to have annual revenues over $75 million.
In addition, our Sponsored Finance group provides debt financing in support of private equity sponsored company acquisitions, primarily technology and life science/healthcare companies.
Global Fund Banking (formerly Private Equity/Venture CapitalCapital)
We serve clients in the private equity/venture capital community, many of whom are investors in the portfolio company clients to whom we provide banking services. In particular, we provide credit facilities to our private equity/venture capital clients, including capital call lines of credit, the repayment of which is dependent on the payment of capital calls or management fees by the underlying limited partner investors in the funds managed by the firms.
Since our founding, we have cultivated strong relationships within the venture capital community, which has over time expanded intoto relationships within the private equity community. We believe our network helps to facilitate deal flow opportunities between these private equity/venture capital firms and the companies within the markets we serve.
Premium Wine
We are one of the leading providers of financial services to premium wine producers across the Westernwestern United States, primarily in California’s Napa Valley, Sonoma County and Central Coast regions, as well as the Pacific Northwest. We focus on vineyards and wineries that produce grapes and premium wines.
Private Bank/Wealth Management
We provide private banking and wealth management services to consumer clients, including private equity/venture capital professionals and executive leaders of the innovation companies wethey support. We offer private banking, cash management and wealth management services to meet their personal banking and financial needs.
Competition
The banking and financial services industry is highly competitive and continues to evolve as a result of changes in regulation, technology, product delivery systems and the general market and economic climate. Our competitors include other banks, debt funds, specialty and diversified financial services intermediaries and other “Fintech” disruptors that offer lending, leasing, payments, investment, foreign currency exchange, advisory and other financial products and services to our target client base. For example, we compete with alternative lenders, such as “marketplace” lenders, peer-to-peer lenders and other non-traditional lenders that have emerged in recent years. We also compete with non-financial service providers, particularly payment facilitators and processors, as well as other nonbanking technology providers in the payments industry which may offer specialized services to our client base. In addition, we compete with hedge funds and private equity funds.funds, as well as investment banks. The principal competitive factors in our markets include product offerings, service, pricing and transaction size and structure. Given our established market position within the client segments that we serve, our continued efforts to develop products and services, and our ability to integrate and cross-sell our diverse financial services to extend the length of our relationships with our clients, we believe we compete favorably in the markets in our core business areas.
EmployeesHuman Capital
SVB Financial Group’s success is dependent on our ability to retain, attract and motivate qualified employees. We rely on our personnel, which includes a substantial number of employees who have technical or other expertise and/or a strong network of relationships with individuals and institutions in the markets we serve. Competition for skilled and qualified
personnel in financial services, technology and innovation is significant in the markets in which we operate. As part of our effort to retain, attract and motivate employees, we strive to offer competitive compensation and benefits, promote diversity, equity and inclusion, support the safety and well-being of our employees, encourage our employees to give back to their communities and lead with our corporate values. Through these efforts, we strive to foster a workplace and environment that empower our employees to be successful.
As of December 31, 2017,2020, we employed 2,4384,461 full-time equivalent employees. Approximately 81% of our employees are in the United states and approximately 19% are in international locations, including the United Kingdom, Ireland, Germany, Israel, China, Hong Kong, Canada, India and Denmark.
Specifically during 2020, much of our human capital management focus was in response to the COVID-19 pandemic. As described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management’s Overview of 2020 Financial Performance – Recent Developments – COVID-19”, we focused on the safety, well-being and stability of our people. We maintained our workforce without the need for any furloughs or layoffs. Our primary focus was to provide support for our employees, including expanded medical and other support to those directly impacted by COVID-19, mental health and wellness support, and other work-from-home support such as utility stipends and technology and equipment.
Compensation and Benefits. In order to retain and attract talent, we provide employees with competitive compensation and benefits packages. Our compensation and benefits program provides both short-term and long-term awards, incentivizing performance and aligning employee and shareholder interests. Employee compensation packages include a competitive base salary and, subject to Company and individual performance, may include an annual incentive cash bonus. Employees at certain levels are eligible to receive equity awards tied to the value of the Company’s stock. Other employee benefits include health insurance (medical, dental and vision), parental bonding leave, a 401(k) plan with matching employee contributions, an employee stock purchase plan, an employee home ownership plan that offers mortgages on primary homes, paid time off, life insurance, disability insurance and learning opportunities.
Diversity, Equity and Inclusion (“DEI”). We believe that advancing diversity, equity and inclusion produces better results for our clients and is crucial to attracting and retaining skilled personnel. We embrace pathways to increase diversity and achieve gender parity in our senior leadership. Our approach to promoting a diverse and inclusive workplace includes employee awareness programs and resource groups, internal DEI-focused “town hall” meetings, training and educational opportunities, fair pay analysis, leadership development, hiring outreach programs and strategic partnerships to advance diversity objectives. We published our first DEI report in 2020, a copy of which is available on our Company website.
Safety and Well-Being. The safety and well-being of our employees is of paramount importance. We have developed and maintain company procedures and practices to ensure the safety of our employees in the different markets we operate. We are also committed to maintaining a work environment that is free of harassment or discriminatory practices. We have processes and escalation channels for employees to report harassment, discrimination or other concerns. In addition, we regularly seek feedback from employees through engagement surveys to help evaluate whether employees are satisfied and engaged in their job positions, as well as understand and are aligned with our business objectives and values.
Community. We are committed to giving back to the communities in which our employees live and work and believe these efforts help us retain and attract talent. We match certain employee charitable donations to eligible non-profits. We also encourage employee volunteering. Our non-profit charitable SVB Foundation also contributes to community organizations and other causes. We have published our Corporate Responsibility Report for 2020 on our website, which provides additional information about our community initiatives.
Company Values. Our Company values guide our actions and empower our employees to be successful. Our core values are: start with empathy for others; speak and act with integrity; embrace diverse perspectives; take responsibility; and keep learning and improving. We believe that our values are key to attracting, retaining, and inspiring our employees and contribute to the success of both our business and the innovation economy more generally.
Supervision and Regulation
Our bank and bank holding company operations are subject to extensive regulation by federal and state regulatory agencies. This regulation is intended primarily for the stability of the U.S. banking system as well as the protection of depositors and the Deposit Insurance Fund (the “DIF”). This regulation is not intended for the benefit of our security holders.
As a bank holding company that has elected financial holding company (“FHC”) status, SVB Financial is subject to primary inspection,regulation, supervision, regulation, and examination by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Bank, as a California state-chartered bank and a member of the Federal Reserve System, is subject to primary supervision and examination by the Federal Reserve as well as the California Department of Business Oversight (the “DBO”) - Division of Financial Institutions.DFPI. In addition, the Bank must comply with
certain requirements of the Federal Deposit Insurance Corporation (the “FDIC”),FDIC as, to the extent provided by law, the Bank'sBank’s deposits are insured by the FDIC. Our consumer banking activities also are subject to regulation and supervision by the Consumer Financial Protection Bureau (the “CFPB”). Many of these banking regulations are designed primarily to protect our customers, counterparties and the stability of the U.S. and international banking systems.
SVB Financial and certain of its other non-bank subsidiaries are also subject to regulation by the Federal ReserveSEC and FINRA as well as certain other applicable federal and state regulatory agencies and self-regulatory organizations, including the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”).agencies. In addition, we are subject to regulation by certain foreign regulatory agencies in international jurisdictions where we conduct, or may in the future wish to conduct, business, including the United Kingdom, Israel, Hong Kong, China, Germany and Canada. (See “-International“International Regulation” below.)
The following discussion of statutes and regulations is a summary and does not purport to be complete. This discussion is qualified in its entirety by reference to the statutes and regulations referred to in this discussion. Regulators, the U.S. Congress, state legislatures and international consultative and standard settingstandard-setting bodies continue to enact rules, laws and policies to regulate the financial services industry and public companies in an effort to protect consumers and investors, and may have differing interpretations in the implementation of such rules. The change of control in the U.S. Congress and in the U.S. presidential administration, as well as related changes in key personnel at regulatory agencies, could result in changes in regulations applicable to us and how they are interpreted. As a result, the precise nature of these laws and regulations and the effect of such policies on the Company’s business cannot be predicted and, in some cases, may have a material and adverse effect on our business, financial condition, and/or results of operations. For more information, see "Risk Factors - Legal“Risk Factors-Legal and Regulatory Risks"Risks” under Part I, Item IA of this report.
Regulation and Supervision of SVB Financial and Silicon Valley Bank
Under the BHC Act, SVB Financial, asAs a bank holding company, is subject to the Federal Reserve’s regulation and supervision and its authority to, among other things:
Require periodic reports and such other additional information as the Federal Reserve may require in its discretion;
Require the maintenance of certain minimum levels of capital and adherence to capital adequacy standards;
Restrict the ability of bank holding companies to service debt, pay dividends or receive dividends or other distributions from their subsidiary banks;
Require prior approval for senior executive officer and director changes under certain circumstances;
Require that bank holding companies serve as a source of financial and managerial strength to their banks and commit resources as necessary to support their banks. The determination of a bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice, a violation of Federal Reserve regulations or otherwise inconsistent with applicable statutory standards, or all of the foregoing;
Terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the Federal Reserve believes the activity or the control of the subsidiary or affiliate constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary, or if there is a failure to maintain certain capital and management standards;
Regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt and require prior approval to purchase or redeem our securities in certain situations; and
Require approval of acquisitions and mergers with banks and large financial companies and consider certain competitive, management, financial, financial stability and other factors in granting these approvals. Similar California and other state banking agency approvals may also be required.
Bank holding companies generally are prohibited, except in certain statutorily prescribed instances including exceptions for financial holding companies, from acquiring direct or indirect ownership or control of five percent or more of any class of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, subject to prior notice or Federal Reserve approval, bank holding companies may engage in, or acquire shares of companies engaged in, activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition to being a bank holding company, SVB Financial has elected to be a "financial holding company" as permitted under the Gramm-Leach-Bliley Act of 1999 ("GLBA"), which status allows SVB Financial to generally may engage in certain otherwise prohibited nonbankingnon-banking activities and certain other broader securities, insurance, merchant banking and other activities that the Federal Reserve has determined to be “financial in nature” or are incidental or complementary to activities that are financial in nature, without prior Federal Reserve approval, subject to the requirement imposed by the Dodd‑Frank Wall Street Reformincluding certain securities, merchant banking and Consumer Protection Act (the "Dodd-Frank Act") that SVB Financial must obtain prior Federal Reserve approval (subject to certain exceptions) ininsurance activities.
In order to acquireretain FHC status, a nonbanking company engaged in financial activities with more than $10 billion in consolidated assets.
Pursuant to the GLBA, in order to elect and retain financial holding company status,and all of its depository institution subsidiaries of a bank holding company must be well-capitalized and well-managed, as determined under relevant banking regulations. Otherwise, SVB Financial could face material restrictions on its activities and exceptits ability to enter into certain transactions. In addition, if the Bank has not received at least a satisfactory rating on its most recent examination under the Community Reinvestment Act of 1977 (“CRA”), we would not be able to commence any new financial activities or acquire a company that engages in limited circumstances,such activities. In that case, we would still be allowed to engage in activities closely related to banking and make investments in the ordinary course of conducting banking activities. The Bank continues to be in satisfactory compliance with the Community Reinvestment Act (“CRA”).CRA.
Pursuant to applicable California and federal law, state-chartered commercial banks are permitted to engage in any activity permissible for national banks, which includes the many so-called “closely related to banking” or “non-banking” activities commonly conducted by national banks. In addition, pursuantthe Bank may conduct, through a subsidiary, certain “financial” activities that would be impermissible for the Bank itself to the Dodd-Frank Act,same extent as a financial holding company,national bank may, provided the Bank remains “well-capitalized,” “well-managed” and no longer just bank subsidiaries thereof, is required to be well-capitalized and well-managed. Failure to maintainin satisfactory compliance with these requirements or correct any non-compliance within a specified time could lead to divestiture of subsidiarythe CRA.
Bank holding companies and insured banks require all activities to conform to those permissible for a bank holding company (as opposed to the greater range of activities permissible for a financial holding company), or subject the financial holding company to other regulatory restrictions.
Because SVB Financial is a holding company, our rights and the rights of our creditors and security holders to participate in the assets of any of our subsidiaries upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors, except to the extent we may ourselves be a creditor with recognized claims against the subsidiary. In addition, there are various statutory and regulatory limitations on the extent to which the Bank can finance or otherwise transfer funds to us or to our non−bank subsidiaries, including certain investment funds to which the Bank serves as an investment adviser, whether in the form of loans or other extensions of credit, including a purchase of assets subject to an agreement to repurchase, securities investments, the borrowing or lending of securities to the extent that the transaction causes the Bank or a subsidiary to have credit exposure to the affiliate, or certain other specified types of transactions, as discussed in further detail below. Further, loans and other extensions of credit by the Bank to us or any of our non-bank subsidiaries are required to be secured by specified amounts of collateral and are required to be on terms and conditions consistent with safe and sound banking practices.
In addition to regulation and supervision by the Federal Reserve as a bank holding company and financial holding company, SVB Financial is also treated as a bank holding company under the California Financial Code. As such, SVB Financial and its subsidiaries are subject to periodic examinationpotential enforcement actions of varying levels of severity by federal and may be required to file reportsstate regulators and law enforcement authorities for unsafe or unsound practices in conducting their business or for violations of law, regulation or condition imposed in writing by any applicable agency or term of a written agreement with the DBO.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act, enacted in 2010, was intended to make significant structural reforms to the financial services industry. The Dodd-Frank Act broadly affects the financial services industry by creating new resolution authorities, requiring ongoing stress testing of capital, mandating higher capital levels and more stringent liquidity management requirements, increasing regulation of executive and incentive-based compensation and requiring numerous other provisions aimed at strengthening the sound operation of the financial services sector, many of which vary depending on the asset size of the financial institution. Various aspects of the Dodd-Frank Act apply based on the asset size of the financial institution. Among other things, the Dodd-Frank Act provides for:
Capital standards applicable to bank holding companies that may be no less stringent than those generally applicable to insured depository institutions;agency.
Periodic stress tests for financial entities, including SVB Financial and the Bank;
Additional risk management and other enhanced prudential standards for larger bank holding companies with $50 billion or greater in total consolidated assets (See "-Enhanced Prudential Standards" below);
Restrictions on a banking institution’s ability to engage in proprietary trading and to sponsor, invest in or lend to certain funds, including venture capital, hedge and private equity funds;
Repeal of the federal prohibition (Regulation Q) on the payment of interest on demand deposits, including business checking accounts, and establishment of the $250,000 limit for federal deposit insurance;
The establishment of the CFPB with responsibility for promulgating and enforcing regulations designed to protect consumers’ financial interests and prohibit unfair, deceptive and abusive acts and practices by financial institutions;
The authority of the CFPB to directly examine those financial institutions with $10 billion or more in assets, such as SVB Financial, for compliance with the regulations promulgated by the CFPB;
Limits, or the imposition of significant burdens and compliance and other costs on, certain activities previously conducted by banking organizations, such as originating and securitizing mortgage loans and other financial assets, arranging and participating in swap and derivative transactions, proprietary trading and investing in private equity and other funds and restrictions on debit charge interchange fees; and
The establishment of new compensation restrictions and standards regarding the time, manner and form of compensation given to key executives and other personnel receiving incentive compensation, including documentation and governance, proxy access by stockholders, deferral and claw-back requirements.
The Dodd-Frank Act also requires the issuance of numerous implementing regulations, some of which have not yet been finalized. Individually and collectively, both the proposed and final regulations resulting from the Dodd-Frank Act may materially and adversely affect our businesses, financial conditions and results of operations. Further, the Dodd-Frank Act imposes enhanced prudential standards on bank holding companies with average total consolidated assets of $50 billion or more. In addition, under the Federal Reserve's implementing regulations, certain additional standards apply to bank holding companies with average total consolidated assets of $250 billion or more or $10 billion or more in on-balance sheet foreign exposures. See "-Enhanced Prudential Standards" and "-Regulatory Capital" below. As we approach having average total consolidated assets size of $50 billion, as measured under the Federal Reserve's regulations (see below under "-Enhanced Prudential Standards"), we may experience heightened regulatory expectations with respect to our risk management practices and other matters, even though we are not yet formally subject to such enhanced prudential standards.
Enhanced Prudential Standards
UnderIn October 2019, the Federal Reserve’s regulations implementingfederal banking agencies issued rules that tailor the Dodd-Frank Act’sapplication of enhanced prudential standards to large bank holding companies and the capital and liquidity rules to large bank holding companies and depository institutions (the “Tailoring Rules”) to implement amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”). Under the EGRRCPA, the threshold above which the Federal Reserve is required to apply enhanced prudential standards to bank holding companies increased from $50 billion in average total consolidated assets to $250 billion. The Federal Reserve may also impose enhanced prudential standards on bank holding companies with between $100 billion and $250 billion in average total consolidated assets.
Under the Tailoring Rules, banking organizations are grouped into four categories based on their U.S. G-SIB status, size and four other risk-based indicators. The most stringent standards apply to U.S. G-SIBs, which represent Category I, and the least stringent standards apply to Category IV organizations, which have between $100 billion and $250 billion in average total consolidated assets and less than $75 billion in all four other risk-based indicators. SVB Financial, as a banking organization with less than $100 billion in average total consolidated assets, currently is not subject to most of the enhanced prudential standards, but will be subject to heightened requirements when we surpass $100 billion in average total consolidated assets over four consecutive financial quarters, which we expect to occur in 2021. Category IV firms are, among other things, subject to (1) certain liquidity risk management and risk committee requirements, including liquidity buffer and liquidity stress testing
requirements; (2) requirements to develop and maintain a capital plan on an annual basis; and (3) supervisory capital stress testing on a biennial basis. Several of the standards are summarized below:
•Risk Management. Bank holding companies with $50 billion or more in average total consolidated assets, including SVB Financial, are subject to more stringent prudential requirements, including requirements for risk-basedrisk committee and leverage capital, liquidity management, risk management resolution planning, supervisory capital stress testing and capital planning, and single counterparty credit exposure limits. Additional requirements apply torequirements. In addition, bank holding companies with $100 billion or more in average total consolidated assets of $250 billion or more or $10are subject to liquidity risk management, liquidity buffer and liquidity stress testing requirements.
•Comprehensive Capital Analysis and Review (“CCAR”). Bank holding companies with $100 billion or more in on-balance sheet foreign exposures. Certain requirements, including the single counterparty credit exposure limits and separate early remediation standards, have not yet been finalized and implemented.
Pursuantaverage total consolidated assets are required to submit an annual capital plan to the Federal Reserve’s regulations, a bank holding company becomesReserve. In January 2021, the Federal Reserve finalized changes to the capital plan rule, which will, among other things, provide firms subject to theCategory IV standards additional flexibility to develop their capital plans. For firms subject to CCAR, failure to submit a satisfactory plan can result in restrictions on capital distributions, including dividends and common stock repurchases. The CCAR process is intended to help ensure that BHCs have robust, forward-looking capital planning processes that account for each company’s unique risks and that permit continued operations during times of economic and financial stress.
•Stress Testing. Bank holding companies with $100 billion or more stringent prudential standards at the end of a four-quarter period over the course of which the bank holding company averagesin average total consolidated assets of $50are subject to supervisory stress tests conducted by the Federal Reserve every other year and, except for Category IV firms, are also subject to company-run stress testing requirements (commonly referred to as Dodd-Frank Stress Tests or “DFAST”) to determine whether the firms have sufficient capital on a consolidated basis necessary to absorb losses in baseline and severely adverse economic conditions. Because we expect to be a Category IV firm, we do not expect to be subject to DFAST. Under the Tailoring Rules, bank holding companies with less than $100 billion in average total consolidated assets are not subject to company-run or supervisory stress testing requirements.
•Resolution Planning. Except for Category IV firms, bank holding companies with $100 billion or more. We refer to the conclusion of that four-quarter period as the time at which a bank holding company becomes “subject to enhanced prudential standards.” Once a bank holding company becomes subject to enhanced prudential
standards, certain of the standards include a transition period that provides a timeline for the bank holding company to comply. Below we describe several of the enhanced prudential standards’ requirements and the associated transition periods that apply once a bank holding company becomes subject to the requirements.
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• | Comprehensive Capital Analysis and Review (“CCAR”). Bank holding companies are required to submit an annual capital plan to the Federal Reserve. Failure to submit a satisfactory plan can result in restrictions on the payment of dividends as well as other restrictions. Bank holding companies that first become subject to enhanced prudential standards on or before September 30th of a given calendar year must comply with the requirements of the rules on January 1 of the following year. In contrast, bank holding companies that first become subject to enhanced prudential standards after September 30th of a given calendar year need not comply with the requirements of the capital plan rule until January 1 of the second following year. Under modifications to the Federal Reserve's capital planning and stress testing rules that became effective in 2017, for “large and noncomplex” bank holding companies. (defined as a bank holding company that has less than $250 billionmore in average total consolidated assets less than $75 billion in non-bank assets and is not a global systemically important bank holding company under the Federal Reserve’s rules), the Federal Reserve may object to a capital plan if it determines that the bank holding company has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the relevant planning horizon. With respect to bank holding companies that are large and complex (as compared to large and noncomplex), the Federal Reserve may object on a broader range of bases, including so-called “qualitative” bases.
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Stress Testing. Bank holding companies are required to submit to the Federal Reserve and the resultsFDIC a plan for rapid and orderly resolution in the event of a mid-year and annual company-run stress test and make summaries of such results available to the public. SVB Financial is currently subject to the annual company-run stress test requirements by virtue of having morematerial financial distress or failure. Bank holding companies with less than $10$100 billion in average total consolidated assets.assets are not required to submit resolution plans. Because we expect to be a Category IV firm, we do not expect to be required to submit a resolution plan. Separately, the FDIC requires insured depository institutions (“IDIs”) with average total consolidated assets of $50 billion or more, such as the Bank, to submit a resolution plan with respect to the bank. In addition, bank holding companiesApril 2019, the FDIC released an advance notice of proposed rulemaking about potential changes to its IDI resolution planning requirements, and the next round of IDI resolution plan submissions will not be required until the rulemaking process was complete. In January 2021, the FDIC lifted the moratorium on resolution plans required for IDIs with $100 billion or more in assets.The FDIC plans to provide further details surrounding its modified approach, including efforts to streamline content requirements for IDI plan submissions, as well as outline the timing for submissions, in early 2021.
•Liquidity Coverage Ratio. Banking organizations in Categories I-III and certain Category IV institutions with greater than $50 billion in weighted short-term wholesale funding (“WSTWF”) are subject to an annual supervisory stress test conducted by the Federal Reserve, which publicly discloses summaries of the results of the supervisory stress tests. Bank holding companies become subject to stress testing requirements in the year following the first year in which the bank holding company submits a capital plan.
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• | Resolution Planning. Bank holding companies are required to annually submit to the Federal Reserve and the FDIC a plan for rapid and orderly resolution in the event of material financial distress or failure. Separately, the FDIC requires insured depository institutions that have average total consolidated assets of $50 billion or more, based on a four-quarter average, to annually submit to the FDIC a plan that enables the FDIC as receiver to resolve the bank under Sections 11 and 13 of the Federal Deposit Insurance Act, as amended (the “FDIA”). A bank holding company or bank must submit its first resolution plan by the next July 1st following the date it becomes subject to the rule, provided the submission date occurs at least 270 days after it becomes subject to the rule.
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Liquidity Coverage Ratio. Pursuant to the Liquidity Coverage Ratioliquidity coverage ratio (“LCR”) requirement, bank holding companies are required torequirements and must maintain high-quality liquid assets in accordance with specific quantitative requirements. A modified,Given that we have less stringent version of the Federal Reserve’s LCR rule applies to bank holding companies with greater than $50 billion in average total consolidated assets, but less than $250 billion in average total consolidated assets and $10 billion in on-balance sheet foreign exposures (so-called “advanced approaches” banking organizations). The modified LCR rule, whichWSTWF, we woulddo not expect to be the version of the rule most likely to apply to SVB Financial upon our becoming subject to enhanced prudential standards, requires subject bank holding companies to maintain sufficient high-quality liquid assets to meet 70 percent of anticipated cash outflows (as calculated under the rule) on the last business day of the applicable calendar month. A bank holding company must comply with thean LCR rule after meeting the relevant asset threshold according to a transition schedule set out in the LCR rule, which varies based on the size of the institution.requirement.
Risk Management. Bank holding companies must comply with enhanced risk management requirements. These requirements impose standards on the Board of Directors’ risk committee and for a chief risk officer. The enhanced prudential requirements also impose liquidity risk management standards and require subject bank holding companies to conduct regular liquidity stress testing over various time horizons and maintain a buffer of liquid assets based on the results of such stress testing. Bank holding companies are required to comply with such risk management and liquidity risk management requirements on the first day of the fifth quarter after becoming subject to the enhanced prudential standards.
Pillar III Disclosure. Bank holding companies are required to make timely qualitative and quantitative disclosures about their regulatory capital, referred to as “Pillar III disclosures.” Quantitative disclosures must be made quarterly, and qualitative disclosures that do not change each quarter may be disclosed annually. Bank holding companies
are required to make Pillar III disclosures after reporting $50 billion or more in total consolidated assets in their year-end financial reports to the Federal Reserve. Because the disclosures are backward-looking, a bank holding company makes its first disclosures with respect to data from prior quarters.
Regulation and Supervision of Silicon Valley Bank
The Bank is a California state-chartered bank, a member of the Federal Reserve and a member of the FDIC. The Bank is subject to primary supervision, periodic examination and regulation by the DBO and the Federal Reserve, as the Bank’s primary federal regulator. In general, under the California Financial Code, California banks have all the powers of a California corporation, subject to the general limitation of state bank activities and investments under the FDIA. Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their transactions with affiliates, their foreign operations, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The regulatory structure also gives the bank regulatory agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. If, as a result of an examination, the DBO or the Federal Reserve should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the DBO and the Federal Reserve, and separately the FDIC as insurer of the Bank’s deposits, have broad prudential authority to:
Require affirmative action to correct any conditions resulting from any violation or practice;
Require prior approval for senior executive officer and director changes;
Direct an increase in capital and the maintenance of specific minimum capital ratios which may preclude the Bank from being deemed well capitalized for regulatory purposes;
Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
Enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders to take corrective action and enjoin unsafe and unsound practices;
Restrict or prohibit the Bank from paying dividends or making other distributions to SVB Financial;
Remove officers and directors and assess civil monetary penalties; and
Take possession of and close and liquidate the Bank.
Pursuant to applicable California and federal law, state chartered commercial banks are permitted to engage in any activity permissible for national banks. Therefore, the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries, and further, the Bank may conduct certain “financial” activities in a subsidiary that would be impermissible for the Bank itself to the same extent as may a national bank, provided the Bank remains “well-capitalized,” “well-managed” and in satisfactory compliance with the CRA. The Bank continues to be in satisfactory compliance with the CRA.
Regulatory Capital
In July 2013, the Federal Reserve, FDIC and the Office of the Comptroller of the Currency (the “OCC”) jointly published final rules establishingU.S. banking organizations are subject to a new comprehensive capital framework for U.S.(the “Capital Rules”), issued by the federal banking organizations. The agencies, said that they believe the new rules will result in capital requirements that better reflect banking organizations’ risk profiles. The ruleswhich implement the “Basel III”Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to the internationally agreed regulatory capital framework adopted by the Basel Committee on Banking Supervision (the “Basel Committee”).
The new rules largely became effectiveCapital Rules establish minimum risk-weighted capital ratios for SVB Financial and the Bank in January 2015, with some rules being transitioned into full effectiveness over two to four years. The new capital rules, among other things, (i) require elevated capital levels for the Bank and SVB Financial; (ii) introduce a new capital measure limited to common equity called “CommonCommon Equity Tier 1”1 (“CET1”) and a related regulatory capital, ratio of CET 1 to risk-weighted assets; (iii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements; (iv) change the risk-weightings of certain on- and off-balance sheet assets for purposes of risk-based capital ratios; (v) create an additional capital conservation buffer (which will limit dividends and other discretionary bonus payments to certain executive officers if not satisfied) above the required capital ratios; (vi) limit what qualifies as capital for purposes of meeting the various capital requirements; (vii) apply most deductions/adjustments to regulatory capital measures to CET1 and not to the other components of capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios; and (viii) expand the scope of the deductions from, and adjustments to,total capital as compared to prior regulations. Further, under the Basel III capital adequacy frameworkwell as implemented in the United States, banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposures (the “Advanced Approaches Thresholds”) are subject to the “advanced approaches” capital rules, which require banking organization to use an internal ratings-based approach and other model-based methodologies to calculate risk-based capital requirements for credit risk and advanced measurement approaches to calculate risk-based capital requirements for operational risk. As of December 31, 2017, we had
total consolidated assets of $51.2 billion and approximately $6.0 billion in on-balance sheet foreign exposures. Our level of foreign exposures is determined based on our current understanding of applicable regulatory standards, guidance, interpretations, expectations and assumptions, and may be subject to change based on any modifications, clarifications or evolution of these standards, guidance, interpretations, expectations or assumptions. In addition to being required to use internal models to calculate capital requirements, crossing the Advanced Approaches Thresholds triggers a number of additional requirements, including the following:
Application of a Standardized Capital Floor. Section 171 of the Dodd-Frank Act, commonly referred to as the Collins Amendment, provides that a banking organization’s capital requirements calculated under the “advanced approaches” capital rules may not be lower than the capital requirements calculated using the prescriptive “standardized approach” that otherwise generally applies to banking organizations.
Supplementary Leverage Ratio of 3%. The supplementaryminimum leverage ratio (“SLR”) is more stringent than the otherwise applicable Tier 1 leverage ratio of 4%, which is discussed below.
Unavailability of the Accumulated Other Comprehensive Income Opt-Out Election under the Risk-Based Capital Rules. Banking organizations subject to the advanced approaches capital rules are not permitted to opt-out from having accumulated other comprehensive income (“AOCI”) included in regulatory capital.
Countercyclical Capital Buffer. This standard requires a banking organization to hold an additional buffer amount, designed to counteract systemic vulnerabilities. The buffer amount is currently set by the Federal Reserve at zero percent, but could change in the future. If the buffer is not met, the banking organization is subject to limitations on dividends and other payouts.
Full Liquidity Coverage Ratio. The full LCR requires LCR calculation on a daily (compared to the modified LCR’s monthly standard) basis, uses the banking organization’s full net cash outflow amount (compared to 70% under the modified LCR), and includes an “add-on” to net cash outflows for certain maturity mismatch during the 30-day LCR period.
On December 7, 2017, the Basel Committee published a set of revisions to its Basel III framework to address perceived weaknesses in the current methodology for calculating risk weighted assets, in particular to increase the risk-sensitivity of the standardized approach and to constrain banking organizations’ discretion in modeling their capital requirements under models-based approaches (such as the advanced approaches in the United States). Following the adoption of the final standards, the Federal Reserve, the FDIC and the OCC announced, also on December 7, 2017, that they support the conclusion of efforts to reform the international bank capital standards in response to the global financial crisis, and that they would consider how to appropriately apply these revisions to the Basel III reform package in the United States through the standard notice-and-comment rulemaking process.
In addition to meeting the capital requirements set forth in the new capital rules, the Bank is required to demonstrate its ability to maintain sufficient capital ratios under the scenarios of adverse and severely adverse financial conditions that are part of Federal Reserve’s stress testing requirements. Bank holding companies with total consolidated assets between $10 billion and $50 billion and state member banks with total consolidated assets of more than $10 billion, such as SVB Financial and the Bank, respectively, are generally required to conduct annual company-run stress tests, the results of which could require us to take certain actions, including raising additional capital. We are required to submit to the Federal Reserve the results of the annual company-run stress tests and to make summaries of the results of the company-run stress tests available to the public.
Under the new capital rules,ratio. CET1 is defined as common stock, plus related surplus, and retained earnings plus limited amounts of minority interest in the form of common stock, subject to a limit, less the majority of the regulatory deductions and adjustments. The new capital rules, like the prior capital rules, specify that total capital consists of Tier 1 capital and Tier 2 capital. Tier 1 capital for SVB Financial and the Bank consists of common stock, plus related surplus and retained earnings. Under the new capital rules, forFor most banking organizations, the most common form of Additional Tier 1 capital (other than CET1) is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated debt and a portion of the allowance for loan and lease losses, (“ALLL”), in each case, subject to the newcertain requirements. Total capital rules’ specific requirements.consists of Tier 1 capital and Tier 2 capital.
The new capital rules require several changes to regulatory capital deductions and adjustments, subject to a transition period. These changes include, for example, the requirement that deferred tax assets (“DTAs”) arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In addition, under the previous capital rules, certain effects of AOCI or loss items included in shareholders’ equity were reversed for the purposes of determining regulatory capital ratios. Under the newCapital Rules, the minimum capital rules, the effects of certain AOCI
are not excluded; however, non-advanced approaches banking organizations, includingratios applicable to SVB Financial and the Bank may make a one-time permanent election to continue to exclude these items. We made this election in April 2015 to reduce the potential impact on SVB Financial’s and the Bank’s regulatory capital levels due to periodic volatile changes in long-term interest rates. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and is being phased-in over a four-year period (begun at 40% on January 1, 2015 and increasing by a 20% percentage points per year until 100%).
The new capital rules also include changes in the risk-weighting of assets to better reflect perceived credit risk and other risk exposure and require higher tangible common equity components of capital. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisitions, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status and a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable. Under the new capital rules, the minimum capital ratios are as follows:
4.5% CET1 to risk-weighted assets
capital, 6.0% Tier 1 capital, to risk-weighted assets
8.0% Total capital to risk-weighted assets
and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”)
The new capital rules require SVB Financial and the Bank toleverage. In addition, banking organizations must meet a 2.5% CET1 risk-based capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. To meet the requirement when it is fully phased in, the organization must maintain an amount of CET1 capital that exceeds the buffer level of 2.5% above eachThe severity of the minimum risk-weighted capital ratios. The requirement is being phased in over a four year period, which beganconstraints would depend on January 1, 2016, at which time the amount of such capital must have exceeded the buffer levelshortfall and the banking organization’s “eligible retained income” (that is, four-quarter trailing net income, net of 0.625%distributions and tax effects not reflected in net income). The buffer level will continue to increase by 0.625 percentage points each year until reachingIn March 2020, for BHCs with $100 billion
or more in assets, the Federal Reserve approved a final rule replacing the static 2.5% on January 1, 2019. Whencomponent of the capital conservation buffer with a firm-specific stress capital buffer (“SCB”) requirement, is fully phasedreflecting stressed losses in the supervisory severely adverse scenario of the Federal Reserve’s CCAR stress tests and including four quarters of planned common stock dividends, subject to avoid constraints, a banking organization must maintainminimum 2.5% floor. During a year in which a Category IV firm does not undergo a supervisory stress test, the firm will receive an updated SCB that reflects the firm’s updated planned common stock dividends. A Category IV firm may also elect to participate in the supervisory stress test in a year in which the firm would not normally be subject to the supervisory stress test to receive an updated SCB.
The regulatory capital ratios of SVB Financial and the Bank currently exceed these levels, as shown in the following chart:
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | SVB Financial | | Bank | | Required Ratio (1) |
| CET 1 risk-based capital | | 11.04% | | 10.70% | | 7.0% |
| Tier 1 risk-based capital | | 11.89% | | 10.70% | | 8.5 |
| Total risk-based capital | | 12.64% | | 11.49% | | 10.5 |
| Tier 1 leverage | | 7.45% | | 6.43% | | 4.0 |
(1) Percentages represent the minimum capital ratios (after any distribution): (i)plus, as applicable, the 2.5% CET1 capital conservation buffer under the Capital Rules.
The regulatory capital ratios of SVB Financial and the Bank also exceed the “well-capitalized” requirements under relevant regulations. Refer to risk-weighted assets more than 7.0%, (ii) Tier 1 capital to risk-weighted assets more than 8.5%, and (iii) total capital (Tier 1 plus Tier 2) to risk-weighted assets more than 10.5%.
With respectNote 23—“Regulatory Matters” of the “Notes to the Bank,Consolidated Financial Statements” under Part II, Item 8 of this report for more information.
In July 2019, the federal banking agencies issued final rules intended to simplify compliance with capital rules for non-advanced approaches banking organizations (the “Capital Simplification Rules”), such as SVB Financial and the Bank. The Capital Simplification Rules took effect for SVB Financial as of January 1, 2020 and simplify the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions and minority interests for banking organizations.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms. Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including recalibrating risk weights and introducing new capital rules also revised the “prompt corrective action” regulations, by (i) introducingrequirements for certain “unconditionally cancellable commitments,” and establish a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5%new standardized approach for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared tooperational risk capital. Under the current 6%); and (iii) eliminating the provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The newCapital Rules, operational risk capital rulesrequirements do not changeapply to non-advanced approaches banking organizations, such as SVB Financial and the total risk-based capital requirement for any “prompt corrective action” category. See “-Prompt Corrective ActionBank. The federal banking agencies have not yet implemented these revised standards, and Other General Enforcement Authority” below.
Although we continue to evaluate thetheir impact that the new capital rules have on SVB Financial and the Bank will depend on the manner in which they are implemented.
In light of the economic disruptions and monitor developments fromoperational challenges related to the COVID-19 pandemic, in 2020 the federal banking agencies andadopted a rule that provides relief to banking organizations with respect to the Basel Committee, we believeimpact of CECL on regulatory capital (the “2020 CECL Transition Rule”). Under the 2020 CECL Transition Rule, banking organizations that adopt CECL during the 2020 calendar year, such as SVB Financial and the Bank, meet allmay delay the estimated impact of CECL on regulatory capital requirementsuntil January 2022, followed by a three-year period to phase out the aggregate capital benefit provided during the initial two-year delay. The rule prescribes a methodology for estimating the impact of differences in credit loss allowances reflected under CECL versus under the new capital rules on a fully phased-in basis as if such requirements were effective as of December 31, 2017. The estimate is based on management’s current interpretation, expectations, and understanding ofincurred loss methodology during the new capital rules.five-year transition period. We anticipate thathave elected to use the Bank will continue to exceedfive-year transition option under the well-capitalized minimum capital requirements, and that SVB Financial will thus continue to qualify as a financial holding company.2020 CECL Transition Rule.
Capital Planning
Banking organizations must have appropriate capital planning processes, with proper oversight from the Board of Directors. Accordingly, pursuant to a separate, general supervisory letter from theThe Federal Reserve expects bank holding companies, are expectedsuch as SVB Financial, to conduct and document comprehensive capital adequacy analyses prior to the declaration of any dividends (on common stock, preferred stock, trust preferred securities or other Tier 1 capital instruments), capital redemptions or capital repurchases. Moreover, the federal banking agencies have adopted a joint agency policy statement, noting thatview the adequacy and effectiveness of a bank’s interest rate risk management process and the level of its interest rate exposures areas critical factors in the evaluation of the bank’s capital adequacy. A bank with material weaknesses in its interest rate risk management process or high levels of interest rate exposure relative to its capital will be directed by the relevant federal banking agencies to take corrective actions. Bank holding companies with $50
The Capital Simplification Rules eliminate the standalone prior approval requirement for any repurchase of common stock. In certain circumstances, repurchases of common stock may be subject to a prior approval or notice requirement under other regulations or policies of the Federal Reserve. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve. Once we exceed $100 billion or more in average total consolidated assets and are additionally subject to the SCB and CCAR framework, we will be required to submit an annual capital plan requirements underto the enhanced prudential standards. See “-Enhanced Prudential Standards-Comprehensive Capital AnalysisFederal Reserve.
If we are required to resubmit a capital plan, we must receive prior approval from the Federal Reserve for any dividend, stock repurchase or other capital distribution, other than a capital distribution on a newly issued capital instrument.
On June 25, 2020, the Federal Reserve announced that all BHCs participating in CCAR were required to update and Review” above.
resubmit their capital plans in light of the economic uncertainty surrounding the COVID-19 pandemic, and such BHCs were also generally required to suspend share repurchases and limit dividend payments.On September 30, 2020, the Federal Reserve extended these measures for the fourth quarter of 2020.The Federal Reserve announced on December 18, 2020 that it would extend the distribution limitations to the first quarter of 2021, subject to adjustment, requiring that dividend payments and share repurchases be limited to an amount not in excess of average net income over the four preceding quarters, provided that dividend payments remain limited to the amount paid in the second quarter of 2020.
Proprietary Trading and Certain Relationships with Hedge Funds and Private EquityCertain Funds
The “Volcker Rule” underVolcker Rule, set out in section 13 of the Dodd-FrankBHC Act, restricts, among other things, bank holding companies and their affiliates from engaging in proprietary trading activities of banking holding companies as well as the ability of such entities to sponsorand from sponsoring, investing in, or invest inhaving certain other relationships with certain privately offered funds, including certain venture capital, hedge funds and private equity funds. On December 10, 2013, the federal bank regulatory agencies, the SEC and the Commodity Futures Trading Commission (the “CFTC”) adopted final regulations implementing the Volcker Rule. The final regulations became effective on April 1, 2014, subject to a conformance timeline pursuant to which affected entities (referred to as “banking entities”) are required to bring their activities and investments into conformance with the prohibitions and restrictions of the Volcker Rule and the final regulations thereunder.
Subject to certain exceptions, the Volcker Rule prohibits a banking entity from engaging in “proprietary trading,” which is defined as engaging in purchases or sales of securities or certain other financial instruments, as principal, for the “trading account” of the banking entity. Certain forms of proprietary trading may qualify as “permitted activities,” and thus not be subject to the ban on proprietary trading, such as market-making related activities, risk-mitigating hedging activities, trading in U.S. government or agency obligations, or certain other U.S. state or municipal obligations, and the obligations of Fannie Mae, Freddie Mac or Ginnie Mae. Based on this definition and the exceptions provided under the final regulations, we do not believe that compliance with the Volcker Rule's proprietary trading prohibition is likely to have a material effect on our business or operations.
Additionally, subject to certain exceptions, the rule prohibits a banking entity from sponsoring or investing in “covered funds” which includes many venture capital, private equity and hedge funds. One such exception permits a banking entity to sponsor and invest in a (“covered fund that it organizes and offers to customers, provided that additional requirements are met. These permitted investments generally are limited to 3% of the total amount or number of ownership interests in each covered fund. In addition, the aggregate investments a banking entity makes in all covered funds generally are limited to 3% of the institution’s Tier 1 capital.
funds”). On June 6, 2017, we received notice that the Board of Governors of the Federal Reserve approved the Company’sour application for an extension of the permitted conformance period for the Company’sour investments in certain “illiquid” covered funds.funds ("Restricted Volcker Investments"). The approval extends the deadline by which the Company must sell, divest, restructure or otherwise conform such investmentsRestricted Volcker Investments to the provisions of the Volcker Rule until the earlier of (i) July 21, 2022 or (ii) the date by which each fund matures by its terms or is otherwise conformed to the Volcker Rule.
As of December 31, 2017,2020, we estimate that our totalthe aggregate carrying value and fair value of venture capital and private equity fund investments deemed to be prohibited covered fund interests and therefore subject to theRestricted Volcker Rule’s restrictions, had an aggregate carrying value ofInvestments was approximately $153 million (and an aggregate fair value of approximately $253 million).$230 million. These covered fund interestsinvestments are comprised of interests attributable solely to the Company in our consolidated managed funds and certain of our non-marketable securities. We expect these Restricted Volcker Investments will comply with the Volcker Rule, subject to the amended rules and amendments discussed below, before July 21, 2022 (or, if they do not comply, be disposed of prior to July 21, 2022).
In October 2019, the Volcker Rule implementing agencies, including the Federal Reserve (the “Agencies”), finalized rules amending the regulations implementing the Volcker Rule (the "2019 Volcker Amendments"). These amendments tailor compliance requirements based on the size of a firm’s trading assets and liabilities and eliminate or adjust certain requirements to clarify permitted and prohibited activities. The 2019 Volcker Amendments went into effect on January 1, 2020, and became mandatory on January 1, 2021. Additionally, on June 25, 2020, the Agencies approved further amendments (the “2020 Volcker Amendments”) effective October 1, 2020, which provide for, among other things, the adoption of new exclusions from the definition of “covered fund” for venture capital funds and credit funds that meet certain criteria. We believe that a substantial portion of our Restricted Volcker Investments will qualify for these new exclusions, or will have commenced or completed a liquidation or dissolution process, and thus, would not be required to be disposed of or otherwise conformed under the Volcker Rule requirements. We continue to assess the financialextent of the impact of these rulesthe 2019 Volcker Amendments and the 2020 Volcker Amendments, on our fund investments as well as the impact of other Volcker Rule restrictions onand other areas of our business.
The Volcker Rule also requires banking entities to design and implement a compliance program reasonably designed to ensure and monitor compliance with the Volcker Rule. If SVB Financial reports total consolidated assets as of $50 billion or more as of the previous calendar year-end, it will become subject to the Volcker Rule’s enhanced compliance program requirements, which, among other things, require an annual attestation from the chief executive officer regarding the design and effectiveness of the compliance program.
Prompt Corrective Action and Other General Enforcement Authority
State and federal banking agencies possess broad powers to take corrective and other supervisory action against an insured bank and its holding company. The FDIA requires each federal banking agency to take prompt corrective action to resolve the problemsFor example, an IDI is placed into one of insured depository institutions, including those that fall below one or more prescribed minimum capital ratios. The law requires each federal banking agency to promulgate regulations defining five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. At each successive lower capital category, an insured depository institutionIDI is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Further, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized or undercapitalized may
be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or practice warrants such treatment.
Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of severity by the federal regulators for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation or condition imposed in writing by any applicable agency or term of a written agreement with that agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; the termination of the bank’s deposit insurance; the appointment of a conservator or receiver for the bank; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
Safety and Soundness Guidelines
Banking regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest-rate exposure; (v) asset growth and asset quality; and (vi) compensation, fees and benefits. In addition, the bank regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. The Federal Reserve’s enhanced prudential standards require publicly traded bank holding companies with total consolidated assets of $10 billion or more to establish and maintain risk management committees for their boards of directors to oversee the bank holding companies’ risk management frameworks. In January 2015, we formed a risk committee of our Board of Directors. Bank holding companies with total consolidated assets of $50 billion and greater are subject to more stringent board risk committee and risk management requirements, including liquidity risk requirements.
Restrictions on Dividends
Dividends from the Bank constitute one of the primary sources of cash for SVB Financial. The Bank is subject to various federal and state statutory and regulatory restrictions on its ability to pay dividends, including applicable provisions of the California Financial Code and the federal prompt corrective action regulations. For example, the Bank may not, without approval of the Federal Reserve, declare or pay a dividend to SVB Financial if the total of all dividends declared in a calendar year exceeds the total of (a) the Bank’s net income for that year and (b) its retained net income for the preceding two calendar years, less any required transfers to additional paid-in capital or to a fund for the retirement of preferred stock. In addition, the banking agencies have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Further, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to itstheir banking subsidiaries. Additionally, in consideration ofUnder the recent financial and economic environment,prompt corrective action regulations, the Federal Reserve has indicated thatmay prohibit a bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
Transactions with Affiliates
Transactions between the Bank and its operating subsidiaries (such as SVB Securities andAsset Management or SVB Asset Management)Wealth Advisory), on the one hand, and the Bank’s affiliates (such as SVB Financial, SVB AnalyticsLeerink or an entity affiliated with our SVB Capital business), on the other, are subject to restrictions imposed by federalstatutory and state law,regulatory restrictions designed to protectlimit the risks to the Bank and its subsidiaries, from engaging in unfavorable behavior with their affiliates. The Dodd-Frank Act further extended the definition of an “affiliate” to include any investment fund to which the Bank or an affiliate serves as an investment adviser. The Federal Reserve’s Regulation W, implements these restrictions on affiliate transactionsincluding Sections 23A and prevents SVB Financial and other affiliates from borrowing from, or entering into other credit transactions with, the Bank or its operating subsidiaries unless the loans or other credit transactions are secured by specified amounts of collateral, and also require that the Bank enter into such transaction on terms no less favorable to the Bank than the terms of an arms’ length transaction with an unaffiliated party. Moreover, all loans and credit transactions and other “covered transactions” by the Bank and its operating subsidiaries with any one affiliate are limited, in the aggregate, to 10%23B of the Bank’s capitalFederal Reserve Act and surplus; and all loans and credit transactions and other “covered transactions” by the Bank and its operating subsidiaries with all affiliates are limited, in the aggregate, to 20% of the Bank’s capital and surplus. For this purpose, a “covered transaction” generally includes, among other things, a loan or extension of credit to an affiliate, including a purchase of assets subject to an agreement to repurchase; a purchase of or investment in securities issued by an
affiliate; the acceptance of a security issued by an affiliate as collateral for an extension of credit to any borrower; the borrowing or lending of securities where the Bank has credit exposure to the affiliate; the acceptance of “other debt obligations” of an affiliate as collateral for a loan to a third party; any derivative transaction that causes the Bank to have credit exposure to an affiliate; and the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. The Dodd-Frank Act expanded the transactions for which collateral is required to be maintained, and for all such transactions, it requires collateral to be maintained at all times. In addition, the Volcker Rule under the Dodd-Frank Act established certain prohibitions, restrictions and requirements (known as “Super 23A” and “Super 23B”) on covered transactions and other arrangements between a covered fund and a banking entity that serves as an investment manager, investment adviser, organizer and offeror, or sponsor with respect to that covered fund (and certain other covered funds), regardless whether the banking entity has an ownership interest in the fund.
Loans to Insiders
Extensions of credit by the Bank to insiders of both the Bank and SVB Financial are subject to prohibitions and other restrictions imposed by the Federal Reserve’s Regulation O. For purposesW. These restrictions include quantitative and qualitative limits on the amounts and types of these limits, “insiders” include directors, executive officers and principal stockholders of the Bank or SVB Financial and their related interests. The term “related interest” means a company controlled by a director, executive officer or principal stockholder of the Bank or SVB Financial. The Bank may not extend credit to an insider of the Bank or SVB Financial unless the loan is made on substantially the same terms as, and subject to credit underwriting procedures that are no less stringent than, those prevailing at the time for comparable transactions with non-insiders. In addition, the Bank may not extend credit to insiders in an amount, when aggregated with all other extensions of credit, that is greater than $500,000 without prior approval from the Bank’s Board of Directors (with any interested person abstaining from participating directly or indirectly in the voting). California law, the federal regulations and the Dodd-Frank Act place additional restrictions on loans to insiders, and generally prohibit loans to executive officers other than for certain specified purposes. The Bank is required to maintain records regarding insiders andaffiliates, including extensions of credit to them.
affiliates, investments in the stock or securities of affiliates, purchases of assets from affiliates and certain other transactions with affiliates. In addition, credit transactions with affiliates must be collateralized, and transactions with affiliates must be on market terms or better for the Bank.
Premiums for Deposit Insurance
The FDIC insures our customer deposits through the Deposit Insurance Fund (the “DIF”)DIF up to prescribed limits for each depositor. Due to higher levels of bank failures during the 2008 economic recession, the FDIC’s resolution costs increased, which depleted the DIF. In order to restore the DIF to its statutorily mandated minimum of 1.35% of total deposits by September 30, 2020, the FDIC has increased deposit insurance premium rates. Insured institutions with assets of $10 billion or more, such as the Bank, are responsible for funding the increase, with assessment rates based on a risk-based scorecard calculation provided by the FDIC. In addition, the FDIC retains the authority to further increase assessment rates and theThe FDIC has established a higher reserve ratio of 2% as a long-term goal, which goes beyond what is required by statute. Continued increasesthe statutorily mandated minimum of 1.35%, and may increase assessment rates in our FDIC insurance premiums could have an adverse effect on the Bank’s results of operations. For the years ended December 31, 2017 and 2016, we recorded $35.1 million and $25.5 million, respectively, in FDIC assessments expense.
future accordingly.
Consumer Regulations
The Bank is subject to many federal consumer protection statutes and regulations, such as the CRA, the Equal Credit Opportunity Act (Regulation B), the Electronic Fund Transfer Act (Regulation E), the Truth in Lending Act (Regulation Z), the National Flood Insurance Act, the Fair Credit Reporting Act as(as amended by the Fair and Accurate Credit Transaction ActAct) and various federal and state privacy protection laws. In addition, the CFPB has the authority to conduct examinations for all depository institutions with total assets of $10 billion or more, which includes the Bank. The CFPB’s mandate is to promulgate consumer regulations and ensure that consumer financial practices at large banks, such as the Bank, comply with consumer financial protection legal requirements. The CFPB’s authority includes the ability to examine all subsidiaries and affiliates of the Bank as well. Penalties for violating these laws could subject the Bank to lawsuits and could also result in administrative penalties, including, civil monetary penalties, remediation for affected consumers and reimbursements and orders to halt expansion/existing activities. The CFPB has broad authority to institute various enforcement actions for violation of these laws, including investigations, civil actions, cease and desist proceedings and the ability to refer criminal findings to the Department of Justice. The Bank and SVB Financial are also subject to federal and state laws prohibiting unfair, deceptive, abusive, corrupt or fraudulent business practices, untrue or misleading advertising and unfair competition.
As a depository institution with more than $10 billion in total assets, the Bank is subject to examination by the CFPB. The CFPB’s mandate is to promulgate consumer regulations and ensure that consumer financial practices at large banks, such as the Bank, comply with federal consumer financial protection requirements. The CFPB has broad enforcement authority, including investigations, civil actions, cease and desist proceedings and the ability to refer criminal findings to the Department of Justice. Penalties for violating these laws could include civil monetary penalties, remediation for affected consumers and reimbursements and orders to halt expansion or existing activities.
State and federal banking agencies and other such enforcement authorities have increased efforts to aggressively enforce consumer protection laws, implement regulations and take action against non-compliant parties.
Privacy and Cybersecurity
Data privacy and data protection are areas of increasing legislative focus. For example, the California Consumer Protection Act of 2018 (the “CCPA”), which became effective on January 1, 2020, applies to for-profit businesses that conduct business in California and meet certain revenue or data collection thresholds. The adventCCPA gives consumers the right to request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request deletion of personal information (subject to certain exceptions), the right to opt out of the CFPB further heightens oversight and review of compliance with consumer protection laws and regulations. Due to these heightened regulatory concerns, including increased enforcementsale of the CRAconsumer’s personal information, and the right not to be discriminated against for exercising these rights. The CCPA contains several exemptions, including an exemption applicable to information that is collected, processed, sold or disclosed pursuant to federal law. Such requirements will be further expanded under the California Privacy Rights Act (“CPRA”) once it goes into effect on January 1, 2023. Similar laws have been and may be adopted by other states where we do business, and the federal government may also pass data privacy or data protection legislation. In addition, in the European Union, privacy law is governed by the General Data Protection Regulation (the “GDPR”). The GDPR established enhanced compliance obligations and increased penalties for non-compliance compared to the prior law governing data privacy in the European Union.
In 2016, the federal banking agencies issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and broad consumer protection powersinterconnected entities under their supervision and authorityhelp reduce the potential impact of a cyber incident on the CFPB,financial system. The proposed standards focus on five areas: (1) cyber risk governance; (2) cyber risk management; (3) internal dependency management; (4) external dependency management; and (5) incident response, cyber resilience and situational awareness. As of December 2020, the Bankfederal banking agencies have not issued further guidance on this issue.
In December 2020, the federal banking agencies released a notice of proposed rulemaking regarding notification requirements for banking organizations and its affiliates may incur additional compliance costs orbank service providers related to significant cybersecurity incidents. Under the
proposal, among other requirements, a banking organization would be required to expend additional funds for investmentsnotify its primary banking regulator within 36 hours of a “computer-security incident” that it believes could impact its ability to carry out banking operations or deliver services to a material portion of its customer base, result in their local community.
a material loss of revenue, profit, or franchise value, or impact the stability of the U.S. financial sector.
Anti-Money Laundering, Sanctions and Anti-Corruption Regulations
TheU.S. anti-money laundering laws and regulations, including the U.S. Bank Secrecy Act (“BSA”) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) and itstheir corresponding regulations, substantially broadened the scope of U.S. anti-money laundering laws and regulations as set forth in the U.S. Bank Secrecy Act ("BSA"), by requiring insured depository institutions,require IDIs, broker-dealers, and certain other financial institutions to have policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The USA PATRIOT Act and its regulations also provide for information sharing, subject to certain conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. FederalAdditionally, federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to consider the effectiveness of the anti-money laundering activities of the applicants. Material deficiencies in
In January 2021, the Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering laws. Among other things, the AMLA codifies a risk-based approach to anti-money laundering compliance and non-compliance with related requirements such asfor financial institutions; requires the development of standards by the U.S. economicDepartment of the Treasury for evaluating technology and tradeinternal processes for BSA compliance; and expands enforcement- and investigation-related authority, including a significant expansion in the available sanctions regimes, can resultfor certain BSA violations. Many of the statutory provisions in public enforcement actions by the bank regulatory agenciesAMLA will require additional rulemakings, reports and other government agencies, including the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also have serious reputational consequences for SVB Financialmeasures, and the Bank.
impact of the AMLA will depend on, among other things, rulemaking and implementation guidance.
In addition, towe must comply with economic sanctions administered by the anti-money laundering provisionsU.S. Treasury's Office of the BSAForeign Assets Control and USA PATRIOT Act, wetargeted against designated foreign countries, nationals and others. We are also subject to anti-corruption laws and regulations both in the United States and internationally, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, which impose strict prohibitions on payments and hiring practices with regard to government officials and employees.
Material deficiencies in compliance with anti-money laundering and anti-corruption rules and sanctions regimes can result in public enforcement actions by the bank regulatory agencies and other government agencies, including civil money penalties and supervisory restrictions on growth and expansion.
Regulation of Certain Subsidiaries and Regulatory Affiliates
SVB Securities isLeerink LLC, a subsidiary of SVB Leerink, and SVB Wealth Advisory, Inc., a subsidiary of the Bank, are each registered as a broker-dealerbroker-dealers with the SEC and a memberare members of FINRA, and accordingly, isare subject to regulation by both agencies. SVB Securities isThey are also a membermembers of the Securities Investor Protection Corporation. As a broker-dealer, SVB Securities must comply with a variety of regulationsAsset Management, SVB Wealth Advisory and funds management entities associated with its business lines, including (i) rules that govern the registration and examinationSVB Leerink Capital LLC, a subsidiary of SVB SecuritiesLeerink, are registered with the SEC under the Investment Advisers Act of 1940, as amended, and are subject to its employees, (ii) substantive requirementscorresponding regulations.
SVB Leerink LLC and prohibitions concerning its relationships with its customers and counterparties, (iii) anti-fraud provisions and (iv) requirements to develop and maintain internal compliance and supervisory programs. SVB Securities alsoWealth Advisory must comply with the financial responsibility rules governing broker-dealers, including Rule 15c3-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), which is designed to measure the general financial condition and liquidity of a broker-dealer and seek to ensure its financial stability in light of its activities. Under this rule, SVB SecuritiesIt is required to maintain minimum net capital calculated in accordance with a specified formula in order to help meet its continuing commitments to customers and others. Under certain circumstances, this rulelevels, which could limit the ability of the Bankfor capital to withdraw capital from SVB Securitiesbe withdrawn or require a capital infusion to support growth in the business or new or ongoing activities. SVB Asset Management and SVB Wealth Advisory are registered with
In June 2019, the SEC underadopted a rule that requires broker-dealers to act in the Investment Advisers Actbest interest of 1940, as amended,their customers and are subject toissued an interpretation clarifying the its rules and regulations. In addition, following completionviews of various studies onthe existing fiduciary duty owed by investment advisers and broker-dealers required by the Dodd-Frank Act,to their clients. Additionally, the SEC has, among other things, recommended to Congressadopted a rule that it consider various means to enhance the SEC’s examination authority overrequires broker-dealers and investment advisers whichto provide a standardized, short-form disclosure highlighting services offered, applicable standards of conduct, fees and costs, the differences between brokerage and advisory services, and any conflicts of interest. Several states have also proposed uniform fiduciary duty standards for broker-dealers and advisers.
Further, the Company has oversight responsibilities with respect to the regulatory compliance of certain unconsolidated subsidiaries and affiliates, such as Vouch Inc. and Bolster Networks, Inc., that the Company may have an impact on SVB Asset Management and SVB Wealth Advisory that we cannot currently assess.be deemed to control for purposes of the BHC Act.
Securities Registration and Listing
SVB Financial’s common stock, is5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), and depositary shares, each representing a 1/40th interest in a share of Series A Preferred Stock (“Series A Depositary Shares”), as well as Series B Non-Cumulative Perpetual Preferred Stock (“Series B Preferred Stock”), and depositary shares, each representing a 1/100th interest in a share of Series B Preferred Stock (“Series B Depositary Shares”), are registered under the ExchangeSecurities Act of 1933, as amended. SVB Financial’s common stock and Series A Depositary Shares are
also listed on the NASDAQNasdaq Global Select Market. As such, SVB Financial is subject to the SEC’s information, proxy solicitation, insider trading, corporate governance, and other public company requirements and restrictions of the Exchange Act, as well as theNasdaq’s Marketplace Rules and other requirements promulgated by Nasdaq Stock Market, LLC.requirements.
As a public company, SVB Financial is also subject to the accounting oversight and corporate governance requirements of the Sarbanes−OxleySarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), including, among other things, required executive certification of financial presentations, increased requirements for board audit committees and their members, and enhanced requirements relating to disclosure controls and procedures and internal controlcontrols over financial reporting.
International Regulation
Our international-based subsidiaries and offices and global activities, including our banking branchbranches in the United Kingdom, Germany, Canada and the Cayman Islands as well as our joint venture bank in China, are subject to the respective laws and regulations of those countries and the regions in which they operate. This includes laws and regulations promulgated by, but not limited to, the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom, the Office of the Superintendent of Financial Institutions in Canada, the German Federal Financial Supervisory Authority (BaFin), the China Banking and Insurance Regulatory Commission, the Cayman Islands Monetary Authority and the Hong Kong Monetary Authority. Pursuant to UK regulatory requirements, Silicon Valley Bank will need to restructure its UK branch into a full-service bank subsidiary when the branch reaches £100 million of insured small business deposits, which we currently expect will be sometime in 2022.
To the extent we are able to commence operations as anticipated in Canada and Germany or in any other international market, we will also become subject to the regulatory regimes of those jurisdictions. In jurisdictions where we do not currently have certain licenses or other regulatory authorizations, our activities may be limited. Moreover, promulgation by standard-setting bodies that are charged with the development of international regulatory frameworks, such as the Basel Committee, can affect the Bank and SVB Financial globally as national regulators implement the frameworks in local jurisdictions.
Available Information
We make available free of charge through our Internet website, http://www.svb.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The contents of our website are not incorporated herein by reference and the website address provided is intended to be an inactive textual reference only.
ITEM 1A.RISK FACTORS
Our business faces significantmaterial risks, including credit, market and liquidity, operational, legal and regulatory and strategic and reputational risks. The factors described below are not intended to serve as a comprehensive listing of the risks we face and are generally applicable to more than one of the following categories of risks.face. Additional risks and uncertainties that we have not identified as material, or of which we currently are not aware, may also impair our business operations. If any of the events or circumstances described in the following factors occurs, our business, financial condition and/or results of operations could be materially and adversely affected.
Summary of Risk Factors
Credit Risks
•Because of the credit profile of our loan portfolio, our levels of nonperforming assets and charge-offs can be volatile. Wevolatile, and we may need to make material provisions for loancredit losses in any period, which could reduce net income, increase net losses, or otherwise adversely affect our financial condition in that period.
Our loan portfolio has a credit profile different from that of most other banking companies. The credit profiles of our clients vary across our loan portfolio, based on the nature of the lending we do for different market segments. In our portfolios for early-stage and mid-stage privately-held companies, many of our loans are made to companies with modest or negative cash flows and/or no established record of profitable operations, primarily within the technology and life science and healthcare industries. Consequently, repayment of these loans is often dependent upon receipt by our borrowers of additional financing from venture capitalists or others, or in some cases, a successful sale to a third party, public offering or other form of liquidity or "exit" event. In recent periods, liquidity levels have been healthy and have improved. Many companies have been able to obtain liquidity through venture capital-backed financing as well as various other exit opportunities at relatively high valuations. However, there can be no assurance that they will be able to continue to obtain funding at current valuation levels, if at all. If current economic conditions weaken or do not continue to improve, such activities may slow down, or valuations may drop in a meaningful manner, which may impact the financial health of our client companies. In such case, investors may provide financing in a more selective manner, at lower levels, and/or on less favorable terms, if at all, any of which may have an adverse effect on our borrowers' ability to repay their loans to us. In addition, because of the intense competition and rapid technological change that characterizes the technology, and life science and healthcare industry sectors in which most of our borrowers reside, as well as periodic volatility in the market prices for their securities, a borrower’s financial position can deteriorate rapidly. Collateral for many of our loans often includes intellectual property and other intangible assets, which are difficult to value and may not be readily salable in the case of default. As a result, even if a loan is secured, we may not be able to fully recover the amounts owed to us, if at all.
In addition, a meaningful portion of our loan portfolio is comprised of our larger loans, which could increase the impact on us of any single borrower default. As of December 31, 2017, gross loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $10.5 billion, or 45.1 percent, of our portfolio. These larger loans have over time represented, and continue to represent, an increasingly greater portion of our total loan portfolio. They include capital call lines of credit to our private equity and venture capital clients, as well as other loans made to our later-stage and larger corporate clients, and may be made to companies with greater levels of debt relative to their equity, balance sheet liquidity, or cash flow. Additionally, we have continued our efforts to grow our loan portfolio by agenting or arranging larger syndicated credit facilities and participating in larger syndicates agented by other financial institutions as well as making sponsor-led buyout loans, which are leveraged buyout or recapitalization financings typically sponsored by our private equity clients. In those arrangements where we do not act as the lead syndicate agent, our control or decision-making ability over the credit facility is typically limited to our participation interest.
Further, the repayment of financing arrangements we enter into with our clients may be dependent on the financial condition or ability of third parties to meet their payment obligations to our clients. For example, we enter into formula-based financing arrangements that are secured by our clients’ accounts receivable from third parties with whom they do business. We also make loans secured by letters of credit issued by other third party banks and enter into letters of credit discounting arrangements, the repayment of which may be dependent on the reimbursement by third party banks. We also extend recurring revenue-based lines of credit, where repayment may be dependent on borrowers’ revenues from third parties. Further, in our loan portfolio of private equity and venture capital firm clients, many of our clients have lines of credit, the repayment of which are dependent
on the payment of capital calls or management fees by the underlying limited partner investors in the funds managed by these firms. In recent periods, we have increased the levels of these capital call lines of credit. These third parties may not be able to meet their financial obligations to our clients or to us which, ultimately, could have an adverse impact on us.
We also lend to private equity and venture capital professionals primarily through SVB Private Bank. These individual clients may face difficulties meeting their financial commitments, especially during a challenging economic environment, and may be unable to repay their loans. In certain instances, we may also relax loan covenants and conditions or extend loan terms to borrowers that are experiencing financial difficulties. While such determinations are based on an assessment of various factors including access to additional capital in the near term, there can be no assurance that such continued support will result in any borrower meeting his or her financial commitments. In addition, we lend to premium wineries and vineyards through SVB Wine. Repayment of loans made to these clients may be dependent on overall wine demand and sales, or other sources of financing or income which may be adversely affected by a challenging economic environment, as well as overall grape supply which may be adversely affected by poor weather, heavy rains, flooding, droughts, fires, wildfires, earthquakes or other natural conditions.
Based on the credit profile of our overall loan portfolio, our level of nonperforming loans, loan charge-offs and allowance for loan losses can be volatile and can vary materially from period to period. Increases in our level of nonperforming loans or loan charge-offs may require us to increase our provision for loan losses in any period, which could reduce our net income or cause net losses in that period. Additionally, such increases in our level of nonperforming loans or loan charge-offs may also have an adverse effect on our capital ratios, credit ratings and market perceptions of us. See “Loans” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Financial Condition” under Part II, Item 7 of this report.
•Our allowance for loancredit losses is determined based upon both objective and subjective factors, and may not be adequate to absorb loanany actual credit losses.
As a lender, we face the risk that our borrower clients will fail to pay their loans when due. If borrower defaults cause large aggregate losses, it could have a material adverse effect on our business, results of operations or financial condition. We reserve for such losses by establishing an allowance for loan losses, the increase of which results in a charge to our earnings as a provision for loan losses. Although we have established an evaluation process designed to determine the adequacy of our allowance for loan losses that uses historical and other objective information, the classification of loans and the forecasts and establishment of loan losses are also dependent upon the subjective experience and judgment of our management. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience or are otherwise inconsistent with our credit quality assessments. Moreover, banking regulators, as part of their supervisory function, periodically review our methodology, models and the underlying assumptions, estimates and assessments we make in determining the adequacy of our allowance for loan losses. These regulators may conclude that changes are necessary, which could impact our overall credit portfolio. Such changes could result in, among other things, modifications to our methodology or models, reclassification or downgrades of our loans, increases in our allowance for loan losses or other credit costs, imposition of new or more stringent concentration limits, restrictions in our lending activities and/or recognition of further losses. There can be no assurance that our allowance for loan losses will be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition or results of operations.
•The borrowing needs of our clients have been and may continue to be unpredictable, especially during a challenging economic environment. We may not be able to meet our unfunded credit commitments, or adequately reserve for losses, associated with our unfunded credit commitments, which could have a material adverse effect on our business, financial condition, results of operations or reputation.effect.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our clients under these credit commitments have historically been lower than the contractual amount of the commitments. As a result, we typically have a substantial amount of total unfunded credit commitments reflected off our balance sheet and a significant portion of these commitments ultimately expire without being drawn upon. See Note 19—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details. However, the actual borrowing needs of our clients may exceed our expected funding requirements. For example, our client companies may be more dependent on our credit commitments in a challenging economic environment due to the lack of available credit elsewhere, the increasing costs of credit through other channels, or the limited availability of financings from private equity or venture capital firms. In addition, limited partner investors of our private equity and venture capital fund clients may fail to meet their underlying investment commitments due to liquidity or other financing difficulties, which may impact our clients’ borrowing needs. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our clients may have a material adverse effect on our business, financial condition, results of operations or reputation.
Further, although we have established a reserve for losses associated with our unfunded credit commitments, the level of the reserve is determined by a methodology similar to that used to establish our allowance for loan losses in our funded loan portfolio. While the reserve is susceptible to significant changes, it is primarily based on credit commitments outstanding less the amounts that have been funded, the amount of the unfunded portion that we expect to be utilized in the future, credit quality of the loan credit commitments, and management’s estimates and judgment. There can be no assurance that our allowance for unfunded credit commitments will be adequate to provide for actual losses associated with our unfunded credit commitments. An increase in the allowance for unfunded credit commitments in any period may result in a charge to our earnings, which could reduce our net income or increase net losses in that period.
Market and Liquidity Risks
Our current level of interest rate spread may decline in the future. Any material reduction in our interest rate spread, caused by sustained periods of low market interest rates or changes in our clients' preferences for interest-bearing deposit products in periods of rising interest rates, could have a material adverse effect on our business, results of operations or financial condition.
A significant portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on interest-bearing liabilities such as deposits and internal borrowings, and the interest rates and fees we receive on our interest-earning assets such as loans extended to our clients, securities held in our investment portfolio and excess cash held to manage short-term liquidity. •Our interest rate spread can be affected by the mix of the types of loans, investment securities, depositshas and other liabilities on our balance sheet, as well as a variety of external factors beyond our control that affect interest rate levels, such as competition, inflation, recession, global economic disruptions, unemployment and the fiscal and monetary policies of various governmental bodies. For example, changes in key variable market interest rates, such as the Federal Funds, National Prime, the London Interbank Offered Rate (“LIBOR”) or Treasury rates, generally impact our interest rate spread. While changes in interest rates do not generally produce equivalent changesmay continue to decline in the revenues earned from our interest-earning assets and the expenses associated with our interest-bearing liabilities, increases in market interest rates are nevertheless likely to cause our interest rate spread to increase. Conversely, if interest rates decline, our interest rate spread will likely decline. In response to the last global economic recession, the U.S. Federal Reserve and other central banking institutions took monetary policy actions, including the utilization of quantitative easing and created and maintained a low interest rate environment. Over the last few years, interest rates have increased. Since December 2015, the Federal Reserve has raised interest rates five times and may institute further changes in the future. Increases, or sustained periods of increases, in interest rates may result in a change in the mix of non-interest and interest bearing accounts, and the level of off-balance sheet market-based investment preferred by our clients, which may also impact our interest rate spread. If interest rates decline or do not continue to rise, low rates could constrain our interest rate spread and may adversely affect our business forecasts. In addition, changes in the method of determining LIBOR or other reference rates, or uncertainty related to such potential changes, may adversely affect the value of reference rate-linked debt securities that we hold or issue, which could further impact our interest rate spread. Any material reduction in our interest rate spread could have a material adverse effect on our business, results of operations or financial conditions.condition.
•Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business, both at the SVB Financial and the Bank level. We require sufficient liquidity to meet our expected financial obligations, as well as unexpected requirements stemming from client activity and market changes. Primary liquidity resources for SVB Financial include cash flow from investments and interest in financial assets held by operating subsidiaries other than the Bank; to the extent declared, dividends from the Bank, its main operating subsidiary; and as needed, periodic capital market transactions offering debt and equity instruments in the public and private markets. The primary source
Table of liquidity for the Bank is client deposits. When needed, wholesale borrowing capacity in the form of short- and long-term borrowings secured by our portfolio of high quality investment securities, long-term capital market debt issuances and unsecured overnight funding channels available to us in the Federal Funds market supplement our liquidity. An inability to maintain or raise funds through these sources could have a substantial negative effect, individually or collectively, on SVB Financial and the Bank's liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. For example, factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, a reduction in our credit rating, any damage to our reputation or any other decrease in depositor or investor confidence in our creditworthiness and business. Our access to liquidity could also be impaired by factors that are not specific to us, such as severe volatility or disruption of the financial markets or negative views and expectations about prospects for the financial services industry as a whole. Any such event or failure to manage our liquidity effectively could affect our competitive position, increase our borrowing costs and the interest rates we pay on deposits, limit our access to the capital markets and have a material adverse effect on our financial condition.Contents
•Our equity warrant assets, venture capital and private equity fund investments and direct equity investment portfolio gains depend upon the performance of our portfolio investments and the general condition of the public and private equity and merger and acquisitionM&A markets which are uncertain and may vary materially by period.
In connection with negotiated credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science and healthcare industries subject to applicable regulatory limits, we have also made investments through SVB Financial and our SVB Capital family of funds in venture capital funds and direct investments in companies, many of which are required to be carried at fair value or are impacted by changes in fair value. The fair value of these warrants and investments are reflected in our financial statements and are adjusted on a quarterly basis. Fair value changes are generally recorded as unrealized gains or losses through consolidated net income. However, the timing and amount of changes in fair value, if any, of these financial instruments depend on factors beyond our control, including the perceived and actual performance of the companies or funds in which we invest, fluctuations•Changes in the market prices of the preferred or common stock of the portfolio companies, the timing of our receipt of relevant financial information from these companies, market volatility and interest rate factors and legal and contractual restrictions. Moreover, the timing and amount of our realization of actual net proceeds, if any, from our disposition of these financial instruments also often depend on factors beyond our control. In addition to those mentioned above, such factors include the level of public offering and merger and acquisition or other exit activity, legal and contractual restrictions on our ability to sell our equity positions (including the expiration of any “lock-up” agreements) and the timing of any actual dispositions. Because of the inherent variability of these financial instruments and the markets in which they are bought and sold, their fair market value might increase or decrease materially from period to period, and the net proceeds ultimately realized upon disposition might be materially different than the then-current recorded fair market value.
In addition, depending on the fair value of these warrants and direct equity investments, a meaningful portion of the aggregate fair value of our total warrant and direct equity investment portfolios may, from time to time, be concentrated in a limited number of warrants and direct equity investments. Valuation changes in one or more of these warrants or direct equity investments may have a material impact on the valuation of our total investment portfolio. We cannot predict future realized or unrealized gains or losses, and any such gains or losses are likely to vary materially from period to period. See Note 13—“Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details.
Increase in public equity offerings, mergers and acquisitionsM&A or a slowdown in private equity or venture capital investment levels may reduceaffect the borrowing needs of our clients for investment banking or M&A advisory services and lending products, which could adversely affect our business, results of operations or financial condition.
While an active market for public equity offerings, financings, and merger and acquisition activity generally has positive implications for our business, one negative consequence is that our clients may pay off or reduce their loans with us if they complete a public equity offering, are acquired by or merge with another entity or otherwise receive a significant equity investment. Moreover, our capital call lines of credit are typically utilized by our private equity and venture capital fund clients to make investments prior to receipt of capital called from their respective limited partners. A slowdown in overall private equity or venture capital investment levels may reduce the need for our clients to borrow from our capital call lines of credit. Any significant reduction in the outstanding amounts of our loans or under our lines of credit could have a material adverse effect on our business, results of operations or financial condition.
Operational Risks
If we fail to retain our key employees or recruit new employees, our growth•Our business, financial condition, liquidity, capital and results of operations couldhave been, and will likely continue to be, adversely affected.affected by the COVID-19 pandemic.
We rely on key personnel, including a substantial number of employees who have technical expertise in their subject matter area and a strong network of relationships with individuals and institutions in the markets we serve. In addition, as we expand in international markets, we will need to hire local personnel within those markets. If we were to have less success in recruiting and retaining these employees than our competitors, for reasons including domestic or foreign regulatory restrictions on compensation practices or the availability of more attractive opportunities elsewhere, our growth and results of operations could be adversely affected.
Moreover, equity awards are an important component of our compensation program, especially for our executive officers and other members of senior management. The extent of shares available for grant in connection with such equity awards pursuant to our incentive compensation plans is generally subject to stockholder approval. Our grants are also subject to our
internal equity burn rate limit. If we do not have sufficient shares to grant to existing or new employees, there could be an adverse effect on our recruiting and retention efforts, which could impact our growth and results of operations.
•The occurrence of fraudulent activity, breaches of our information security or cybersecurity-related incidents could have a material adverse effect on our business, financial condition or results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that could be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, malfeasance, and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us, our clients or third party partners, denial or degradation of service attacks, malware, or other cyber-attacks. Sources of attacks vary and may include hackers, disgruntled employees or vendors, organized crime, terrorists, foreign governments, corporate espionage and activists. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we remain at risk for attempted electronic fraudulent activity, as well as attempts at security breaches and cybersecurity-related incidents. These attempts can be, and in some cases have been, directed at us (including our employees, executives or directors), as well as our vendors or other third party partners. Moreover, in recent periods, large corporations (including financial institutions and retail companies), as well as U.S. governmental agencies, have suffered significant data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us, which could subject us to potential liability. Additionally, state-sponsored or terrorist-sponsored efforts to hack or disable information technology systems increases risks, since the motivation may be for geopolitical as much as for financial gain.
Information pertaining to us and our clients is maintained, and transactions are executed, on our networks and systems, as well as those of our clients and certain of our third-party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain our clients' confidence. Breaches of information security also may occur, and in infrequent cases have occurred, through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information, including employees and third-party contractors. In addition, SVB provides card transaction processing services to some merchant customers under agreements we have with those merchants and/or with the payment networks. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data security breach. Furthermore, SVB's cardholders use their debit and credit cards to make purchases from third parties or through third-party processing services. As such, SVB is subject to risk from data breaches of such third-party's information systems or their payment processors, for reasons including unauthorized card use. Such a data security breach could compromise SVB's account information, cause losses on card accounts and increase litigation costs. SVB may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers' card accounts, as well as for other costs related to data security breaches, such as replacing cards associated with compromised card accounts.
We also offer certain services that allow non-accountholders to process payments through SVB’s systems, as well as financial analytics services. In the course of providing those services, we may obtain sensitive data about customers who do not otherwise hold accounts with us, including information regarding accounts held at other institutions, as well as profit and loss and other proprietary financial or other information regarding our customers or the non-accountholders they service. In the event of a data breach, this sensitive information may be exposed and could subject us to claims for damages.
In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. The forms, methods, and sophistication of fraud, security breaches, cyber-attacks and other similar criminal activity continue to evolve, and as we evolve and grow our business, especially in new businesses or geographies, we may be unable to foresee future risks. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, fraudulent activities, breaches of security or cyber-attacks could result in: financial losses to us or our clients; our loss of business and/or clients; loss or exposure of our confidential data or information; damage to our reputation; the incurrence of additional expenses; loss of personnel; disruption to our business; force majeure claims by us or critical suppliers; our inability to grow our
online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability --- any of which could have a material adverse effect on our business, financial condition and results of operations. Our risk mitigation strategies and internal controls, including risk assessment policies and procedures, testing, backup and redundancy systems, incident response plans, training, and authentication or encryption tools, may not be effective against defending against fraud, security breaches or cyber-attacks.
More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition or results of operations could be adversely affected.
•We face risks associated with the ability of our information technology systems and our people and processes to support our operations and future growth effectively.
Our information technology systems, people and internal business processes are critical to our operations and future growth. Our systems may be subject to service outages from time to time due to various reasons, including infrastructure failures, interruptions due to system upgrades or malware removal, employee error or malfeasance, or other force majeure-related reasons, which could cause business disruption. Additionally, our systems and processes need to be sufficiently scalable to operate effectively, and we need to have the appropriate talent to support our business. As a result, we continue to invest in technology and more automated solutions in order to optimize the efficiency of our core operational and administrative infrastructure. In the absence of having effective automated solutions, we may rely on manual processes which may be more prone to error. Moreover, as we evolve, we may further install or implement new systems and processes or otherwise replace, upgrade or make other modifications to our existing systems and processes. These changes could be costly and require significant investment in the training of our employees and other third-party partners, as well as impose substantial demands on management time. If we do not implement new initiatives or utilize new technologies effectively or in accordance with regulatory requirements, or if our people (including outsourced business partners) are not appropriately trained or developed or do not perform their functions properly, we could experience business interruptions or other system failures which, among other things, could result in inefficiencies, revenue losses, loss of clients, exposure to fraudulent activities, regulatory enforcement actions or damage to our reputation, each of which could have a material adverse effect on our business.
•Business disruptions and interruptions due to natural disasters and other external events beyond our control canhave in the past adversely affect our business, financial condition or results of operations.
Our operations can be subject to natural disasters and other external events beyond our control, such as earthquakes, fires, floods, severe weather, public health issues, power failures, telecommunication loss, major accidents, terrorist attacks, acts of war, and other natural and man-made events. For example, our corporate headquarters and some of our critical business offices are located in California, near major earthquake faults. An earthquake or other disaster could cause severe destruction, disruption or interruption to our operations or property. We and other financial institutions generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards,affected our business, financial condition or results of operations could be adversely affected in a material manner. In addition, depending on the nature and duration of the disruption or interruption, we might become vulnerable to fraud, additional expense or other losses, or to a loss of business and clients. Although we have implemented a business continuity management program that we continue to enhance on an ongoing basis, there can be no assurance that the program will adequately mitigate the risks of such business disruptions and interruptions.
Additionally, natural disasters and external events, including those occurring in and around the state of California, could affect the business and operations of our clients, which could impair their ability to pay their loans or fees when due, impair the value of collateral securing their loans, cause our clients to reduce their deposits with us, or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on our business, financial condition or results of operations. A significant portion of our client borrowers, including our premium winery and vineyard clients, our SVB Private Bank mortgage clients and other corporate clients, are located in or have officesmay do so in the state of California, which has historically experienced severe natural disasters resulting in disruptions to businesses and damage to property, including wildfires in 2017 that impacted regions of Northern California where some of our premium wine clients are located. If there is a major earthquake, flood, fire, drought or other natural disaster in California or elsewhere in the markets in which we operate, our borrowers may experience uninsured property losses or sustained disruption to business or loss that may materially impair their ability to meet the terms of their loan obligations.future.
•We face reputation and businessrisksfrom a prolonged work-from-home arrangement, as well as from our eventual implementation of a broader plan to return to the office or increase virtual working arrangements.
•We face risks due tofrom our interactions with business partners, service providers and other third parties.
We rely on third parties, both in the United States and internationally in countries such as the United Kingdom, Hong Kong, China, Israel and India, to provide services to us and our clients or otherwise act as partners in our business activities in a variety of ways, including through the provision of key components of our business infrastructure. We expect these third parties to perform services for us, fulfill their obligations to us, accurately inform us of relevant information, and conduct their activities in a manner that reflects positively on our brand and business. Although we manage exposure to such third party risk through a variety of means including the performance of due diligence and ongoing monitoring of vendor performance, there can be no assurance these efforts will be effective. Any failure of our business partners, service providers or other third parties to meet their commitments to us or to perform in accordance with our expectations could result in operational disruptions, increased expenditures, regulatory actions in which we may be held responsible for the actions of third parties, damage to our reputation and the loss of clients, which in turn could harm our business and operations, strategic growth objectives and financial performance.
•The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated because of trading, clearing, counterparty and other relationships. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, payment processors, and other institutional clients, which may result in payment obligations to us or to our clients due to products we have arranged. Many of these transactions expose us to credit and market risk that may cause our counterparty or client to default. In addition, we are exposed to market risk when the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of the secured obligation. Any losses arising from such occurrences could materially and adversely affect our business, results of operations or financial condition.
•We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other information relating to their business or financial condition. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports or other certifications of their auditors or accountants. For example, under our accounts receivable financing arrangements, we rely on information, such as invoices, contracts and other supporting documentation, provided by our clients and their account debtors to determine the amount of credit to extend. Similarly, in deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to U.S. GAAP (or other applicable accounting standards in foreign markets) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. If we rely on materially misleading, false, inaccurate or fraudulent information in evaluating the credit-worthiness or other risk-profiles of our clients or counterparties, we could be subject to loan losses, regulatory action, reputational harm or experience other adverse effects on our business, results of operations or financial condition.
Our accounting policies and methods are key to how we report our financial condition and results of operations. They require management to make judgments and estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with U.S. GAAP and reflect management's judgment of the most appropriate manner to report our financial condition or results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under an alternative policy or method.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential holders of our securities could lose confidence in our financial reporting, which would harm our business and the trading price of our securities.
Maintaining and adapting our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act and related rules and regulations of the SEC, can be costly and require significant management attention. As we continue to grow, our internal controls may become more complex and require additional resources to ensure they remain effective amidst dynamic regulatory and other guidance. Failure to maintain effective controls or implement required new or improved controls or difficulties encountered in the process may harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered accounting firm identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement costly and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also
face regulatory enforcement or other actions, including the potential delisting of our common stock from the NASDAQ Stock Market. This could have an adverse effect on our business, financial condition or results of operations, as well as the trading price of our securities, and could potentially subject us to litigation.
•We face risks associated with our current international operations and ongoing international expansion.
One important component•Our holding company, SVB Financial, relies on equity warrant assets income, investment distributions and dividends from its subsidiaries for most of our strategy isits cash revenues.
•Climate change has the potential to expand internationally. We currently have international offices in the United Kingdom, Israel, Hong Kong and China, including a joint-venture bank in China. We further plan to expand our operations and business activities in some of our current international markets, as well as expand our business beyond those markets, including Germany and Canada. Our efforts to expand our business internationally carry with them certain risks, including risks arising from the uncertainty regarding our ability to generate revenues from foreign operations; risks associated with leveraging and doing business with local business partners through joint ventures, strategic arrangements or other partnerships; and, other general operational risks. In addition, there are certain risks inherent in doing business on an international basis, including, among others, legal, regulatory and tax requirements and restrictions, uncertainties regarding liability, tariffs and other trade barriers, difficulties in staffing and managing foreign operations, the incremental requirement of management's attention and resources, differing technology standards or customer requirements, data security or transfer risks, cultural differences, political and economic risks such as uncertainty created by the approval of an advisory referendum by a majority of voters in the United Kingdom to the leave the European Union in June 2016, and financial risks, including currency and payment risks such as fluctuation in the value of the euro and Chinese yuan (renminbi). These risks could hinder our ability, or the ability of our local partners, to service our clients effectively, and adversely affect the success of our international operations, which in turn, could have a material adverse effect on our overall business, results of operations or financial condition. In addition, we face risks that our employees and affiliates may fail to comply with applicable laws and regulations governing our international operations, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, anti-corruption laws, privacy laws, economic and trade sanctions requirements and other foreign laws and regulations. Failure to comply with such laws and regulations could, among other things, result in enforcement actions and fines against us, as well as limitations on our conduct, any of which could have a material adverse effect ondisrupt our business and resultsadversely impact the operations and creditworthiness of operations.our clients.
Legal and Regulatory Risks
•We are subject to extensive regulation that could limit or restrict our activities, impose financial requirements or limitations on the conduct of our business, or result in higher costs to us, and the stringency of the regulatory framework applicable to us may increase if, and as, our balance sheet continues to grow.
•We expect to exceed $100 billion of average total consolidated assets (over four quarters) during 2021. We will therefore be subject to more stringent regulations, including certain enhanced prudential standards applicable to large bank holding companies.
•We face a risk of noncompliance and enforcement action with the Bank Secrecy Act, other anti-money laundering and anti-bribery statutes and regulations, and U.S. economic and trade sanctions.
•If we were to violate, or fail to comply with, international, federal or state laws or regulations governing financial institutions, we could be subject to disciplinary action or litigation that could have a material adverse effect on our business, financial condition, results of operations or reputation.
•Laws and regulations regarding the handling of personal data and information may impede our services or result in increased costs, legal claims or fines against us.
•Adverse results from litigation or governmental or regulatory investigations can impact our business practices and operating results.
•A failure to identify and address potential conflicts of interest could adversely affect our businesses.
•Anti-takeover provisions and federal laws may prevent a merger or acquisition that may be attractive to stockholders and/or have an adverse effect on our stock price.
Strategic, Reputational and other Risks
•Concentration of risk increases the potential for significant losses, while the establishment of limits to mitigate concentration risk increases the potential for lower revenues and slower growth.
•Decreases in the amount of equity capital available to our portfolio companies could adversely affect us.
•We face competitive pressures that could adversely affect our business, financial results, or growth.
•Our ability to maintain or increase our market share depends on our ability to attract and maintain, as well as meet the needs of, existing and future clients.
•We face risks in connection with our strategic undertakings and new business initiatives.
•Any damage to our reputation and relationships could have a material adverse effect on our business.
•An ineffective risk management framework could have a material adverse effect on our strategic planning and our ability to mitigate risks and/or losses and could have adverse regulatory consequences.
•We do not currently pay dividends on shares of our common stock and may not do so in the future.
Risks Related to Our Pending Acquisition of Boston Private
•We cannot ensure that the proposed Boston Private acquisition will be completed.
•We may fail to realize growth prospects and benefits anticipated as a result of the Boston Private acquisition.
Credit Risks
Because of the credit profile of our loan portfolio, our levels of nonperforming assets and charge-offs can be volatile. We may need to make material provisions for credit losses in any period, which could reduce net income, increase net losses or otherwise adversely affect our financial condition in that period.
Our loan portfolio has a credit profile different from that of most other banking companies. The credit profiles of our clients vary across our loan portfolio, based on the nature of our lending to different market segments.
Investor dependent loans. Many of our loans, particularly in our portfolios for early-stage and mid-stage privately held companies, are made to companies with modest or negative cash flows and/or no established record of profitable operations, primarily within the technology and life science and healthcare industries. Consequently, repayment of these loans is often dependent upon receipt by our borrowers of additional financing from venture capitalists or others, or in some cases, a successful sale to a third party, public offering or other form of liquidity or “exit” event. The effects of the COVID-19 pandemic have caused certain client valuations to drop, reduced the rate of financing or other “exit” events, which has had and may continue to have an adverse effect on certain of our clients and their ability to repay their loans to us. Although these challenges have been somewhat offset by relief programs and decreased cash utilization, many of these companies may experience difficulties sustaining their businesses over time. There can be no assurance that these companies will be able to continue to obtain funding at current valuation levels, if at all and valuations may drop in a meaningful manner, which may impact the financial health of our client companies. For example, continued volatility in financial markets may make initial public offerings less attractive to investors seeking an “exit” event. In such case, investors may provide financing in a more selective manner, at lower levels and/or on less favorable terms, if at all, any of which may have an adverse effect on our borrowers’ ability to repay their loans to us.
Larger loans; syndicated loans. In addition, a significant portion of our loan portfolio is comprised of larger loans, which could increase the impact on us of any single borrower default. As of December 31, 2020, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $26.7 billion, or 59.0 percent of our portfolio. These larger loans have represented an increasing portion of our total loan portfolio over time. They include capital call lines of credit to our private equity and venture capital clients, as well as other loans made to our later-stage and larger corporate clients, and may be made to companies with greater levels of debt relative to their equity, balance sheet liquidity or cash flow. Additionally, we have continued our efforts to grow our loan portfolio by agenting or arranging larger syndicated credit facilities and participating in larger syndicates agented by other financial institutions as well as making sponsor-led buyout loans, which are leveraged buyout or recapitalization financings typically sponsored by our private equity clients. In those arrangements where we do not act as the lead syndicate agent, our control or decision-making ability over the credit facility is typically limited to our participation interest.
Loans dependent on third parties. Further, the repayment of financing arrangements we enter into with our clients may be dependent on the financial condition or ability of third parties to meet their payment obligations to our clients. For example, we enter into formula-based financing arrangements that are secured by our clients’ accounts receivable from third parties with whom they do business. We make loans secured by letters of credit issued by third party banks and enter into letters of credit discounting arrangements, the repayment of which may be dependent on reimbursement by third party banks. We extend recurring revenue-based lines of credit, where repayment may be dependent on borrowers’ revenues from third parties. We also extend project financing to solar and other renewable energy providers, where repayment may be dependent on factors related to renewable energy generation, construction and access to take-out sources of financing, including tax credit equity. Further, in our loan portfolio of private equity and venture capital firm clients, many of our clients
have lines of credit, the repayment of which is dependent on the payment of capital calls or management fees by the underlying limited partner investors in the funds managed by these firms. These capital call lines of credit are a significant portion of our loan portfolio. (Capital call lines of credit represent more than half of our loan portfolio as of the end of 2020, and may in future periods increase). These third parties may not be able to meet their financial obligations to our clients or to us, which, ultimately, could have an adverse impact on us.
Technology, life science and healthcare industries. In addition, because of the intense competition and rapid technological change that characterize the technology, life science and healthcare industry sectors in which most of our borrowers reside, as well as periodic volatility in the market prices for securities of companies in these industries, a borrower’s financial position can deteriorate rapidly. Collateral for many of our loans often includes intellectual property and other intangible assets, which are difficult to value and may not be readily salable in the case of default. As a result, even if a loan is secured, we may not be able to fully recover the amounts owed to us, if at all.
Wineries and vineyards. In addition, we lend to premium wineries and vineyards through SVB Wine. Repayment of loans made to these clients may be dependent on overall wine demand and sales, or other sources of financing or income which may be adversely affected by a challenging economic environment, as well as the value of underlying real estate and non-real estate collateral, overall grape supply and income from tourism which may be adversely affected by climate change, poor weather, heavy rains, flooding, droughts, fires, wildfires, earthquakes or other natural or catastrophic conditions. Our premium wine industry clients have been and may continue to be impacted by the loss of restaurant and winery sales as a result of the COVID-19 pandemic as well as the impacts of the California wildfires in 2020.
Loans to individuals. We also lend to individual investors, executives, entrepreneurs or other influencers in the innovation economy, primarily through SVB Private Bank, a division of the Bank. Our lending to individuals will substantially increase upon completion of our acquisition of Boston Private. These individual clients may face difficulties meeting their financial commitments, especially in a challenging economic environment, and may be unable to repay their loans, and these difficulties may be more acute if accompanied by a decline in real estate values. In certain instances, we may also relax loan covenants and conditions or extend loan terms to individual borrowers who are experiencing financial difficulties. While such determinations are based on an assessment of various factors, including access to additional capital in the near term, there can be no assurance that such continued support will result in any individual borrower meeting his or her financial commitments.
Based on the credit profile of our overall loan portfolio, our level of nonperforming loans, loan charge-offs and allowance for credit losses can be volatile and can vary materially from period to period. Increases in our level of nonperforming loans, loan charge-offs or changes in economic forecasts may require us to increase our provision for credit losses in any period, which could reduce our net income or cause net losses in that period. For instance, duringthe first half of 2020, we significantly increased our allowance for credit losses in response to the COVID-19 pandemic and its effect on our borrowers. The continued effects of COVID-19 or other unforeseen events or future economic downturns or recessions may cause our clients to be unable to pay their loans as they come due or decrease the value of collateral, such as accounts receivable, which could cause us to materially increase our allowance for credit losses or incur credit losses in excess of the allowance in future periods. Additionally, such increases in our level of nonperforming loans, loan charge-offs or changes in economic forecasts may also have an adverse effect on our capital ratios, credit ratings and market perceptions of us. See “Loans” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Financial Condition” under Part II, Item 7 of this report.
Our allowance for credit losses is determined based upon both objective and subjective factors, and may not be adequate to absorb credit losses.
As a lender, we face the risk that our borrower clients will fail to repay their loans when due. If borrower defaults cause large aggregate losses, it could have a material adverse effect on our business, results of operations or financial condition. We reserve for such losses by establishing an allowance for credit losses, the increase of which results in a charge to our earnings as a provision for credit losses. Although we have established an evaluation process designed to determine the adequacy of our allowance for credit losses that uses historical and other objective information reflective of the classification of loans, the establishment of credit losses are also dependent on macroeconomic forecasts as well as the subjective experience and judgment of our management. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience, as has occurred during the COVID-19 pandemic, or are otherwise inconsistent with our credit quality assessments. There can be no assurance that our allowance for credit losses will be sufficient to absorb future credit losses or prevent a material adverse effect on our business, financial condition or results of operations.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13" or "CECL"), became effective January 1, 2020 and amended the incurred loss impairment methodology 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. The standard removed the previous “probable” threshold in GAAP for recognizing credit losses and instead requires companies to reflect their estimate of credit losses over the life of the financial
assets. Our ability to accurately forecast estimated credit losses depends on whether our credit loss model and related inputs correspond to actual loss rates.
Banking regulators, as part of their supervisory function, periodically review our methodology, models and the underlying assumptions, estimates and assessments we make in determining the adequacy of our allowance for credit losses. These regulators may conclude that changes are necessary, which could impact our overall credit portfolio. Such changes could result in, among other things, modifications to our methodology or models, reclassification or downgrades of our loans, increases in our allowance for credit losses or other credit costs, imposition of new or more stringent concentration limits, restrictions in our lending activities and/or recognition of further losses.
The borrowing needs of our clients have been and may continue to be unpredictable, especially during a challenging economic environment. We may not be able to meet our unfunded credit commitments, or adequately reserve for losses associated with our unfunded credit commitments, which could have a material adverse effect on our business, financial condition, results of operations or reputation.
A commitment to extend credit is a formal agreement to lend funds to a client as long as the conditions established under the agreement have been satisfied. The actual borrowing needs of our clients under these credit commitments have historically been lower than the contractual amount of the commitments. As a result, we typically have a substantial amount of total unfunded credit commitments reflected off our balance sheet, and a significant portion of these commitments ultimately expire without being drawn upon. See Note 21-“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details. However, the actual borrowing needs of our clients may exceed our expected funding requirements. For example, our client companies may be more dependent on our credit commitments in a challenging economic environment due to the lack of available credit elsewhere, the increasing costs of credit through other channels, or the limited availability of financings from private equity or venture capital firms, such as occurred at the onset of the COVID-19 pandemic, when certain clients increased utilization of credit lines to secure liquidity. In addition, limited partner investors of our private equity and venture capital fund clients may fail to meet their underlying investment commitments due to liquidity or other financing difficulties, which may impact our clients’ borrowing needs. Any failure to meet our unfunded credit commitments in accordance with the actual borrowing needs of our clients may have a material adverse effect on our business, financial condition, results of operations or reputation.
Further, although we have established a reserve for losses associated with our unfunded credit commitments, the level of the reserve is determined by a methodology that is similar to that used to establish our allowance for credit losses in our funded loan portfolio and that has also been amended by CECL. The reserve is susceptible to significant changes and is primarily based on credit commitments less the amounts that have been funded, the amount of the unfunded portion that we expect to be utilized in the future, credit quality of the loan credit commitments, and management’s estimates and judgment. There can be no assurance that our allowance for unfunded credit commitments will be adequate to provide for actual losses associated with our unfunded credit commitments. An increase in the allowance for unfunded credit commitments in any period may result in a charge to our earnings, which could reduce our net income or increase net losses in that period.
Market and Liquidity Risks
Our interest rate spread has declined, and may continue to decline in the future. Any material reduction in our interest rate spread could have a material adverse effect on our business, results of operations or financial condition.
A significant portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on interest-bearing liabilities, such as deposits and internal borrowings, and the interest rates and fees we receive on our interest-earning assets, such as loans extended to our clients, securities held in our investment portfolio and excess cash held to manage short-term liquidity. Our interest rate spread can be affected by the mix of loans, investment securities, deposits and other liabilities on our balance sheet, as well as a variety of external factors beyond our control that affect interest rate levels, such as competition, inflation, recession, global economic disruptions, unemployment and the fiscal and monetary policies of various governmental bodies. For example, changes in key variable market interest rates, such as the Federal Funds, National Prime (“Prime”), LIBOR or Treasury rates, generally impact our interest rate spread. While changes in interest rates do not generally produce equivalent changes in the revenues earned from our interest-earning assets and the expenses associated with our interest-bearing liabilities, increases in market interest rates are nevertheless likely to cause our interest rate spread to increase. Conversely, if interest rates decline, our interest rate spread will likely decline. In the first quarter of 2020, the Federal Reserve lowered the target Federal Funds rate to between zero and 0.25%, which contributed to the decline of our interest rate spread, and also led to a decrease in the rates and yields on U.S. Treasury securities. If interest rates do not rise, or if the Federal Reserve lowers the target Federal Funds rate to below 0%, these low rates could continue to constrain our interest rate spread and may adversely affect our business forecasts. On the other hand, increases in interest rates may result in a change in the mix of non-interest and interest-bearing accounts, and the level of off-balance sheet market-based investment preferred by our clients, which may also impact our interest rate spread.
Changes in the method of determining LIBOR or other reference rates, or uncertainty related to such potential changes, may adversely affect the value of reference rate-linked debt securities that we hold or issue, which could further impact our interest rate spread. In 2017, the U.K. Financial Conduct Authority announced that it would no longer persuade or compel submission of bank rates used for calculation of LIBOR after 2021. In 2020, the administrator of LIBOR announced that it will extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023 and will cease publishing other LIBOR settings on December 31, 2021. The federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. Dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. At this time, it is not possible to predict what rate or rates may become broadly accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-linked financial instruments.
Regulators, industry groups and certain committees (for example, the Alternative Reference Rates Committee) have published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these recommendations and proposals will be broadly accepted in their current form, whether they will continue to evolve, and what the ultimate effect of their implementation may be on the markets for floating-rate financial instruments.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business, both at the SVB Financial and the Bank level. We require sufficient liquidity to meet our expected financial obligations, as well as unexpected requirements stemming from client activity and market changes, such as the unexpected cash outflows that occurred at the onset of the COVID-19 pandemic when certain clients increased utilization of their credit lines. Primary liquidity resources for SVB Financial include: cash flow from investments and interest in financial assets held by operating subsidiaries other than the Bank; to the extent declared, dividends from the Bank; and as needed, periodic capital market transactions offering debt and equity instruments in the public and private markets. The primary source of liquidity for the Bank is client deposits. When needed, our liquidity is supplemented by wholesale borrowing capacity in the form of short- and long-term borrowings secured by our portfolio of high-quality investment securities, long-term capital market debt issuances and unsecured overnight funding channels available to us in the Federal Funds market. An inability to maintain or raise funds through these sources could have a substantial negative effect, individually or collectively, on SVB Financial and the Bank’s liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. For example, factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, a downturn in asset markets such that the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of our secured obligations, a reduction in our credit rating, any damage to our reputation or any other decrease in depositor or investor confidence in our creditworthiness and business. Our access to liquidity could also be impaired by factors that are not specific to us, such as laws and regulations that limit the amount of intercompany dividends that bank subsidiaries may pay, severe volatility or disruption of the financial markets or negative views and expectations about prospects for the financial services industry as a whole. Any such event or failure to manage our liquidity effectively could affect our competitive position, increase our borrowing costs and the interest rates we pay on deposits, limit our access to the capital markets and have a material adverse effect on our financial condition.
Our equity warrant assets, venture capital and private equity fund investments and direct equity investment portfolio gains depend upon the performance of our portfolio investments and the general condition of the public and private equity and M&A markets, which have seen significant volatility in the past year, are uncertain and may vary materially by period.
In connection with negotiated credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies primarily in the technology, life science and healthcare industries subject to applicable regulatory limits. We have also made investments through SVB Financial, SVB Leerink and our SVB Capital family of funds in venture capital funds and direct investments in companies, many of which are required to be carried at fair value or are impacted by changes in fair value. The fair values of these warrants and investments are reflected in our financial statements and are adjusted on a quarterly basis. Fair value changes are recorded as unrealized gains or losses through consolidated net income. However, the timing and amount of changes in fair value, if any, of these financial instruments depends on factors beyond our control, including the perceived and actual performance of the companies or funds in which we invest, fluctuations in the market prices of the preferred or common stock of the portfolio companies, the timing of our receipt of relevant financial information from these companies, market volatility and interest rate factors and legal and contractual restrictions. The value of these assets were impacted by the negative effects of the earlier stages of the COVID-19 pandemic.Though valuations and financial markets have rebounded since then, prolonged negative effects of the COVID-19 pandemic may have a further impact (potentially in a significant manner). Moreover, the timing and amount of our
realization of actual net proceeds, if any, from our disposition of these financial instruments also often depend on factors beyond our control. In addition to those mentioned above, such factors include the level of public offerings, and M&A or other exit activity, legal and contractual restrictions on our ability to sell our equity positions (including the expiration of any “lock-up” agreements) and the timing of any actual dispositions. Because of the inherent variability of these financial instruments and the markets in which they are bought and sold, their fair market value might increase or decrease materially from period to period, and the net proceeds ultimately realized upon disposition might be materially different than the then-current recorded fair market value.
In addition, depending on the fair value of these warrants and direct equity investments, a meaningful portion of the aggregate fair value of our total warrant and direct equity investment portfolios may, from time to time, be concentrated in a limited number of warrants and direct equity investments. Valuation changes in one or more of these warrants or direct equity investments may have a material impact on the valuation of our total investment portfolio. Moreover, because valuations of private companies are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value for private companies may differ materially from the values that would have been used if a ready market for these securities existed. Therefore, fair value determinations may materially understate or overstate the value that we ultimately realize upon the sale of one or more investments. We cannot predict future realized or unrealized gains or losses, and any such gains or losses are likely to vary materially from period to period. See Note 15-”Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details.
Changes in the market for public equity offerings, M&A or a slowdown in private equity or venture capital investment levels may affect the needs of our clients for investment banking or M&A advisory services and lending products, which could in turn adversely affect our business, results of operations or financial condition.
While an active market for public equity offerings, financings, and M&A activity generally has positive implications for our business, one negative consequence is that our clients may pay off or reduce their loans with us if they complete a public equity offering, are acquired by or merge with another entity or otherwise receive a significant equity investment.
By contrast, a low demand for public equity or M&A transactions or an inability to complete such transactions due to events affecting market conditions generally, could result in fewer transactions overall and therefore decrease revenues of SVB Leerink, our investment banking business, as such revenues stem primarily from underwriting and advisory fees associated with capital markets and M&A transactions. Although there was strong capital markets activity in the healthcare and life sciences sector in the second half of 2020, a decline in this activity in the future could lead to decreased revenues of SVB Leerink.
A slowdown in overall private equity or venture capital investment levels may reduce the need for our clients to borrow from our capital call lines of credit, which are typically utilized by our private equity and venture capital fund clients to make investments prior to receipt of capital called from their respective limited partners. Any significant reduction in the outstanding amounts of our loans or under our lines of credit could have a material adverse effect on our business, results of operations or financial condition.
Operational Risks
Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has created significant economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. Although financial markets have rebounded from the significant declines that occurred earlier in the pandemic, and global economic conditions showed signs of improvement in the second half of 2020, the COVID-19 pandemic may continue to contribute to, among other things (i) increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures; (ii) sudden and significant declines, and significant increases in volatility, in financial markets; (iii) ratings downgrades, credit deterioration and defaults in many industries; (iv) increased utilization of credit lines as clients seek to bolster liquidity; (v) significant reductions in the targeted federal funds rate; and (vi) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements and the current environment, including increased fraudulent activity. In addition, we also face an increased risk of client disputes, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions, actions that governmental authorities take in response to those conditions, and our implementation of and participation in special financial relief programs, such as the U.S. Small Business Administration’s Paycheck Protection Program ("PPP") and U.K. Coronavirus Business Interruption Loan Scheme ("CBILS"). Moreover, we have focused resources and management
attention towards managing the impacts of the COVID-19 pandemic, and we have and likely will have to continue to prioritize managing these impacts over certain growth initiatives and other investments in the near term.
Early-stage companies and certain industries (including the premium wine industry) where the Company has credit exposure, have experienced, and are expected to continue to experience, significant operational and financial challenges as a result of COVID-19. The effects of COVID-19 may also cause our clients to be unable to pay their loans as they come due or decrease the value of collateral, such as accounts receivable, which we expect would cause significant increases in our credit losses.
We remain unable to predict the full extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity, capital and results of operations. The extent of any continued or future adverse effects of the COVID-19 pandemic will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, clients, counterparties and service providers, as well as other market participants, actions taken by governmental authorities and other third parties in response to the pandemic, the scope and duration of future phases or outbreaks, or seasonal or other resurgences, of the disease, and the effectiveness and implementation of vaccination efforts.
The occurrence of fraudulent activity, breaches of our information security or cybersecurity-related incidents could have a material adverse effect on our business, financial condition or results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that could be committed against us, our clients or our third-party partners, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our employees or clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including credit fraud, check fraud, electronic fraud, wire fraud, phishing, social engineering, business email compromise, ransomware, malfeasance and other dishonest acts. For example, in our Current Report on Form 8-K filed on February 26, 2021, we disclosed that we became aware of a potentially fraudulent loan transaction, with possible credit exposure to us of up to $70 million, net of tax. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us, our clients or third-party partners, denial or degradation of service attacks, malware or other cyber-attacks. Sources of attacks vary and may include hackers, employees, vendors, business partners, organized crime, terrorists, foreign governments, corporate espionage and activists. Breaches may also be a result of human errors or mistakes unintentionally caused by us.In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. During the COVID-19 pandemic, we continued to experience heightened fraud and cybersecurity risks, as well as other information security risks, particularly as a result of work-from-home arrangements, which may be more susceptible to inadvertent human errors given the change in operating environment.
Consistent with industry trends, we remain at risk for attempted electronic fraudulent activity, as well as attempts at security breaches and cybersecurity-related incidents. Cybersecurity risks may increase in the future as we increase our mobile, digital and internet-based product offerings and expand our internal use of internet-based products and applications, which we expect to remain elevated as long as the COVID-19 pandemic continues. Moreover, in recent periods, large corporations (including financial institutions and retail companies), as well as U.S. governmental agencies, have suffered significant data breaches or malware attacks, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could involve their accounts with us, which could subject us to potential liability. Additionally, state-sponsored or terrorist-sponsored efforts to hack or disable information technology systems increases risks, since the motivation may be for geopolitical as much as for financial gain.
Information pertaining to us and our clients is maintained, and transactions are executed, on our networks and systems, as well as those of our clients and certain of our third-party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain our clients’ confidence. Breaches of information security also may occur, and in infrequent cases have occurred, through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’ confidential information, including employees and third-party contractors. In addition, SVB provides card transaction processing services to some merchant customers under agreements we have with those merchants and/or with the payment networks. Under these agreements, we may be responsible for certain losses and penalties if one of our merchant customers suffers a data security breach. Furthermore, SVB’s cardholders use their debit and credit cards to make purchases from third parties or through third-party processing services. As such, SVB is subject to risk from data breaches of such third party’s information systems or its payment processors, for reasons including
unauthorized card use. Such a data security breach could compromise SVB’s account information, cause losses on card accounts and increase litigation costs. SVB may suffer losses associated with reimbursing our customers for such fraudulent transactions on customers’ card accounts, as well as for other costs related to data security breaches, such as replacing cards associated with compromised card accounts.
We also offer certain services that allow non-accountholders to process payments through SVB’s systems, as well as financial analytics services. In the course of providing those services, we may obtain sensitive data about customers who do not otherwise hold accounts with us, including information regarding accounts held at other institutions, as well as profit and loss and other proprietary financial or other information regarding our customers or the non-accountholders they service. In the event of a data breach, this sensitive information may be exposed and could subject us to claims for damages.
In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, ongoing work-from-home arrangements for our employees, vulnerabilities in third-party technologies and services (including cloud computing and storage, computing hardware, browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. The forms, methods and sophistication of fraud, security breaches, cyber-attacks and other similar criminal activity continue to evolve, and as we evolve and grow our business, especially in new business lines or geographic areas, we may be unable to foresee future risks. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security and effectiveness of our cyber incident response plans, our risk mitigation strategies and internal controls, including risk assessment policies and procedures, testing, backup and redundancy systems, incident response plans, training and authentication or encryption tools, may not be effective against defending against fraud, security breaches or cyber-attacks, and any insurance we maintain may not be sufficient to compensate us for all losses that may occur. Our inability to anticipate, or failure to adequately mitigate, fraudulent activities, breaches of security or cyber-attacks could result in: financial losses to us or our clients; our loss of business and/or clients; loss or exposure of our confidential data or information; damage to our reputation; the incurrence of additional expenses; loss of personnel; disruption to our business; force majeure claims by us or critical suppliers; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability.
We face risks associated with the ability of our information technology systems and our people and processes to support our operations and future growth effectively.
Our information technology systems, people and internal business processes are critical to our operations and future growth, and were critical to our continued operations during the COVID-19 pandemic as we implemented work-from-home arrangements. Our systems may be subject to service outages from time to time due to various reasons, including infrastructure failures, interruptions due to system upgrades or malware removal, employee error or malfeasance, or other force majeure-related reasons (such as potential blackouts or brownouts in California), which could cause business disruption. Additionally, our systems and processes need to be sufficiently scalable to operate effectively, and we need to have the appropriate talent and organizational structures to support our business. Many of our systems and processes are interdependent and interconnected, meaning that a service outage or operational inefficiency with respect to one system or process could negatively impact other systems or processes. As a result, we continue to invest in technology and more automated solutions in order to optimize the efficiency of our core operational and administrative infrastructure. In the absence of having effective automated solutions, we may rely on manual processes which may be more prone to error. Moreover, as we evolve, we may further install or implement new systems and processes or otherwise replace, upgrade or make other modifications to our existing systems and processes. These changes could be costly and require significant investment in the training of our employees and other third-party partners, as well as impose substantial demands on management time. If we do not implement new initiatives or utilize new technologies effectively or in accordance with regulatory requirements, or if our people (including outsourced business partners) are not appropriately trained or developed or do not perform their functions properly or have the appropriate resources to do so, we could experience business interruptions or other system failures which, among other things, could result in inefficiencies, revenue losses, loss of clients, employee dissatisfaction, exposure to fraudulent activities, regulatory enforcement actions or damage to our reputation, each of which could have a material adverse effect on our business.
Business disruptions and interruptions due to natural disasters and other external events beyond our control have in the past adversely affected our business, financial condition or results of operations and may do so in the future.
Our operations can be subject to natural disasters and other external events beyond our control, such as the effects of earthquakes, fires, floods, severe weather, public health issues such as the recent outbreak of the coronavirus or other pandemic diseases, power failures, telecommunication loss, major accidents, terrorist attacks, acts of war, political, economic and social unrest, and other natural and man-made events, some of which may be intensified by the effects of climate change and changing weather patterns. For example, our corporate headquarters and some of our critical business offices are located in California, which has recently experienced major wildfires and blackouts and is located over major earthquake fault lines. We also maintain critical business facilities in Texas, which has recently experienced severe weather conditions, major blackouts and water service disruptions. Furthermore, climate change, the increasing frequency or severity of weather events, an earthquake or other disaster could cause severe destruction, disruption or interruption to our operations or property and significantly impact our employees and could damage, destroy or otherwise reduce the value of collateral, which could materially increase our credit losses.More recently, the COVID-19 pandemic has had direct effects on our operations, including by limiting employee travel and increasing telecommuting arrangements. We may experience negative effects of prolonged work-from-home arrangements, such as increased risks of systems access or connectivity issues, cybersecurity or information security breaches, and challenges our employees may face in maintaining a balance between work and home life, which may lead to reduced productivity and/or significant disruptions in our business operations.
We and other financial institutions generally must resume operations promptly following any interruption. If we were to suffer a disruption or interruption and were not able to resume normal operations within a period consistent with industry standards, our business, financial condition or results of operations could be adversely affected in a material manner. In addition, depending on the nature and duration of the disruption or interruption, we might become vulnerable to fraud, additional expense or other losses, or to a loss of business and clients. Although we have implemented a business continuity management program that we continue to enhance on an ongoing basis, there can be no assurance that the program will adequately mitigate the risks of such business disruptions and interruptions.
Additionally, natural disasters and external events, including but not limited to those that have occurred and may occur in and around California, have affected, and could in the future affect, the business and operations of our clients, which could impair their ability to repay their loans or fees when due, impair the value of collateral securing their loans, cause our clients to reduce their deposits with us, or otherwise adversely affect their business dealings with us, any of which could have a material adverse effect on our business, financial condition or results of operations. A significant portion of our client borrowers, including our premium winery and vineyard clients, our SVB Private Bank mortgage clients and other corporate clients, are located in or have offices in California, which has historically experienced severe natural disasters resulting in disruptions to businesses and damage to property, including wildfires and earthquakes. If there is a major earthquake, flood, fire, drought or other natural or catastrophic disaster in California or elsewhere in the markets in which we operate, our borrowers may experience uninsured property losses or sustained disruption to business or loss that may materially impair their ability to meet the terms of their loan obligations.
We face risks from a prolonged work-from-home arrangement, as well as from our eventual implementation of a broader plan to return to the office or increase virtual working arrangements.
Since the first quarter of 2020, we have moved to a work-from-home plan, restricted business travel, postponed or moved to online SVB-hosted events, and enabled remote access to our systems. Although our work-from-home plan has been effective thus far, we may experience negative effects of a prolonged work-from-home arrangement, such as increasing risks of systems access or connectivity issues, cybersecurity or information security breaches, reduced team collaboration, or imbalances between work and home life, which may lead to reduced productivity and/or significant disruptions in our business operations.
Moreover, we are developing a plan for employees to eventually return to work in our offices, the manner and timing of which are still to be finalized.Our return to office plan will be subject to a variety of complex considerations including, among others, international, federal, state and local government laws, regulations and guidance, health organization guidance, health and safety implications (including the availability of vaccinations and potential health testing requirements), employee needs, and the practical requirements of potential office reconfigurations or a phased return.We may also expand our work model to increase virtual or remote working arrangements, and if implemented ineffectively, may also result in reduced productivity and/or significant disruptions in our business operations.
We face reputation and business risks due to our interactions with business partners, service providers and other third parties.
As a financial service institution with domestic and international operations, we rely on third parties, both in the United States and internationally in countries such as Canada, the United Kingdom, Ireland, Germany, Denmark, Hong Kong, China, Israel and India, to provide services to us and our clients or otherwise act as partners in our business activities in a variety of ways, including through the provision of key components of our business infrastructure. We expect these third parties to
perform services for us, fulfill their obligations to us, accurately inform us of relevant information, and conduct their activities in a manner that reflects positively on our brand and business. Although we manage exposure to such third-party risk through a variety of means, including the performance of due diligence and ongoing monitoring of vendor performance, there can be no assurance these efforts will be effective. Any failure of our business partners, service providers or other third parties to meet their commitments to us or to perform in accordance with our expectations could result in operational disruptions, increased expenditures, regulatory actions in which we may be held responsible for the actions of third parties, damage to our reputation and the loss of clients, which in turn could harm our business and operations, strategic growth objectives and financial performance. Because of the COVID-19 pandemic, many of our counterparties and third-party service providers have been, and may further be, affected by “stay-at-home” orders, market volatility and other factors that increase their risk of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services.
Our third-party partners may also rely on their own business partners and service providers in the ordinary course of their business. Although we seek to diversify our exposure to third-party partners in order to increase our resiliency, we are nevertheless exposed to the risk that a disruption or other information technology event at a common service provider to our vendors could impede their ability to provide products or services to us, which in turn could harm our business and operations, strategic growth objectives and financial performance.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated because of trading, clearing, counterparty and other relationships. We routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, payment processors and other institutional clients, which may result in payment obligations to us or to our clients due to products we have arranged. Many of these transactions expose us to credit and market risk that may cause our counterparty or client to default. In particular, the interconnectivity of multiple financial services institutions with central agents, exchanges and clearing houses, and the increased centrality of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Any losses arising from such occurrences could materially and adversely affect our business, results of operations or financial condition.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other information relating to their business or financial condition. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports or other certifications of their auditors or accountants. For example, under our accounts receivable financing arrangements, we rely on information, such as invoices, contracts and other supporting documentation, provided by our clients and their account debtors to determine the amount of credit to extend. Similarly, in deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to GAAP (or other applicable accounting standards in foreign markets) and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. If we rely on materially misleading, false, inaccurate or fraudulent information in evaluating the creditworthiness or other risk profiles of our clients or counterparties, we could be subject to credit losses, regulatory action, reputational harm or experience other adverse effects on our business, results of operations or financial condition.
We face risks associated with our current international operations and ongoing international expansion.
One important component of our strategy is to expand internationally. We currently have international offices in Canada, the United Kingdom, Israel, Germany, Denmark, India, Hong Kong and China, including a joint-venture bank in China. We have expanded and plan to continue to expand our operations and business activities in some of our current international markets. For example, we have expanded our presence in India, where we currently conduct certain technology and finance operations. We also plan to expand our business beyond our current markets over time. Our efforts to expand our business internationally carry certain risks, including risks arising from the uncertainty regarding our ability to generate revenues from foreign operations; risks associated with leveraging and doing business with local business partners through joint ventures, strategic arrangements or other partnerships; and other general operational risks. In addition, there are certain risks inherent in doing business on an international basis, including, among others, legal, regulatory and tax requirements and restrictions; uncertainties regarding liability, tariffs and other trade barriers, such as recent trade tensions between the United States and China; uncertainties regarding international public health issues like the COVID-19 pandemic; difficulties in staffing and managing foreign operations; the incremental requirement of management’s attention and resources; differing technology standards or customer requirements; data security or transfer risks; cultural differences; political and economic risks such as uncertainty created by the withdrawal of the United Kingdom from the European Union; and financial risks, including currency
and payment risks such as fluctuation in the value of foreign currencies, such as the euro. These risks could hinder our ability, or the ability of our local partners, to service our clients effectively, and adversely affect the success of our international operations, which, in turn, could have a material adverse effect on our overall business, results of operations or financial condition. In addition, we face risks that our employees and affiliates may fail to comply with applicable laws and regulations governing our international operations, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act, GDPR, anti-corruption laws, privacy laws, anti-money laundering laws, economic and trade sanctions requirements and other applicable laws and regulations. Failure to comply with such laws and regulations could, among other things, result in enforcement actions and fines against us, as well as limitations on the conduct of our business, any of which could have a material adverse effect on our business and results of operations.
Our holding company, SVB Financial, relies on equity warrant assets income, investment distributions, periodic capital market transactions and dividends from its subsidiaries for most of its cash revenues.
SVB Financial is a holding company and is a separate and distinct legal entity from its subsidiaries. It receives most of its cash revenues from a few primary funding sources: income from equity warrant assets and investment securities, from periodic capital markets transactions offering debt and equity instruments in the public and private markets, and, to the extent declared, cash dividends paid by subsidiaries, primarily the Bank. These sources generate cash which is used by SVB Financial to pay operating and borrowing costs and, to the extent authorized or declared, fund dividends to holders of its capital stock and stock repurchase programs. Any income derived from those financial instruments is subject to a variety of factors as discussed in the “Credit Risks” portion of this “Risk Factors” section. Moreover, various federal and state laws and regulations limit the amount of dividends that the Bank and certain of our nonbank subsidiaries may pay to SVB Financial. In addition, SVB Financial’s right to participate in a distribution of assets upon a liquidation or reorganization of any of its subsidiaries is subject to the prior claims of the subsidiary’s creditors.
Climate change has the potential to disrupt our business and adversely impact the operations and creditworthiness of our clients.
Climate change has caused severe weather patterns and events that could disrupt operations at one or more of our locations, which may disrupt our ability to provide financial products and services to our clients. Climate change could also have a negative effect on the financial status and creditworthiness of our clients, such as those in the wine industry, which may decrease revenues and business activities from those clients, increase the credit risk associated with loans and other credit exposures to such clients, and decrease the value of our warrants and direct equity investments in such clients, if any.
Legal and Regulatory Risks
We are subject to extensive regulation that could limit or restrict our activities, impose financial requirements or limitations on the conduct of our business, or result in higher costs to us, and the stringency of the regulatory framework applicable to us may increase if, and as, our asset sizebalance sheet continues to grow.
SVB Financial, Group, including the Bank, is extensively regulated under federal and state laws and regulations governing financial institutions, including those imposed by the FDIC, the Federal Reserve, the CFPB, the SEC, and the DBO,DFPI, as well as various regulatory authorities that govern our global activities. Federal and state laws and regulations govern, restrict, limit or otherwise affect the activities in which we may engage and may affect our ability to expand our business over time, result in an increase in our compliance costs, including higher FDIC insurance premiums, and may affect our ability to attract and retain qualified executive officers and employees.employees (especially when compared to competitors not subject to similar restrictions). Further, the stringency of the federal bank prudential regulatory framework that applies to us may increase as our asset size and international business grows. As one example, under the Dodd-Frank Act and current Federal Reserve regulations, certain enhanced prudential standards will apply to us if we reach or exceed $50 billion in average total consolidated assets. In addition, federal regulations implementing the advanced approaches capital rules as well as the additional heightened standards noted above apply to banking organizations with total consolidated assets of $250 billion or more or $10 billion or more in on-balance sheet foreign exposure (which is a measure of international activity). Compliance with any of these additional requirements could require a material investment of resources and lead to other limitations on our business and our ability to expand. Further, a
A change in the applicable statutes, regulations or regulatory policies, including the possibility of legislative regulatory and policy changes by the new Congress and Biden-Harris Administration, could have a material adverse effect on our business, including limiting or imposing conditions on the types of financial services and products we may offer or increasing the ability of nonbanks to offer competing financial services and products. These laws and regulations also require financial institutions, including SVB Financial and the Bank, to maintain certain minimum levels of capital and meet other minimum financial standards, which may require us to raise additional capital in the future, affect our ability to use our capital resources for other business purposes or affect our overall business strategies and plans. Furthermore, following the 2008 financial crisis, the Basel Committee adopted additional capital, leverage and liquidity standards under Basel III, and has since finalized additional standards. Most notably, in December 2017, the Basel Committee published a set of revisions to its Basel III framework to address perceived weaknesses in the current methodology for calculating risk weighted assets, in particular to increase the risk-sensitivity of the standardized approach and to constrain banking organizations’ discretion in modeling their capital requirements under models-based approaches (such as the advanced approaches in the United States). Following the adoption of the final standards, the Federal Reserve, the FDIC and the OCC announced on December 7, 2017 that they support the conclusion of efforts to reform the international bank capital standards in response to the global financial crisis, and that they would consider how to appropriately apply these revisions to the Basel III reform package in the United States through the standard notice-and-comment rulemaking process. The Federal Reserve previously has adopted regulations that generally align with international standards,
and have the effect of raising our capital requirements beyond those previously in place. Such requirements include limitations on capital distributions and discretionary bonus payments to executives if certain minimum capital requirements are not maintained. The Federal Reserve also has adopted certain stress testing requirements, the results of which we are required to submit to the Federal Reserve and to disclose to the public. In addition, depending on the results of the stress tests, we could be required to raise additional capital or take certain other actions. Increased regulatory requirements (and the associated compliance costs), whether due to the growth of our business, the adoption of new laws and regulations, changes in existing laws and regulations, or more expansive or aggressive interpretationsenforcement of existing laws and regulations, may have a material adverse effect on our business, financial condition or results of operations. In addition, personnel at the U.S. banking agencies that regulate us may soon change given the change in presidential administration. New personnel may take new or different positions than their predecessors and that could result in additional regulatory requirements or requirements to change certain practices.
If we continueWe expect to grow and meet regulatory thresholds that trigger enhanced standards, such asexceed $100 billion of average total consolidated assets of $50 billion or more or $10 billion or more in foreign exposures, we(over four quarters) during 2021. We will therefore be subject to more stringent regulations, including certain enhanced prudential standards required by the Dodd-Frank Act and regulations adopted by the Federal Reserve applicable to large bank holding companies.
Certain enhanced prudential standards and related requirements will apply to us when we exceed $100 billion in average total consolidated assets were $51.2 billioncalculated over four consecutive financial quarters, which we expect to happen in 2021. Category IV institutions under the Tailoring Rules (which we expect to be) are subject to additional requirements, such as certain enhanced prudential standards and we had approximately $6.0 billion in on-balance sheet foreign exposures.monitoring and reporting certain risk-based indicators. Under the Federal Reserve’s enhanced prudential standard regulations, SVB Financial would becomeTailoring Rules, Category IV firms are, among other things, subject to more stringent prudential standards if, whether as a result of organic growth, potential future acquisitions or otherwise, we averaged total consolidated assets of $50 billion or more at the end of a four-quarter period. Pursuant to the Dodd-Frank Act, the more stringent prudential standards include requirements related to risk-based and leverage capital, liquidity, risk management, resolution planning,(1) supervisory capital stress testing single counterparty credit exposure limits,on a biennial basis, (2) requirements to develop and early remediation - all of which require appropriate resourcesmaintain a capital plan on an annual basis and planning. The Dodd-Frank Act further permits, but does not require, the Federal Reserve to apply enhanced prudential standards to large bank holding companies in other areas,(3) certain liquidity risk management and risk committee requirements, including short-term debt limitsliquidity buffer and enhanced public disclosures. Further, our international business continues to grow. Crossing the Advanced Approaches Thresholds would trigger additional heightened requirements and compliance costs that may have a material adverse effect on our business, financial conditions or results of operations. Our level of foreign exposures is determined based on our current understanding of applicable regulatory standards, guidance, interpretations, expectations and assumptions, and may be subject to change based on any modifications, clarifications or evolution of these standards, guidance, interpretations, expectations or assumptions.
Ifliquidity stress testing requirements. When we become subject to such enhanced prudential standards, we will face more stringent requirements or limitations on our business, as well as increased compliance costs. For example, if we are subject to CCAR, the Federal Reserve may object to, or otherwise not respond favorably tocosts, and, depending on our levels of capital plan, capital actions orand liquidity, stress test results and other factors, we may be limited in the types of activities we may conduct and be limited as to how we utilize our capital, including with respect to common stock dividendsrepurchases.Further, we may be subject to heightened expectations, which could result in additional regulatory scrutiny, higher penalties, and stock repurchases. In addition,more severe consequences if we become subjectare unable to the Federal Reserve’s and the FDIC’s resolution planning rules requiring us to submit plans for an orderly resolution in the event of material financial distress or failure, andmeet those agencies jointly determine that our resolution plan is not credible, and we fail to cure the deficiencies in a timely manner, the Federal Reserve and the FDIC may jointly impose on SVB Financial or our subsidiaries more stringent capital, leverage or liquidity requirements or restrictions on growth, activities or operations, or require the divestment of assets or operations. Further, under the LCR rule, we would be required to measure specified unencumbered high-quality liquid assets against our expected net cash outflows, using the methodologies prescribed by the rule. As a result of the rule’s application, SVB Financial may be required to manage our holdings of high-quality liquid assets at levels beyond what we believe we need operationally in order to manage liquidity effectively. Additionally, such an increase may also adversely affect our financial condition and results of operations since high-quality liquid assets tend to carry lower yields.expectations. See “Business-Supervision and Regulation-Enhanced Prudential Standards,” under this Part I, Item 1, for a more detailed description of the various requirements whichthat may become applicable to us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act, other anti-money laundering and anti-bribery statutes and regulations, and U.S. economic and trade sanctions.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, the Anti-Money Laundering Act of 2020, and other laws and regulations require financial institutions to, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with state and federal banking regulators, as well as the U.S. Department of Justice Drug Enforcement Administration, and Internal Revenue Service.IRS. We also must comply with U.S. economic and trade sanctions administered by the U.S. Treasury Department'sDepartment’s Office of Foreign Assets Control and the U.S. Foreign Corrupt Practices Act, and we, like other financial institutions, are subject to increased scrutiny for compliance with these requirements. We maintain policies, procedures and systems designed to detect and deter prohibited financing activities, howeveractivities. However, if these controls were deemed deficient or fail to prevent wrongdoing, we could be subject to liability, including civil fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan. In addition, any failure to effectively maintain and implement adequate
programs to combat money laundering and terrorist financing could have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition or results of operations.
If we were to violate, or fail to comply with, international, federal or state laws or regulations governing financial institutions, we could be subject to disciplinary action that could have a material adverse effect on our business, financial condition, results of operationsor reputation.
International, federal and state banking regulators possess broad powers to take supervisory or enforcement action with respect to financial institutions. Other regulatory bodies, including the SEC, FINRA and state securities regulators, regulate investment advisers and broker-dealers, including our subsidiaries, SVB Asset Management, SVB Wealth Advisory, and SVB Securities.Leerink, as well as the registered investment advisers we will acquire upon closing the Boston Private acquisition. These laws and regulations are highly complex, and if we were to violate, even if unintentionally or inadvertently, the laws and regulations governing financial institutions and broker-dealers, these regulatory authorities could take various actions against us, such as imposing restrictions on how we conduct our business, imposing higher capital and liquidity requirements, requiring us to maintain higher insurance levels, revoking necessary licenses or authorizations, imposing censures, significant civil money penalties or fines, issuing cease and desist or other supervisory orders, and suspending or expelling us or any of our employees from certain businesses. For example, we could face material restrictions on our activities and our ability to enter into certain transactions if SVB Financial and the securities business.Bank cease to maintain their status as well-capitalized or well-managed as defined under relevant regulations. These remedies and supervisoryenforcement actions could have a material adverse effect on our business, financial condition, results of operations and reputation.
Laws and regulations regarding the handling of personal data and information may impede our services or result in increased costs, legal claims or fines against us.
We are subject to an evolving body of federal, state and non-U.S. laws, regulations, guidelines and principles regarding data privacy and security, including the protection of personal information. Legal requirements relating to the collection, storage, handling, use, disclosure, transfer and security of personal data continue to evolve, and regulatory scrutiny in this area is increasing around the world. Significant uncertainty exists as privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements. For example, the GDPR extends the scope of the European Union data protection law to all companies processing data of EU residents, regardless of location, while the California Consumer Privacy Act ("CCPA") established new requirements regarding handling of personal data to entities serving or employing California residents, and such requirements will be expanded under the California
Privacy Rights Act ("CPRA") once it goes into effect on January 1, 2023. The GDPR, CCPA and CPRA have heightened our privacy compliance obligations and have required us to evaluate our current operations, information technology systems and data handling practices and implement changes where necessary to comply, with associated costs. Our failure to comply with any such laws, or the failure of our current operations, information technology systems and data handling practices to prevent breaches involving personal data, may result in significant liabilities and/or reputational harm. See “Business-Supervision and Regulation-Privacy and Cybersecurity,” under this Part I, Item 1, for a more detailed description of the various consumer privacy laws that are applicable to us.
Adverse results from litigation or governmental or regulatory investigations can impact our business practices and operating results.
We are currently involved in certain legal proceedings, and may from time to time be involved in governmental or regulatory investigations and inquiries relating to matters that arise in connection with the conduct of our business. While we have not recognized a material accrual liability for any lawsuits and claims filed or pending against us to date, the outcome of litigation and other legal and regulatory matters is inherently uncertain and it is possible that the actual results of one or more of such matters may be substantially higher than the amounts reserved, or that judgments may be rendered, or fines or penalties assessed in matters for which we have no reserves. Further, adverse outcomes in lawsuits or investigations may result in significant monetary damages, admissions of guilt or injunctive relief that may adversely affect our operating results or financial condition as well as our ability to conduct our businesses as they are presently being conducted. Any such resolution of a criminal matter involving us or our employees could lead to increased exposure to civil litigation and overlapping government investigations, could adversely affect our reputation, could result in penalties or limitations on our ability to conduct our activities generally or in certain circumstances and could have other negative effects. These matters also include responding to governmental inquiries regarding our customers. In recent years across the financial services industry, a number of investigations of customers have, based on the circumstances, led to investigations of the particular bank and its policies.
Moreover, even if we prevail in such actions, litigation and investigations can cause reputational harm and be costly and time-consuming, and often risksrisk diverting the attention of our management and key personnel from our business operations, which could have a material adverse effect on our business, financial condition and results of operations.
A failure to appropriately identify and address potential conflicts of interest could adversely affect our businesses.
Changes in accounting standards could materially impact our financial statements.
From timeDue to time, the Financial Accounting Standards Board or the SEC may change the financial accounting and reporting standards that govern the preparationbroad scope of our financial statements. Also,businesses, we regularly address potential conflicts of interest, including situations where our global initiatives,services to a particular client or our own investments or other interests conflict, or are perceived to conflict, with the interests of that client or another client, as well as continuing trends towards the convergencesituations where one or more of international accounting standards, such as rulesour businesses have access to material non-public information that may not be adopted undershared with our other businesses and situations where we may be a creditor of an entity with which we also have an advisory or other relationship. For example, SVB Leerink provides investment banking services to clients in the International Financial Reporting Standards (“IFRS”),healthcare and life sciences industry, some of which may result in our Company being subject to newalso be clients or changing accounting and reporting standards.potential clients of the Bank. In addition, we invest in and partner with entities in the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changesinnovation economy, some of which may be beyond our control, can be hard to predict and can materially impact how we record and report our financial conditionclients or resultspotential clients of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our revising or restating prior period financial statements.
Our holding company, SVB Financial, relies on equity warrant assets income, investment distributions and dividends from its subsidiaries for most of its cash revenues.
SVB Financial is a holding company and is a separate and distinct legal entity from its subsidiaries. It receives most of its cash revenues from three primary funding sources: income from our equity warrant assets and investment securities and, to the extent declared, cash dividends paid by its subsidiaries, primarily the Bank. These sources generate cash whichtypes of potential conflicts are expected to increase with our acquisition of Boston Private and the related expansion in our private bank business.
We have procedures and controls designed to identify and address these conflicts of interest, including those designed to prevent the improper sharing of information among our businesses. However, appropriately identifying and dealing with conflicts of interest is used by SVB Financialcomplex and difficult, and our reputation could be damaged and the willingness of clients to pay operatingenter into transactions with us may be affected if we fail, or appear to fail, to identify, disclose and borrowing costs and, to the extent authorized or declared, fund dividends to stockholders and stock repurchase programs. Any income derived from those financial instruments is subject to a varietydeal appropriately with conflicts of factors as discussed in the “Credit Risks” portion of this “Risk Factors” section. Moreover, various federal and state laws and regulations limit the amount of dividends that the Bank and certain of our nonbank subsidiaries may pay to SVB Financial.interest. In addition, SVB Financial’s rightpotential or perceived conflicts could give rise to participate in a distribution of assets upon a liquidationlitigation or reorganization of any of its subsidiaries is subject to the prior claims of the subsidiary’s creditors.
regulatory enforcement actions.
Anti-takeover provisions and federal laws, particularly those applicable to financial institutions, may limit the ability of another party to acquire us, which could prevent a merger or acquisition that may be attractive to stockholders and/or have a material adverse effect on our stock price.
As a bank holding company, we are subject to certain laws that could delay or prevent a third party from acquiring us. The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended, together with federal and state regulations, require that, depending on the particular circumstances, either the Federal Reserve must approve or, after receiving notice, must not object to any person or entity acquiring “control” (as determined under the Federal Reserve'sReserve’s standards) of a bank holding company, such as SVB Financial, or a state member bank, such as the Bank. In addition, DBODFPI approval may be required in connection with the acquisition of control of the Bank. Moreover, certain provisions of our certificate of incorporation and by-laws and certain other actions we may take or have taken could delay or prevent a third-partythird party from acquiring us, anyus. Any of these laws, regulations and other provisions may prevent a merger or acquisition that would be attractive to stockholders and could limit the price investors would be willing to pay in the future for our common stock.
Strategic, Reputational and Other Risks
Concentration of risk increases the potential for significant losses, or towhile the extent we establish internal concentrationestablishment of limits to mitigate suchconcentration risk increases the potential for lower revenues or a slow-down inand slower growth.
Concentration of risk stemming from our
Our focus on certain markets or segments, including those by client industry, life-cycle stage, size and geography, increases the potential for significant losses ordue to concentration of risk. It may also result in lower revenues or slower growth if we choose to limit growth in certain markets or segments to mitigate concentration risk. While there may exist a great deal of diversity within each industry, our clients are concentrated within the following general industry niches:industries: technology, life science and healthcare, private equity and venture capital and premium wine. Clients of our private banking division are primarily professionals in these industries, though this will change upon closing of the acquisition of Boston Private. In particular, our technology clients generally tend to be in the industries of hardware (semiconductors,(such as semiconductors, communications, data storage and electronics), software/internet (such as infrastructure software, applications, software services, digital content and advertising technology), and energy and resource innovation. Our life science and healthcare clients are concentrated in the industries of biotechnology, medical devices, healthcare information technology and healthcare services. Many of our client companies are also concentrated by certain stages within their life cycles, such as early-stage, mid-stage or later-stage and many of these companies are venture capital-backed. We take deposits from these clients and are also continuing to increase our efforts to lend to larger clients and to make larger loans. In addition, growth prospects and our geographic focus on key domestic and international innovation markets, as well as premium wine markets, may lead to an increase in our concentration risk. Our loan concentrations are derived from our borrowers engaging in similar activities as well as certain types of loans extended to a diverse group of borrowers that could cause those borrowers to be similarly impacted by economic or other conditions. Any adverse effect on any of our areas of concentration could have a material impact on our business, results of operations and financial condition, even when economic and market conditions are generally favorable to our competitors.
competitors that are not exposed to similar concentration risk.
Decreases in the amount of equity capital available to our portfolio companies could adversely affect our business, growth and profitability.
Our core strategy is focused on providing banking and financial products and services to companies, investors, entrepreneurs and influencers in the innovation economy, including in particular to early-stage and mid-stage companies that receive financial support from sophisticated investors, including venture capital or private equity firms, “angels,” corporate investors, crowd-funding and other evolving sources of capital. We derive a meaningful share of our deposits from these companies and provide them with loans as well as other banking products and services. In some cases, our lending credit decision is based on our analysis of the likelihood that our client will receive additional rounds of equity capital from investors or other funding sources. Among the factors that have affected and could in the future affect the amount of capital available to our portfolio companies areare: the receptivity of the capital markets,markets; the prevalence of public equity offerings or merger and acquisitionM&A activity primarily(primarily among companies within the technology and life science/science and healthcare industry sectors,sectors); the availability and return on alternative investments,investments; economic conditions in the technology, life science/science and healthcare and private equity/venture capital industries,industries; and overall general economic conditions. Reduced capital markets valuations could also reduce the amount of capital available to our client companies, including companies within our technology and life science/science and healthcare industry sectors. If the amount of capital available to such companies decreases, it is likely that the number of our new clients and investor financial support to our existing clients could decrease, which could have an adverse effect on our business, profitability and growth prospects.
We face competitive pressures that could adversely affect our business, results of operations, financial condition or future growth.
We compete with other banks as well as specialty and diversified financial services companies and investment, debt, venture capital and debtprivate equity funds, some of which are larger than we are and which may offer a broader range of lending, leasing, payments, foreign currency exchange, and other financial products and advisory services to our client base. We also compete with other alternative and
more specialized lenders, such as online “marketplace” lenders, peer-to-peer lenders and other non-traditional lenders that have emerged in recent years.
Moreover, we compete with fintech and non-financial services particularly payment facilitatorscompanies, many of which offer bank or bank-like products, specialized services involving the elimination of banks as intermediaries (known as “disintermediation”) and/or the unbundling of banking products and processorsservices into point solutions. The activity of fintechs and support of fintechs by venture capital firms has increased significantly in recent years and are expected to continue to increase. For example, a number of fintechs have applied for, and in some cases received, bank or other Fintechindustrial loan charters or nonbanking technology providershave partnered with existing banks to allow them to offer deposit products to their customers. There has also been significant fintech activity in the areas of credit cards, payments, industry, whichforeign exchange and lending. Regulatory changes, such as the December 2020 revisions to the FDIC’s rules on brokered deposits, may also make it easier for fintechs to partner with banks and offer specialized services to our client base.deposit products. In addition, some traditional technology companies are beginning to provide financial services directly to their customers and are
expected to continue to explore new ways to do so. Many of these companies have fewer regulatory constraints than we compete with hedge fundsdo, and private equity funds. Suchsome have lower cost structures. Some of these companies also have greater resources to invest in technological improvements than we currently have and may be able to better recruit technology talent.
Our competitors may focus their marketing efforts on industry sectors whichthat we serve andserve; for example, they may seek to increase their lending and other financial relationships with technology companies or special industries such as wineries. When new competitors seek to enter one of our markets, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or credit terms prevalent in that market, which could adversely affect our market share or ability to exploit new market opportunities. We may be forcedhave to agree to accept less attractive credit, pricing and other investment terms if we act to meet these competitive challenges, which could adversely affect our business, results of operations, financial condition and future growth. Similarly, competitive pressures and market disruption could adversely affect the business, results of operations, financial condition or future growth of our non-banking services, including our payments services, as well as our access to capital and attractive investment opportunities for our funds business.
Our ability to maintain or increase our market share depends on our ability to attract and maintain, as well as meet the needs of, existing and future clients.
Our success depends, in part, upon our ability to maintain or increase our market share. In particular, much of our success depends on our ability to attract early-stage or start-up companies as clients and to retain those companies as clients as they grow and mature successfully through the various stages of their life cycles. As a result, we adapt our products and services to evolving industry standards as well as introduce new products and services beyond industry standards in order to serve our clients, who are innovators themselves. A failure to achieve market acceptance for any new products or services we introduce, a failure to introduce products or services that the market demands, or the costs associated with developing, introducing and providing new products and services could have an adverse effect on our business, results of operations, growth prospects and financial condition.
We face risks in connection with our strategic undertakings and new business initiatives.
We are engaged, and may in the future engage, in strategic activities domestically or internationally including(including acquisitions such as the pending acquisition of Boston Private and the recently completed acquisition of WestRiver Group's ("WRG") debt fund business), joint ventures, partnerships, investments or other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.
We are focused on our long-term growth and have undertaken various strategic activities and business initiatives, many of which involve activities that are new to us or, in some cases, are experimental in nature. For example, we are expanding our global presence and may engage in activities in jurisdictions where we have limited experience from a business, legal and/or regulatory perspective. With the acquisition of SVB Leerink, we have also expanded into new lines of business, namely, investment banking and M&A advisory services. In January 2021, we announced our pending acquisition of Boston Private, which will significantly expand our wealth management and private banking business and introduce new lines of lending and new deposit products, new types of customers and a number of bank branches. We are also expanding our payments processing capabilities to better serve our clients, including innovating new electronic payment processing solutions, developing new payments technologies, and supporting new or evolving disruptive payments systems.systems, and, with the pending acquisition of Boston Private, expect to expand our private bank and wealth management services. We may also serve clients that deal with new or evolving industries or business activities, such as digital currencies.currencies and cannabis. Given our evolving geographic and product diversification, and our innovative product solutions, these payment-related initiatives may subject us to, among other risks, increased business, reputational and operational risk, as well as more complex legal, regulatory and compliance costs and risks.
Our ability to execute strategic activities and new business initiatives successfully (such as the acquisition of SVB Leerink and the pending acquisition of Boston Private) will depend on a variety of factors. These factors likely will vary based on the nature of the activity but may include our success in integrating an acquired company or a new internally-developedinternally developed growth initiative into our business, operations, services, products, personnel and systems, operating effectively with any partner with whom we elect to do business, meeting applicable regulatory requirements and obtaining applicable regulatory licenses or other approvals, hiring or retaining key employees, achieving anticipated synergies, meeting management'smanagement’s expectations, actually realizing the anticipated benefits of the activities, and overall general market conditions. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or management'smanagement’s attention from ongoing business operations and may subject us to additional regulatory scrutiny and potential liability. If we do not successfully execute a strategic undertaking, it could adversely affect our business, financial condition, results of operations, reputation or growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which would adversely affect our results of operations.
In addition, in order to finance future strategic undertakings, we might require additional financing, which might not be available on terms favorable to us, or at all. If obtained, equity financing could be dilutive and the incurrence of debt and contingent liabilities could have a material adverse effect on our business, results of operations or financial condition.
Our business reputation and relationships are important and any damage to them could have a material adverse effect on our business.
Our reputation is very important in sustaining our business and we rely on our relationships with our current, former and potential clients and stockholders, the venture capital and private equity communities, and other actors in the industries that we serve. Any damage to our reputation, whether arising from regulatory, supervisory or enforcement actions, matters affecting our financial reporting or compliance with SEC and exchange listing requirements, negative publicity, the way in which we conduct our business (including with respect to the administration of PPP or our actions related to environmental, social and governance matters) or otherwise, could strain our existing relationships and make it difficult for us to develop new relationships. Additionally, negative publicity regarding the industries that we focus on serving (for example, technology, private equity or venture capital) may also damage our reputation. Any such damage to our reputation and relationships could in turn lead to a material adverse effect on our business.
Whereas negative public opinion once was primarily driven by adverse news coverage in traditional media, the increased use of social media platforms facilitates the rapid dissemination of information or misinformation, which magnifies the potential harm to our reputation. In addition, the behavior of our employees, including with respect to our employees’ use of social media, subjects us to potential negative publicity if such behavior does not align with our high standards of integrity or fails to comply with regulations or accepted practices.
An ineffective risk management framework could have a material adverse effect on our strategic planning and our ability to mitigate risks and/or losses and could have adverse regulatory consequences.
We have implemented a risk management framework to identify and manage our risk exposure. This framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, operational, capital, compliance, strategic and reputational risks. Our framework also includes financial, analytical, forecasting or other modeling methodologies, which involvesinvolve management assumptions and judgment. In addition, our Board of Directors, in consultation with management, has adopted a risk appetite statement, which sets forth certain thresholds and limits to govern our overall risk profile. However, there is no assurance that our risk management framework, including the risk metrics under our risk appetite statement, will be effective under all circumstances or that it will adequately identify, manage or mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and become subject to regulatory consequences, as a result of which our business, financial condition, results of operations or prospects could be materially adversely affected.
We do not currently pay dividends on shares of our common stock and may not do so in the future.
Holders of shares of our capital stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. We do not currently pay dividends on our common stock and have no current plans to do so. Furthermore, the terms of our outstanding preferred stock prohibit us from declaring or paying any dividends on any junior series of our capital stock, including our common stock, or from repurchasing, redeeming or acquiring such junior stock, unless we have declared and paid full dividends on our outstanding preferred stock for the most recently completed dividend period. We are also subject to statutory and regulatory limitations on our ability to pay dividends on our capital stock. If we are unable to satisfy the capital requirements applicable to us for any reason, we may be limited in our ability to declare and pay dividends on our capital stock.
Risks Relating to Our Pending Acquisition of Boston Private
We cannot ensure that the proposed Boston Private acquisition will be completed.
We cannot ensure that the proposed Boston Private acquisition will be completed. There are a number of risks and uncertainties relating to the Boston Private acquisition. For example, the Boston Private acquisition may not be completed, or may not be completed in the timeframe, on the terms or in the manner currently anticipated, as a result of a number of factors, including, among other things, the failure of one or more of the conditions to closing. There can be no assurance that the conditions to closing of the Boston Private acquisition will be satisfied or waived or that other events will not intervene to delay or result in the failure to close the Boston Private acquisition. The Boston Private merger agreement may be terminated by the parties thereto under certain circumstances. Any delay in closing or a failure to close could have a negative impact on our business and the trading price of our securities.
In addition, to complete the Boston Private acquisition, we need to obtain approvals or consents from, and make filings with, certain applicable governmental authorities, which include the Federal Reserve, the DFPI and the Massachusetts Commissioner of Banks. While we believe that we will receive all required approvals for the Boston Private acquisition, there can be no assurance as to the receipt or timing of receipt of these approvals. The receipt of such approvals may be conditional upon actions that we are not obligated to take under the Boston Private merger agreement, which could result in the termination of the Boston Private merger agreement by us, or, if such approvals are received, their terms could have a detrimental impact on us following the completion of the Boston Private acquisition. A substantial delay in obtaining any required authorizations, approvals or consents, or the imposition of unfavorable terms, conditions or restrictions contained in such authorizations, approvals or consents, could prevent the completion of the Boston Private acquisition or have an adverse effect on the anticipated benefits of the Boston Private acquisition, thereby adversely impacting our business, financial condition or results of operations.
We may fail to realize the growth prospects and other benefits anticipated as a result of the Boston Private acquisition.
The success of the Boston Private acquisition will depend, in part, on our ability to realize the anticipated business opportunities and growth prospects from the Boston Private acquisition. We may never realize these business opportunities and growth prospects. The Boston Private acquisition and related integration will require significant efforts and expenditures. Our management might have its attention diverted while trying to integrate operations and corporate and administrative infrastructures and the cost of integration may exceed our expectations. We currently expect to incur approximately $200 million of restructuring costs in connection with the transaction and to take an additional write-down on Boston Private’s loan portfolio at closing. We may also be required to make unanticipated capital expenditures or investments in order to maintain, improve or sustain the acquired operations or take write-offs or impairment charges and may be subject to unanticipated or unknown liabilities relating to the Boston Private acquisition. In addition, the success of the Boston Private acquisition will depend in part on our ability to retain Boston Private’s employees and clients. If we are unable, for any reason, to retain key employees or clients, we may not realize the anticipated benefits of the transaction.
If any of these factors limit our ability to complete the Boston Private acquisition and integration of operations successfully or on a timely basis, our expectations of future results of operations following the Boston Private acquisition might not be met. In addition, it is possible that the integration process could result in the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to achieve the anticipated benefits of the Boston Private acquisition and could harm our financial performance.
General Risk Factors
If we fail to retain key employees or recruit new employees, or if we groware unable to total average consolidated assetseffectively manage the growth of $50 billion or greater or crossour employee base, our growth and results of operations could be adversely affected.
We rely on key personnel, including a substantial number of employees who have technical expertise in their subject matter area and a strong network of relationships with individuals and institutions in the Advanced Approaches Thresholds,markets we serve. In addition, as we expand into international markets, we will becomeneed to hire local personnel within those markets. Further, competition for key personnel is substantial and may increase, particularly if new competitors seek to enter one of our markets or existing market participants seek to increase their market share. If we were to have less success in recruiting and retaining these employees than our competitors, for reasons including domestic or foreign regulatory restrictions on compensation practices, inability to effectively address issues related to human capital management, or the availability of more attractive opportunities elsewhere, our growth and results of operations could be adversely affected. In addition, we have experienced meaningful growth in our employee base in recent years. The number of our full-time equivalent employees increased from 3,564 at December 31, 2019 to 4,461 at December 31, 2020, and is expected to continue to increase through our organic growth, as well as through potential acquisitions, such as our pending acquisition of Boston Private Financial Holdings, Inc. If this growth places strain on our operations, corporate culture or human capital management practices, or if we are unable to adequately integrate new employees or to maintain employee satisfaction, our growth and results of operations could be adversely impacted.
Moreover, equity awards are an important component of our compensation program, especially for our executive officers and other members of senior management. The extent of shares available for grant in connection with such equity awards pursuant to our incentive compensation plans is generally subject to stockholder approval. If we do not have sufficient shares to grant to existing or new employees, there could be an adverse effect on our recruiting and retention efforts, which could impact our growth and results of operations.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential holders of our securities could lose confidence in our financial reporting, which would harm our business and the trading price of our securities.
Maintaining and adapting our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act and related rules and regulations of the SEC, can be costly and require significant management attention. As we continue to grow or acquire additional businesses, our internal controls may become more stringent risk management requirementscomplex and require additional resources to ensure they remain effective amidst dynamic regulatory and other guidance. Failure to maintain effective controls or implement required new or improved controls or difficulties encountered in the process may harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered accounting firm identify material weaknesses in our internal controls over financial reporting or if we are otherwise required to restate our financial statements, we could be required to implement costly and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. We may also face regulatory enforcement or other actions, including the potential delisting of our common stock from the NASDAQ Stock Market. This could have an adverse effect on our business, financial condition or results of operations, as well as the trading price of our securities, and could potentially subject us to litigation.
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. Also, our global initiatives, as well as continuing trends towards the convergence of international accounting standards, such as rules that may be adopted under the International Financial Reporting Standards (“IFRS”), may result in our Company being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or external auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition or results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our revising or restating prior period financial statements.
We could be adversely affected by changes in tax laws and regulations or their interpretations.
We are subject to the income tax laws of the United States, its constituent states and municipalities and those of the foreign jurisdictions in which we have business operations. These tax laws are complex and may be subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. Changes to the tax laws, including as a result of the changes in the U.S. presidential administration and the U.S. Congress, administrative rulings or court decisions could increase our compliance costsprovision for income taxes and require us to further enhancereduce our risk management framework and practices. See the section "Business-Supervision and Regulation-Enhanced Prudential Standards" under this Part I, Item 1 of this report.
net income.
We rely on quantitative models to measure risks and to estimate certain financial values.
Quantitative models may be used to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loancredit losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and resultresults of operations, and managing risk. However, all models have certain limitations. For example, our measurement methodologies rely on many assumptions, historical analyses and correlations. These assumptions may not capture or fully incorporate conditions leading to losses, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. Additionally, as businesses and markets evolve, our measurements may not accurately reflect the changing environment. Further, even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design. Although we employ strategies to manage and govern the risks associated with our use of models, they may not be effective or fully reliable. As a result, our models may not capture or fully express the risks we face, suggest that we have sufficient capitalization when we do not, lead us to misjudge the business and economic environment in which we operate and ultimately cause planning failures or the reporting of incorrect information to our regulators. Any such occurrence or the perception of such occurrence by our regulators, investors or clients could in turn have a material adverse effect on our business, operations and financial conditions.
Our capital stress testing processes rely on analytical and forecasting models that may prove to be inadequate or inaccurate, which could adversely affect the effectiveness of our strategic planning and our ability to pursue certain corporate goals.
In accordance with the Dodd-Frank Act and the Federal Reserve’s regulations thereunder, banking organizations with $10 billion to $50 billion in assets are required to perform annual capital stress tests. Thecondition, results of our capital stress tests may require us to increase our regulatory capital, raise additional capitaloperations or take or decline to take certain other capital-related actions under certain circumstances. Our stress testing processes also rely on our use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Furthermore, even if our assumptions are accurate predictors of future performance, the models they are based on may prove to be inadequate or inaccurate because of other flaws in their design or implementation. Also, the assumptions we utilize for our stress tests may not be met with regulatory approval, which could result in our stress tests receiving a failing grade. In addition to adversely affecting our reputation, failing our stress tests would likely preclude or delay the possibility of our growth through acquisition, and would limit our ability to pay any cash dividends.reputation.
We could be adversely affected by changes in tax laws and regulations or the interpretations of such laws and regulations.
We are subject to the income tax laws of the United States, its constituent states and municipalities and those of the foreign jurisdictions in which we have business operations. These tax laws are complex and may be subject to different interpretations. We must make judgments and interpretations about the application of these inherently complex tax laws when determining our provision for income taxes, our deferred tax assets and liabilities, and our valuation allowance. Changes to the tax laws, administrative rulings or court decisions could increase our provision for income taxes and reduce our net income.
U.S. or international tax laws and regulations may continue to change from time-to-time. In particular, the Tax Cuts and Jobs Act (the “TCJ Act”), which became effective as of January 2018, among other things, reduced the federal tax rate for corporation and changed or limited certain tax deductions. While the new tax law is expected to result in overall lower tax expense for the Company beginning in 2018, we incurred an increase in our provision for income taxes due to a one-time revaluation of certain tax-related assets to reflect the lower tax rate as of the end of the fourth quarter of 2017. While impossible to predict, future changes to applicable U.S. or international tax rules could subsequently increase our effective tax rate or could otherwise have a material impact on our income tax expense.
The price of our commoncapital stock may be volatile or may decline.
The trading price of our commoncapital stock may fluctuate or be adversely affected as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations incontrol, including trading volumes that affect the market prices of the shares of many companies. These broad market fluctuationsFactors that could adversely affect the markettrading price of our common stock. Among the factors that could affect ourcapital stock price are:include:
•actual or anticipated quarterly fluctuations in our operating results and financial condition;
•changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts;
•failure to meet analysts’ revenue or earnings estimates;
•speculation in the press or investment community;
•strategic actions by us or our competitors;
•actions by institutional stockholders;
•fluctuations in the stock price and operating results of our competitors;
•general market conditions and, in particular, developments related to market conditions for the financial services industry;
•actual or anticipated changes in interest rates;
•market perceptions about the innovation economy, including levels of funding or "exit"“exit” activities of companies in the industries we serve;
•proposed or adopted regulatory changes or developments;
•anticipated or pending investigations, proceedings or litigation that involve or affect us; and
•domestic and international economic factors unrelated to our performance.
The trading price of the shares of our common stock and depositary shares representing fractional interests in our preferred stock and the value of our other securities will further depend on many factors, which may change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, and future sales of our equity or equity-related securities. In some cases, the markets have produced downward pressure on trading prices of capital stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. A significant decline in the trading price of our capital stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation, as well as the loss of key employees.
Our capital stock is subordinate to our existing and future indebtedness. | |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Our capital stock, including our common stock and depositary shares representing fractional interests in our preferred stock, ranks junior to all of SVB Financial’s existing and future indebtedness and other non-equity claims with respect to assets available to satisfy claims against us, including claims in the event of our liquidation. We may incur additional indebtedness in the future to increase our capital resources or if our total capital ratio or the total capital ratio of the Bank falls below the required minimums. Furthermore, our common stock is subordinate to our outstanding preferred stock.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
Our corporate headquarters facility consists of threetwo buildings and is located at 3003 Tasman Drive, Santa Clara, California. The totalWe currently occupy 157,177 square footage of the premises leased under the current lease arrangement is approximately 213,625 square feet.feet at such location. The lease will expire on September 30, 2024, unless terminated earlier or extended.
We currently operate 2930 regional offices including an administrative office, in the United States as well as offices outside the United States. We operate throughout the Silicon Valley with offices in Santa Clara, Menlo Park and Palo Alto. Other regional offices in California include Irvine, Santa Monica, Sherman Oaks, San Diego, San Francisco, St. Helena, Santa Rosa and Pleasanton. Office locations outside of California but within the United States include: Tempe, Arizona; Broomfield, Colorado; Atlanta, Georgia; Chicago, Illinois; Newton, Massachusetts; Minneapolis, Minnesota; New York, New York; Morrisville, North Carolina; Portland, Oregon; Conshohocken, Pennsylvania; Austin, Texas; Dallas, Texas; Salt Lake City, Utah; Arlington, Virginia; and Seattle, Washington. Our international offices include those located in: Hong Kong; Beijing and Shanghai, China; Bangalore, India; Herzliya
Pituach, Israel; and London, England. All of our office properties are occupied under leases or license agreements, which expire at various dates through 2030,2031, and in most instances include options to renew or extend at market rates and terms. We also own leasehold improvements, equipment, furniture, and fixtures at our offices, all of which are used in our business activities.
Our Global Commercial Bank operations are principally conducted out of our corporate headquarters in Santa Clara, California and our office in Tempe, Arizona, and our lending teams operate out of the various regional and international offices. SVB Private Bank and SVB Capital principally operate out of our Menlo Park, California offices. SVB Leerink principally operates out of our Boston, Massachusetts and New York, New York offices.
We believe that our properties are in good condition and suitable for the conduct of our business.
ITEM 3.LEGAL PROCEEDINGS
The information set forth under Note 25—27—“Legal Matters” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report is incorporated herein by reference.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
| |
ITEM 5. | MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol SIVB. The per share range of high and low sale prices for our common stock as reported on the NASDAQ Global Select Market, for each full quarterly period during the years ended December 31, 2017 and 2016, was as follows:
|
| | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| Three months ended: | | Low | | High | | Low | | High |
March 31st | | $ | 165.05 |
| | $ | 198.83 |
| | $ | 77.87 |
| | $ | 118.09 |
|
June 30th | | 165.08 |
| | 194.87 |
| | 82.90 |
| | 115.93 |
|
September 30th | | 159.44 |
| | 191.38 |
| | 87.28 |
| | 112.83 |
|
December 31st | | 180.33 |
| | 242.92 |
| | 108.94 |
| | 175.74 |
|
As of December 31, 2017, SVB Financial had no preferred stock outstanding."SIVB".
Holders
As of January 29, 2018,31, 2021, there were 625576 registered holders of our stock, and wecommon stock. We believe there were approximately 79,100148,967 beneficial holders of common stock whose shares were held in the name of brokerage firms or other financial institutions. We are not provided with the number or identities of all of these stockholders, but we have estimated the number of such stockholders from the number of stockholder documents requested by these brokerage firms for distribution to their customers.
Dividends and Stock Repurchases
SVB Financial does not currently pay cash dividends on our common stock. We have not paid any cash dividends since 1992.
Our Board of Directors periodically evaluates whether to pay cash dividends, taking into consideration such factors as it considers relevant, including our current and projected financial performance, our projected sources and uses of capital, general economic conditions, considerations relating to our current and potential stockholder base, applicable regulatory requirements, and relevant tax laws. Our ability to pay cash dividends is also limited by generally applicable corporate and banking laws and regulations. See “Business-Supervision and Regulation-Restrictions on Dividends” under Part I, Item 1 of this report. SVB Financial did not repurchase any of its common stock during 2017.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 of this report.
Repurchases of Equity Securities by the Issuer and Affiliated Purchasers
The $350 million stock repurchase program authorized by the Company's Board of Directors and announced on October 24, 2019, expired on October 29, 2020. During the three months ended December 31, 2020, we did not repurchase any shares of our common stock under the stock repurchase program.
Performance Graph
Performance Graph
The following information is not deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and the report shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act or the Exchange Act.
The following graph compares, for the period from December 31, 20122015 through December 31, 2017,2020, the cumulative total stockholder return on the common stock of the Company with (i) the cumulative total return of the Standard and Poor's 500 (“S&P 500”) Index, (ii) the cumulative total return of the NASDAQ Composite index, and (iii) the cumulative total return of the NASDAQ Bank Index. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is not necessarily indicative of future stock price performance.
Comparison of 5 Year Cumulative Total Return*
Among SVB Financial Group, the S&P 500 Index, the NASDAQ Composite Index and the NASDAQ Bank Index
* $100 invested on 12/31/1215 in stock or index, including reinvestment of dividends.Fiscal year ended December 31st.
Copyright ©20182021Standard & Poor's, a division of S&P Global. All rights reserved.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| SVB Financial Group | | $ | 100.00 | | | $ | 144.37 | | | $ | 196.61 | | | $ | 159.73 | | | $ | 211.14 | | | $ | 326.18 | |
| S&P 500 | | 100.00 | | | 111.96 | | | 136.40 | | | 130.42 | | | 171.49 | | | 203.04 | |
| NASDAQ Composite | | 100.00 | | | 108.87 | | | 141.13 | | | 137.12 | | | 187.44 | | | 271.64 | |
| NASDAQ Bank | | 100.00 | | | 137.14 | | | 145.21 | | | 120.76 | | | 150.06 | | | 138.59 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| SVB Financial Group | | $ | 100.00 |
| | $ | 187.35 |
| | $ | 207.38 |
| | $ | 212.44 |
| | $ | 306.70 |
| | $ | 417.67 |
|
| S&P 500 | | 100.00 |
| | 132.39 |
| | 150.51 |
| | 152.59 |
| | 170.84 |
| | 208.14 |
|
| NASDAQ Composite | | 100.00 |
| | 141.63 |
| | 162.09 |
| | 173.33 |
| | 187.19 |
| | 242.29 |
|
| NASDAQ Bank | | 100.00 |
| | 140.76 |
| | 146.90 |
| | 157.63 |
| | 216.24 |
| | 227.94 |
|
ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA
| |
ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and supplementary data as presented under Part II, Item 8 of this report. Information as of and for the years ended December 31, 2017, 20162020, 2019 and 20152018 is derived from audited financial statements presented separately herein, while information as of and for the years ended December 31, 20142017 and 20132016 is derived from audited financial statements not presented separately within.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except per share amounts and ratios) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Income statement summary: | | | | | | | | | | |
| Net interest income | | $ | 1,420,369 |
| | $ | 1,150,523 |
| | $ | 1,006,425 |
| | $ | 856,595 |
| | $ | 697,344 |
|
| Provision for credit losses | | (92,304 | ) | | (106,679 | ) | | (95,683 | ) | | (65,997 | ) | | (71,335 | ) |
| Noninterest income | | 557,231 |
| | 456,552 |
| | 472,794 |
| | 572,239 |
| | 673,206 |
|
| Noninterest expense | | (1,010,655 | ) | | (859,797 | ) | | (779,962 | ) | | (700,669 | ) | | (607,602 | ) |
| Income before income tax expense | | 874,641 |
| | 640,599 |
| | 603,574 |
| | 662,168 |
| | 691,613 |
|
| Income tax expense | | (355,463 | ) | | (250,333 | ) | | (228,754 | ) | | (183,508 | ) | | (146,830 | ) |
| Net income before noncontrolling interests | | 519,178 |
| | 390,266 |
| | 374,820 |
| | 478,660 |
| | 544,783 |
|
| Net income attributable to noncontrolling interests | | (28,672 | ) | | (7,581 | ) | | (30,916 | ) | | (214,790 | ) | | (330,266 | ) |
| Net income available to common stockholders | | $ | 490,506 |
|
| $ | 382,685 |
|
| $ | 343,904 |
| | $ | 263,870 |
| | $ | 214,517 |
|
| Common share summary: | | | | | | | | | | |
| Earnings per common share—basic | | $ | 9.33 |
| | $ | 7.37 |
| | $ | 6.70 |
| | $ | 5.39 |
| | $ | 4.73 |
|
| Earnings per common share—diluted | | 9.20 |
| | 7.31 |
| | 6.62 |
| | 5.31 |
| | 4.67 |
|
| Book value per common share | | 79.11 |
| | 69.71 |
| | 61.97 |
| | 55.24 |
| | 42.83 |
|
| Weighted average shares outstanding—basic | | 52,588 |
| | 51,915 |
| | 51,318 |
| | 48,931 |
| | 45,309 |
|
| Weighted average shares outstanding—diluted | | 53,306 |
| | 52,349 |
| | 51,916 |
| | 49,662 |
| | 45,944 |
|
| Year-end balance sheet summary: | | | | | | | | | | |
| Available-for-sale securities | | $ | 11,120,664 |
| | $ | 12,620,411 |
| | $ | 16,380,748 |
| | $ | 13,540,655 |
| | $ | 11,986,821 |
|
| Held-to-maturity securities | | 12,663,455 |
| | 8,426,998 |
| | 8,790,963 |
| | 7,421,042 |
| | — |
|
| Loans, net of unearned income | | 23,106,316 |
|
| 19,899,944 |
|
| 16,742,070 |
| | 14,384,276 |
| | 10,906,386 |
|
| Total assets | | 51,214,467 |
|
| 44,683,660 |
|
| 44,686,703 |
| | 39,337,869 |
| | 26,410,144 |
|
| Deposits | | 44,254,075 |
|
| 38,979,868 |
|
| 39,142,776 |
| | 34,343,499 |
| | 22,472,979 |
|
| Short-term borrowings | | 1,033,730 |
| | 512,668 |
| | 774,900 |
| | 7,781 |
| | 5,080 |
|
| Long-term debt | | 695,492 |
| | 795,704 |
| | 796,702 |
| | 451,362 |
| | 452,806 |
|
| SVBFG stockholders' equity | | 4,179,795 |
| | 3,642,554 |
| | 3,198,134 |
| | 2,813,072 |
| | 1,961,635 |
|
| Average balance sheet summary: | | | | | | | | | | |
| Available-for-sale securities | | $ | 12,424,137 |
| | $ | 13,331,315 |
| | $ | 14,436,140 |
| | $ | 12,907,135 |
| | $ | 10,598,879 |
|
| Held-to-maturity securities | | 9,984,610 |
| | 8,192,183 |
| | 7,829,177 |
| | 3,696,417 |
| | — |
|
| Loans, net of unearned income | | 21,159,394 |
| | 18,283,591 |
| | 14,762,941 |
| | 11,502,941 |
| | 9,351,378 |
|
| Total assets | | 48,380,272 |
| | 43,987,451 |
| | 40,846,377 |
| | 32,961,936 |
| | 23,208,169 |
|
| Deposits | | 42,745,148 |
| | 38,759,059 |
| | 36,293,362 |
| | 28,320,825 |
| | 19,619,194 |
|
| Short-term borrowings | | 48,505 |
| | 220,251 |
| | 23,226 |
| | 6,264 |
| | 27,018 |
|
| Long-term debt | | 766,943 |
| | 796,302 |
| | 770,848 |
| | 452,215 |
| | 453,906 |
|
| SVBFG stockholders' equity | | 3,961,405 |
| | 3,509,526 |
| | 3,075,371 |
| | 2,523,235 |
| | 1,927,674 |
|
| Capital ratios: | | | | | | | | | | |
| SVBFG CET 1 risk-based capital ratio | | 12.78 | % | | 12.80 | % | | 12.28 | % | | — | % | | — | % |
| SVBFG total risk-based capital ratio | | 13.96 |
| | 14.21 |
| | 13.84 |
| | 13.92 |
| | 13.13 |
|
| SVBFG tier 1 risk-based capital ratio | | 12.97 |
| | 13.26 |
| | 12.83 |
| | 12.91 |
| | 11.94 |
|
| SVBFG tier 1 leverage ratio | | 8.34 |
| | 8.34 |
| | 7.63 |
| | 7.74 |
| | 8.31 |
|
| SVBFG tangible common equity to tangible assets (1) | | 8.16 |
| | 8.15 |
| | 7.16 |
| | 7.15 |
| | 7.43 |
|
| SVBFG tangible common equity to risk-weighted assets (1) | | 12.77 |
| | 12.89 |
| | 12.34 |
| | 12.93 |
| | 11.61 |
|
| Bank CET 1 risk-based capital ratio | | 12.06 |
| | 12.65 |
| | 12.52 |
| | — |
| | — |
|
| Bank total risk-based capital ratio | | 13.04 |
| | 13.66 |
| | 13.60 |
| | 12.12 |
| | 11.32 |
|
| Bank tier 1 risk-based capital ratio | | 12.06 |
| | 12.65 |
| | 12.52 |
| | 11.09 |
| | 10.11 |
|
| Bank tier 1 leverage ratio | | 7.56 |
| | 7.67 |
| | 7.09 |
| | 6.64 |
| | 7.04 |
|
| Bank tangible common equity to tangible assets (1) | | 7.47 |
| | 7.77 |
| | 6.95 |
| | 6.38 |
| | 6.58 |
|
| Bank tangible common equity to risk-weighted assets (1) | | 11.98 |
| | 12.75 |
| | 12.59 |
| | 11.19 |
| | 9.84 |
|
| Average SVBFG stockholders' equity to average assets | | 8.19 |
| | 7.98 |
| | 7.53 |
| | 7.65 |
| | 8.31 |
|
| Selected financial results: | | | | | | | | | | |
| Return on average assets | | 1.01 | % | | 0.87 | % | | 0.84 | % | | 0.80 | % | | 0.92 | % |
| Return on average common SVBFG stockholders' equity | | 12.38 |
| | 10.90 |
| | 11.18 |
| | 10.46 |
| | 11.13 |
|
| Net interest margin | | 3.05 |
| | 2.72 |
| | 2.57 |
| | 2.81 |
| | 3.29 |
|
| Gross loan charge-offs to average total gross loans | | 0.31 |
| | 0.53 |
| | 0.34 |
| | 0.37 |
| | 0.45 |
|
| Net loan charge-offs to average total gross loans | | 0.27 |
| | 0.46 |
| | 0.30 |
| | 0.32 |
| | 0.33 |
|
| Nonperforming assets as a percentage of total assets | | 0.23 |
| | 0.27 |
| | 0.28 |
| | 0.10 |
| | 0.20 |
|
| Allowance for loan losses as a percentage of total gross loans | | 1.10 |
| | 1.13 |
| | 1.29 |
| | 1.14 |
| | 1.30 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands, except per share amounts and ratios) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Income statement summary: | | | | | | | | | | |
| Net interest income | | $ | 2,156,284 | | | $ | 2,096,601 | | | $ | 1,893,988 | | | $ | 1,420,369 | | | $ | 1,150,523 | |
| Provision for credit losses | | (219,510) | | | (106,416) | | | (87,870) | | | (92,304) | | | (106,679) | |
| Noninterest income | | 1,840,148 | | | 1,221,479 | | | 744,984 | | | 557,231 | | | 456,552 | |
| Noninterest expense | | (2,035,041) | | | (1,601,262) | | | (1,188,193) | | | (1,010,655) | | | (859,797) | |
| Income before income tax expense | | 1,741,881 | | | 1,610,402 | | | 1,362,909 | | | 874,641 | | | 640,599 | |
| Income tax expense | | (447,587) | | | (425,685) | | | (351,561) | | | (355,463) | | | (250,333) | |
| Net income before noncontrolling interests | | 1,294,294 | | | 1,184,717 | | | 1,011,348 | | | 519,178 | | | 390,266 | |
| Net income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | | | (28,672) | | | (7,581) | |
| Preferred stock dividends | | (17,151) | | | — | | | — | | | — | | | — | |
| Net income available to common stockholders | | $ | 1,191,217 | | | $ | 1,136,856 | | | $ | 973,840 | | | $ | 490,506 | | | $ | 382,685 | |
| Common share summary: | | | | | | | | | | |
| Earnings per common share—basic | | $ | 23.05 | | | $ | 21.90 | | | $ | 18.35 | | | $ | 9.33 | | | $ | 7.37 | |
| Earnings per common share—diluted | | 22.87 | | | 21.73 | | | 18.11 | | | 9.20 | | | 7.31 | |
| Book value per common share | | 151.86 | | | 118.67 | | | 97.29 | | | 79.11 | | | 69.71 | |
| Weighted average shares outstanding—basic | | 51,685 | | | 51,915 | | | 53,078 | | | 52,588 | | | 51,915 | |
| Weighted average shares outstanding—diluted | | 52,084 | | | 52,311 | | | 53,772 | | | 53,306 | | | 52,349 | |
| Year-end balance sheet summary: | | | | | | | | | | |
| Available-for-sale securities | | $ | 30,912,438 | | | $ | 14,014,919 | | | $ | 7,790,043 | | | $ | 11,120,664 | | | $ | 12,620,411 | |
| Held-to-maturity securities | | 16,592,153 | | | 13,842,946 | | | 15,487,442 | | | 12,663,455 | | | 8,426,998 | |
| Loans, amortized cost | | 45,181,488 | | | 33,164,636 | | | 28,338,280 | | | 23,106,316 | | | 19,899,944 | |
| Total assets | | 115,511,007 | | | 71,004,903 | | | 56,927,979 | | | 51,214,467 | | | 44,683,660 | |
| Deposits | | 101,981,807 | | | 61,757,807 | | | 49,328,900 | | | 44,254,075 | | | 38,979,868 | |
| Short-term borrowings | | 20,553 | | | 17,430 | | | 631,412 | | | 1,033,730 | | | 512,668 | |
| Long-term debt | | 843,628 | | | 347,987 | | | 696,465 | | | 695,492 | | | 795,704 | |
| SVBFG stockholders' equity | | 8,219,700 | | | 6,470,307 | | | 5,116,209 | | | 4,179,795 | | | 3,642,554 | |
| Average balance sheet summary: | | | | | | | | | | |
| Available-for-sale securities | | $ | 18,652,580 | | | $ | 9,597,712 | | | $ | 9,789,211 | | | $ | 12,424,137 | | | $ | 13,331,315 | |
| Held-to-maturity securities | | 13,113,300 | | | 14,672,342 | | | 14,997,846 | | | 9,984,610 | | | 8,192,183 | |
| Loans, amortized cost | | 37,265,976 | | | 29,916,207 | | | 25,630,520 | | | 21,159,394 | | | 18,283,591 | |
| Total assets | | 85,791,659 | | | 63,211,630 | | | 55,229,060 | | | 48,380,272 | | | 43,987,451 | |
| Deposits | | 75,015,430 | | | 55,056,950 | | | 48,075,344 | | | 42,745,148 | | | 38,759,059 | |
| Short-term borrowings | | 401,159 | | | 144,545 | | | 643,886 | | | 48,505 | | | 220,251 | |
| Long-term debt | | 632,266 | | | 685,445 | | | 695,938 | | | 766,943 | | | 796,302 | |
| SVBFG common stockholders' equity | | 7,079,356 | | | 5,674,531 | | | 4,734,417 | | | 3,961,405 | | | 3,509,526 | |
| Capital ratios: | | | | | | | | | | |
| SVBFG CET 1 risk-based capital ratio | | 11.04 | % | | 12.58 | % | | 13.41 | % | | 12.78 | % | | 12.80 | % |
| SVBFG total risk-based capital ratio | | 12.64 | | | 14.23 | | | 14.45 | | | 13.96 | | | 14.21 | |
| SVBFG tier 1 risk-based capital ratio | | 11.89 | | | 13.43 | | | 13.58 | | | 12.97 | | | 13.26 | |
| SVBFG tier 1 leverage ratio | | 7.45 | | | 9.06 | | | 9.06 | | | 8.34 | | | 8.34 | |
| SVBFG tangible common equity to tangible assets (1) | | 6.66 | | | 8.39 | | | 8.99 | | | 8.16 | | | 8.15 | |
| SVBFG tangible common equity to risk-weighted assets (1) | | 11.87 | | | 12.76 | | | 13.28 | | | 12.77 | | | 12.89 | |
| Bank CET 1 risk-based capital ratio | | 10.70 | | | 11.12 | | | 12.41 | | | 12.06 | | | 12.65 | |
| Bank total risk-based capital ratio | | 11.49 | | | 11.96 | | | 13.32 | | | 13.04 | | | 13.66 | |
| Bank tier 1 risk-based capital ratio | | 10.70 | | | 11.12 | | | 12.41 | | | 12.06 | | | 12.65 | |
| Bank tier 1 leverage ratio | | 6.43 | | | 7.30 | | | 8.10 | | | 7.56 | | | 7.67 | |
| Bank tangible common equity to tangible assets (1) | | 6.24 | | | 7.24 | | | 8.13 | | | 7.47 | | | 7.77 | |
| Bank tangible common equity to risk-weighted assets (1) | | 11.58 | | | 11.31 | | | 12.28 | | | 11.98 | | | 12.75 | |
| Average SVBFG stockholders' equity to average assets | | 8.25 | | | 8.98 | | | 8.57 | | | 8.19 | | | 7.98 | |
| Selected financial results: | | | | | | | | | | |
| Return on average assets | | 1.39 | % | | 1.80 | % | | 1.76 | % | | 1.01 | % | | 0.87 | % |
| Return on average SVBFG common stockholders' equity | | 16.83 | | | 20.03 | | | 20.57 | | | 12.38 | | | 10.90 | |
| Net interest margin | | 2.67 | | | 3.51 | | | 3.57 | | | 3.05 | | | 2.72 | |
| Gross loan charge-offs to average total loans | | 0.28 | | | 0.31 | | | 0.26 | | | 0.31 | | | 0.53 | |
| Net loan charge-offs to average total loans | | 0.20 | | | 0.24 | | | 0.22 | | | 0.27 | | | 0.46 | |
| Nonperforming assets as a percentage of total assets | | 0.09 | | | 0.15 | | | 0.17 | | | 0.23 | | | 0.27 | |
| Allowance for credit losses for loans as a percentage of total loans | | 0.99 | | | 0.91 | | | 0.99 | | | 1.10 | | | 1.13 | |
| |
(1) | (1) See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Resources-Capital Ratios” under Part II, Item 7 of this report for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Consolidated Financial Data" under Part II, Item 6 and our audited consolidated financial statements and supplementary data as presented under Part II, Item 8 of this report.Certain prior period amounts have been reclassified to conform to current period presentations. For a comparison of 2019 results to 2018 results and other 2018 information not included herein, refer “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 2019 Form 10-K filed with the SEC on February 28, 2020.
The following discussion and analysis of our financial condition and results of operations contains forward-looking statements. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties. See our cautionary language at the beginning of this report under “Forward-Looking Statements”. Actual results could differ materially because of various factors, including but not limited to those discussed in “Risk Factors,” under Part I, Item 1A of this report.
Our fiscal year ends December 31st and, unless otherwise noted, references to years or fiscal years are for fiscal years ended December 31st.
Overview of Company Operations
SVB Financial 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. For more than 35 years, we have been dedicated to helping innovative companies and their investors succeed, especially in the technology, life science/healthcare, private equity/venture capital and premium wine industries. We provide our clients of all sizes and stages with a diverse set of products and services to support them through all stages of their life cycles, and key innovation markets around the world.
We offer commercial and private banking products and services through our principal subsidiary, the Bank, which is a California-state chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers asset management, private wealth management and other investment services. WeIn addition, through SVB Financial's other subsidiaries and divisions, we also offer investment banking services and non-banking products and services, such as funds management, M&A advisory services and venture capital and private equity investment, through our subsidiaries and divisions.investment.
Management’s Overview of 20172020 Financial Performance
Overall, our performance in 2020 reflected the resilience of our markets and our ability to execute effectively. In spite of a near zero market rate environment for most of 2020, the COVID-19 pandemic and adoption of CECL, we had an outstandinga record year in 2017,with strong profitability and unprecedented balance sheet growth fueled by continued strong client fundraising and exit activity. Additionally, we had investment banking revenue which was marked by higher net interest and core fee income, increased warrant gains, strong total client funds growth, healthy loan growth andexceeded our expectations, stable credit quality. Additionally,and outsized warrant and investment gains. During 2020, we saw higher noninterest expense, primarilymanaged through the COVID-19 pandemic by utilizing our business continuity plans to maintain client service while most of our employees and partners worked from increased compensationhome. We supported and engaged with clients virtually, including the hosting of remote events designed to facilitate our response to the business needs of our clients within the innovation ecosystem. We also successfully administered client support initiatives, such as those which allowed temporary payment deferrals and other relief provided through the PPP. We provided employees extended benefits, expenses, as well as increased professional services expenses reflective of increased expenses topractical support our increasing regulatory, risk management and compliance initiatives tofor working from home. Additionally, we committed financial support our domesticfor local, regional and global expansion as well as investments made in projects, systems,activities focused on health security, food security and technology to support our revenue growthshelter, and related initiatives and other operating costs. small business owner relief during this unprecedented time.
Our core business continued to perform well as a result of our ongoing focus on innovation companies and their investors and continued efforts to secure client relationships. We saw continued success in working with private equity/venture capital firms and technologylife science/healthcare clients as well as clients in our private banking division. Additionally, on January 4, 2021, we announced our acquisition of Boston Private Financial Holdings, which we expect to close in mid-2021, subject to the satisfaction of customary closing conditions. We believe this acquisition will significantly accelerate and scale the growth of our private bank and wealth management strategy, advance our expertise, products and technology; and provide the opportunity to deepen our client relationships.
Recent Developments - COVID-19
The current global health crisis created by the COVID-19 pandemic has resulted in unprecedented challenges and volatility in economic, market and business conditions. It has caused significant economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. We cannot predict at this time the scope and duration of the pandemic, as COVID-19 has not yet been contained and the number of cases remains elevated and may continue to increase in many locations, including in the United States and other
international locations in which we operate. Moreover, the impact of COVID-19 on economic, market and business conditions is likely to be exacerbated if uncontained for a prolonged period of time, and even if it is contained, there may be a seasonal or other resurgence of the pandemic as we have seen domestically and internationally. While there have been varying governmental and other responses to slow or control the spread of COVID-19 and to mitigate the adverse impact of COVID-19, such as stay at home orders, restrictions on business activities, economic relief for individuals and businesses, and monetary policy measures, such responses have met varying degrees of success, and it remains uncertain whether these actions will be successful as the pandemic continues.
The global spread of COVID-19 accelerated in March 2020 at which time it was declared a pandemic by the World Health Organization. Since then, we have been focused on our business and human response to the crisis --- managing and operating our business as seamlessly as possible, and supporting our clients, employees and communities as we weather the crisis together.
During this volatile time, we remain focused on our capital and liquidity. We are “well-capitalized,” remaining above all applicable regulatory capital requirements. We have a liquid and high-quality balance sheet, with approximately half of our assets as of December 31, 2020 held in cash and marketable securities, primarily agency-backed mortgage securities and U.S. Treasuries. We also have access to other funding sources, as necessary. Moreover, we paused our stock repurchase program, and the program expired on October 29, 2020. In addition, we have also elected to use a phase-in transitional approach for the estimated impact of CECL on our regulatory capital, as permitted by the 2020 CECL Transition Rule.
The uncertainties of the duration and severity of the effect of COVID-19 on economic, market and business conditions have made it more difficult to forecast our operating results and the macroeconomic conditions to which our business is subject. Some notable negative effects emerged late in the first quarter and continued through the fourth quarter, as discussed in this Management Discussion and Analysis section, but any longer-term effects or trends remain subject to significant uncertainty. Moreover, we are subject to heightened business, operational (including fraud), market, credit and other risks related to the COVID-19 pandemic, which may have an adverse effect on our business, financial condition and results of operations. (See “Risk Factors” under Part II, Item 1A of this report)
We continue to serve our clients during this difficult time, while managing our credit risk. During the fourth quarter, we continued to provide special debt relief assistance to support certain clients who are experiencing financial hardships related to the COVID-19 pandemic, including offering certain venture-backed companies, Private Bank, Wine and other clients the opportunity to temporarily defer their scheduled loan principal payments. We continue to engage with our clients to understand client needs, and we may implement additional assistance or other relief to support clients across various sectors and life stages. Additionally, we continue to participate as a lender in the PPP and the second draw loan program under the CARES Act and the U.K. Coronavirus Business Interruption Loan Scheme ("CBILS") and Coronavirus Large Business Interruption Loan Scheme ("CLBILS"), and may participate in other government relief programs in the U.S. or internationally. These government programs are complex and our participation in any of these programs may lead to governmental, regulatory and other scrutiny, litigation, negative publicity and reputation damage for us and our customers who participate. For example, like many other participating banks in the United States, we have been named in various lawsuits regarding the right to agent fees under the PPP. Overall, these relief measures, whether our own programs or our participation in government programs, are new programs for us and we may not be successful in implementing or administering the programs as intended. Further, the extent to which these programs are successful in assisting our clients is uncertain. These relief programs are temporary in nature, such as the PPP, and our loan payment deferral programs, which expired during the second half of the year (certain of our programs ended in the third quarter with the remaining ending by year end). Our clients may experience financial difficulties without the continued support from these programs. If these relief measures are not effective, or if they are effective for only a limited period and our clients experience delayed financial hardship, there may be an adverse effect on our revenue and results of operations, including increased provisions in our allowance for credit losses, higher rates of default and increased credit losses in future periods.
We are also prioritizing the safety and well-being of our employees. In March 2020, we activated our business continuity and pandemic plans globally, moving to a work-from-home plan, prohibiting all business travel, postponing or moving online all SVB-hosted events, and enabling remote access to our systems. We have implemented various programs to provide work, life and health-related support for our employees, ranging from expanded time-off, counseling and medical benefits for employees directly impacted by COVID-19, to providing reimbursements and practical support for working from home. In addition, we are also developing a plan for employees to eventually return to work in our offices, which will be subject to a variety of complex considerations. While much of our workforce continues to work from home through the crisis (currently expected until July 2021, subject to further extensions or other changes) and perhaps to some extent beyond the crisis, in the event that we allow an increase in remote working practices even after the pandemic subsides, we will need to continue to provide support to our employees to work effectively in a remote environment, taking into consideration needs relating to technology, physical working conditions, work/life balance, and continued team collaboration.
Moreover, consistent with our tradition of supporting and giving back to our communities, we have also committed $5.5 million to local, regional and global COVID-19 relief activities in various U.S. and international locations where we have offices. This includes corporate contributions to global, national and regional charities, direct community-based giving, and a 3:1 match for employees’ donations to relevant causes. Additionally, we have donated approximately $20 million in PPP fees received from the SBA, net of our costs incurred, to charitable relief efforts.
Although the effects of the pandemic remain uncertain, for the year ending 2021, we currently expect growth in average on-balance sheet deposits and average loans and stable core fees. While credit metrics have been stable to date, we continue to monitor our portfolio vigilantly, in light of continued economic uncertainty, fading government stimulus and expiring deferral programs. Additionally, volatile equity markets, IPO and M&A activity may impact investment banking and market-sensitive revenues. Even after the pandemic subsides, it is possible that the U.S. and other major economies will continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.
Results for the fiscal year ended, and as of, December 31, 20172020 (compared to the fiscal year ended, and as of, December 31, 2016,2019, where applicable):
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| | | | | | | |
| BALANCE SHEET | | EARNINGS |
Assets.$48.485.8 billion in average total assets (up 10.0%35.7%). $51.2$115.5 billion in period-end total assets (up 14.6%62.7%). Loans.$21.237.3 billion in average total loan balances, net of unearned incomeamortized cost (up 15.7%24.6%). $23.1$45.2 billion in period-end total loan balances, net of unearned incomeamortized cost (up 16.1%36.2%). Total Client Funds. (on-balance sheet deposits and off-balance sheet client investment funds).$94.3192.8 billion in average total client fund balances (up 14.8%31.5%). $104.6$243.0 billion in period-end total client fund balances (up 23.4%51.0%). AFS/HTM Fixed Income Investments.$22.431.8 billion in average fixed income investment securities (up 4.1%30.9%). $23.8$47.5 billion in period-end fixed income investment securities (up 13.0%70.5%).
| | EPS. Earnings per diluted share of $9.20$22.87 (up 25.9%5.2%). Net Income.Consolidated net income available to common stockholders of $490.5 million$1.19 billion (up 28.2%4.8%). - Net interest income of $1.4$2.16 billion (up 23.5%2.8%). - Net interest margin of 3.05% (up 33bps)2.67% (down 84bps). - Noninterest income of $557.2 million, with non- GAAP$1.84 billion (up 50.6%), non-GAAP core fee income+ of $379.0$603.2 million (down 6.0%) and non-GAAP SVB Leerink revenue++ of $480.6 million (up 19.9%91.1%). - Noninterest expense of $1.0$2.04 billion (up 17.5%27.1%).
ROE.Return on average equity (“ROE”) performance of 12.38%16.83% (down 16.0%). Operating Efficiency Ratio.Operating efficiency ratio of 51.11%50.92% with a non-GAAP core operating efficiency ratio of 55.90%+++.
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| | |
| CAPITAL | | CREDIT QUALITY |
Capital.Capital++++.Continued strong capital, with all capital ratios considered "well-capitalized" under banking regulations,regulations. SVBFG and SVB capital ratios, respectively, were:
- CET 1 risk-based capital ratio of 12.78%11.04% and 12.06%10.70%. - Tier 1 risk-based capital ratio of 12.97%11.89% and 12.06%10.70%. - Total risk-based capital ratio of 13.96%12.64% and 13.04%11.49%. - Tier 1 leverage ratio of 8.34%7.45% and 7.56%6.43%.
| | Credit Quality. Continued disciplined underwriting.Stable credit in an evolving credit environment. - Allowance for loancredit losses of 1.10%0.99% as a percentage of period-end total gross loans. - ProvisionAllowance for loan lossesunfunded credit commitments of 0.37%0.38% as a percentage of total grossunfunded credit commitments. - Provision for loans of 0.42% as a percentage of total loans. - Net loan charge-offs of 0.27%0.20% as a percentage of average total gross loans. |
+ Consists of fee income forfrom client investments, foreign exchange, credit cards, deposit services, client investments,lending related activities and letters of credit and lending related activities.standby letters of credit. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under “Results of Operations—Noninterest Income”).
++ Consists of investment banking revenue and commissions. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under “Results of Operations—Noninterest Income”).
+++This ratio excludes certain financial line items where performance is typically subject to market or other conditions beyond our control and excludes SVB Leerink revenue and expenses as well as other non-recurring expenses. It is calculated by dividing noninterest expense after adjusting for noninterest expense attributable to SVB Leerink and other non-recurring expenses by total revenue after adjusting for noninterest income attributable to SVB Leerink, net gains or losses on investment securities and equity warrant assets, investment banking revenue and commissions. Additionally, noninterest expense and total revenue are adjusted for income or losses and expenses attributable to noncontrolling interests and adjustments to net interest income for a taxable equivalent basis. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under "Results of Operations-Noninterest Expense").
++++ In March 2020, the federal banking agencies provided transitional relief to banking organizations with respect to the impact of CECL on regulatory capital. Under the 2020 CECL Transition Rule, banking organizations may delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year period to phase out the aggregate capital benefit provided during the initial two-year delay. We have elected to use this five-year transition option. For additional details, see "Capital Resources" within "Consolidated Financial Condition" under Part 1, Item 2 of this report.
A summary of our performance in 20172020 compared to 20162019 is as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except per share amounts and ratios) | | 2017 | | 2016 | | % Change |
| Income Statement: | | | | | | | |
| Diluted earnings per share (1) | | $ | 9.20 |
| | $ | 7.31 |
| | 25.9 |
| % |
| Net income available to common stockholders (1) | | 490,506 |
| | 382,685 |
| | 28.2 |
| |
| Net interest income | | 1,420,369 |
| | 1,150,523 |
| | 23.5 |
| |
| Net interest margin | | 3.05 | % | | 2.72 | % | | 33 |
| bps |
| Provision for credit losses (2) | | $ | 92,304 |
| | $ | 106,679 |
| | (13.5 | ) | % |
| Noninterest income | | 557,231 |
| | 456,552 |
| | 22.1 |
| |
| Noninterest expense (2) | | 1,010,655 |
| | 859,797 |
| | 17.5 |
| |
| Non-GAAP core fee income (3) | | 378,963 |
| | 316,170 |
| | 19.9 |
| |
| Non-GAAP noninterest income, net of noncontrolling interests (3) | | 527,779 |
| | 448,513 |
| | 17.7 |
| |
| Non-GAAP noninterest expense, net of noncontrolling interests (2)(4) | | 1,009,842 |
| | 859,273 |
| | 17.5 |
| |
| Balance Sheet: | | | | | | | |
| Average available-for-sale-securities | | $ | 12,424,137 |
| | $ | 13,331,315 |
| | (6.8 | ) | % |
| Average held-to-maturity securities | | 9,984,610 |
| | 8,192,183 |
| | 21.9 |
| |
| Average loans, net of unearned income | | 21,159,394 |
| | 18,283,591 |
| | 15.7 |
| |
| Average noninterest-bearing demand deposits | | 35,235,200 |
| | 31,189,218 |
| | 13.0 |
| |
| Average interest-bearing deposits | | 7,509,948 |
| | 7,569,841 |
| | (0.8 | ) | |
| Average total deposits | | 42,745,148 |
| | 38,759,059 |
| | 10.3 |
| |
| Earnings Ratios: | | | | | | | |
| Return on average assets (5) | | 1.01 | % | | 0.87 | % | | 16.1 |
| % |
| Return on average common SVBFG stockholders’ equity (6) | | 12.38 |
| | 10.90 |
| | 13.6 |
| |
| Asset Quality Ratios: | | | | | | | |
| Allowance for loan losses as a percentage of total period-end gross loans | | 1.10 | % | | 1.13 | % | | (3 | ) | bps |
| Allowance for loan losses for performing loans as a percentage of total gross performing loans | | 0.92 |
| | 0.94 |
| | (2 | ) | |
| Gross loan charge-offs as a percentage of average total gross loans | | 0.31 |
| | 0.53 |
| | (22 | ) | |
| Net loan charge-offs as a percentage of average total gross loans | | 0.27 |
| | 0.46 |
| | (19 | ) | |
| Capital Ratios: | | | | | | | |
| SVBFG CET 1 risk-based capital ratio | | 12.78 | % | | 12.80 | % | | (2 | ) | bps |
| SVBFG total risk-based capital ratio | | 13.96 |
| | 14.21 |
| | (25 | ) | |
| SVBFG tier 1 risk-based capital ratio | | 12.97 |
| | 13.26 |
| | (29 | ) | |
| SVBFG tier 1 leverage ratio | | 8.34 |
| | 8.34 |
| | — |
| |
| SVBFG tangible common equity to tangible assets (7) | | 8.16 |
| | 8.15 |
| | 1 |
| |
| SVBFG tangible common equity to risk-weighted assets (7) | | 12.77 |
| | 12.89 |
| | (12 | ) | |
| Bank CET 1 risk-based capital ratio | | 12.06 |
| | 12.65 |
| | (59 | ) | |
| Bank total risk-based capital ratio | | 13.04 |
| | 13.66 |
| | (62 | ) | |
| Bank tier 1 risk-based capital ratio | | 12.06 |
| | 12.65 |
| | (59 | ) | |
| Bank tier 1 leverage ratio | | 7.56 |
| | 7.67 |
| | (11 | ) | |
| Bank tangible common equity to tangible assets (7) | | 7.47 |
| | 7.77 |
| | (30 | ) | |
| Bank tangible common equity to risk-weighted assets (7) | | 11.98 |
| | 12.75 |
| | (77 | ) | |
| Other Ratios: | | | | | | | |
| GAAP operating efficiency ratio (8) | | 51.11 | % | | 53.50 | % | | (4.5 | ) | % |
| Non-GAAP operating efficiency ratio (4) | | 51.76 |
| | 53.70 |
| | (3.6 | ) | |
| Book value per common share (9) | | $ | 79.11 |
| | $ | 69.71 |
| | 13.5 |
| |
| Other Statistics: | | | | | | | |
| Average full-time equivalent employees | | 2,396 |
| | 2,225 |
| | 7.7 |
| % |
| Period-end full-time equivalent employees | | 2,438 |
| | 2,311 |
| | 5.5 |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except per share amounts, employees and ratios) | | 2020 | | 2019 | | % Change |
| Income Statement: | | | | | | | |
| Diluted earnings per share | | $ | 22.87 | | | $ | 21.73 | | | 5.2 | | % |
| Net income available to common stockholders | | 1,191,217 | | | 1,136,856 | | | 4.8 | | |
| Net interest income | | 2,156,284 | | | 2,096,601 | | | 2.8 | | |
| Net interest margin | | 2.67 | % | | 3.51 | % | | (84) | | bps |
| Provision for credit losses | | $ | 219,510 | | | $ | 106,416 | | | 106.3 | | % |
| Noninterest income | | 1,840,148 | | | 1,221,479 | | | 50.6 | | |
| Noninterest expense | | 2,035,041 | | | 1,601,262 | | | 27.1 | | |
| Non-GAAP core fee income (1) | | 603,198 | | | 641,838 | | | (6.0) | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Non-GAAP core fee income, plus SVB Leerink Revenue (1) | | 1,083,823 | | | 893,361 | | | 21.3 | | |
| Non-GAAP SVB Leerink revenue (1) | | 480,625 | | | 251,523 | | | 91.1 | | |
| Non-GAAP noninterest income, net of noncontrolling interests (1) | | 1,753,773 | | | 1,172,855 | | | 49.5 | | |
| Non-GAAP noninterest expense, net of noncontrolling interests (2) | | 2,034,566 | | | 1,600,427 | | | 27.1 | | |
| Balance Sheet: | | | | | | | |
| Average available-for-sale-securities | | $ | 18,652,580 | | | $ | 9,597,712 | | | 94.3 | | % |
| Average held-to-maturity securities | | 13,113,300 | | | 14,672,342 | | | (10.6) | | |
| Average loans, amortized cost | | 37,265,976 | | | 29,916,207 | | | 24.6 | | |
| Average noninterest-bearing demand deposits | | 50,192,642 | | | 38,783,470 | | | 29.4 | | |
| Average interest-bearing deposits | | 24,822,788 | | | 16,273,480 | | | 52.5 | | |
| Average total deposits | | 75,015,430 | | | 55,056,950 | | | 36.3 | | |
| Earnings Ratios: | | | | | | | |
| Return on average assets (3) | | 1.39 | % | | 1.80 | % | | (22.8) | | % |
| | | | | | | |
| Return on average SVBFG common stockholders’ equity (4) | | 16.83 | | | 20.03 | | | (16.0) | | |
| | | | | | | |
| Asset Quality Ratios: | | | | | | | |
| Allowance for credit losses for loans as a percentage of total period-end total loans (5) | | 0.99 | % | | 0.91 | % | | 8 | | bps |
| Allowance for credit losses for performing loans as a percentage of total performing loans (5) | | 0.87 | | | 0.78 | | | 9 | | |
| Gross loan charge-offs as a percentage of average total loans (5) | | 0.28 | | | 0.31 | | | (3) | | |
| Net loan charge-offs as a percentage of average total loans (5) | | 0.20 | | | 0.24 | | | (4) | | |
| Capital Ratios: | | | | | | | |
| SVBFG CET 1 risk-based capital ratio | | 11.04 | % | | 12.58 | % | | (154) | | bps |
| SVBFG total risk-based capital ratio | | 12.64 | | | 14.23 | | | (159) | | |
| SVBFG tier 1 risk-based capital ratio | | 11.89 | | | 13.43 | | | (154) | | |
| SVBFG tier 1 leverage ratio | | 7.45 | | | 9.06 | | | (161) | | |
| SVBFG tangible common equity to tangible assets (6) | | 6.66 | | | 8.39 | | | (173) | | |
| SVBFG tangible common equity to risk-weighted assets (66) | | 11.87 | | | 12.76 | | | (89) | | |
| Bank CET 1 risk-based capital ratio | | 10.70 | | | 11.12 | | | (42) | | |
| Bank total risk-based capital ratio | | 11.49 | | | 11.96 | | | (47) | | |
| Bank tier 1 risk-based capital ratio | | 10.70 | | | 11.12 | | | (42) | | |
| Bank tier 1 leverage ratio | | 6.43 | | | 7.30 | | | (87) | | |
| Bank tangible common equity to tangible assets (6) | | 6.24 | | | 7.24 | | | (100) | | |
| Bank tangible common equity to risk-weighted assets (6) | | 11.58 | | | 11.31 | | | 27 | | |
| Other Ratios: | | | | | | | |
| GAAP operating efficiency ratio (7) | | 50.92 | % | | 48.26 | % | | 5.5 | | % |
| | | | | | | |
| Non-GAAP core operating efficiency ratio (2) | | 55.90 | | | 48.06 | | | 16.3 | | |
| Total costs of deposits (8) | | 0.08 | | | 0.32 | | | (75.0) | | |
| Book value per common share (9) | | $ | 151.86 | | | $ | 118.67 | | | 28.0 | | |
| Tangible book value per common share (10) | | 147.92 | | | 115.05 | | | 28.6 | | |
| Other Statistics: | | | | | | | |
| Average full-time equivalent employees | | 4,040 | | 3,362 | | 20.2 | | % |
| Period-end full-time equivalent employees | | 4,461 | | 3,564 | | 25.2 | | |
| |
(1) | Included in diluted earnings per common share and net income available to common stockholders for the year ended December 31, 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 changes to prior period amounts. |
43
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(2) | As of the first quarter of 2017, our consolidated statements of income have been modified from prior periods’ presentation to conform to the current period presentation to reflect 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 was reported separately as a component of noninterest expense. |
| |
(3) | See “Results of Operations–Noninterest Income” below for a description and reconciliation of non-GAAP core fee income and noninterest income. |
| |
(4) | See “Results of Operations–Noninterest Expense” below for a description and reconciliation of non-GAAP noninterest expense and non-GAAP operating efficiency ratio. |
| |
(5) | Ratio represents consolidated net income available to common stockholders divided by average assets. |
| |
(6) | Ratio represents consolidated net income available to common stockholders divided by average SVBFG stockholders’ equity. |
| |
(7) | See “Capital Resources–Capital Ratios” for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets. |
| |
(8) | The operating efficiency ratio is calculated by dividing total noninterest expense by total net interest income plus noninterest income. |
| |
(9) | Book value per common share is calculated by dividing total SVBFG stockholders’ equity by total outstanding common shares at period-end. |
(1)See “Results of Operations–Noninterest Income” for a description and reconciliation of non-GAAP core fee income, non-GAAP core fee income plus SVB Leerink revenue and non-GAAP SVB Leerink revenue. (2)See “Results of Operations–Noninterest Expense” for a description and reconciliation of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio.
(3)Ratio represents consolidated net income available to common stockholders divided by average assets.
(4)Ratio represents consolidated net income available to common stockholders divided by average SVBFG common stockholders’ equity.
(5)For the year ended December 31, 2020, the ratios are calculated using the amortized cost basis for total loans as a result of the adoption of CECL. Prior period ratios were calculated using total gross loans in accordance with previous methodology.
(6)See “Capital Resources–Capital Ratios” for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.
(7)The operating efficiency ratio is calculated by dividing total noninterest expense by total net interest income plus noninterest income.
(8)Ratio represents total cost of deposits and is calculated by dividing interest expense from deposits by average total deposits.
(9)Book value per common share is calculated by dividing total SVBFG common stockholders’ equity by total outstanding common shares at period-end.
(10)Tangible book value per common share is calculated by dividing tangible common equity by total outstanding common shares at period-end. Tangible common equity is a non-GAAP measure defined under the section “Capital Resources-Capital Ratios.”
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding our financial condition and results of operations. We have identified four policiesone policy as being critical because they requireit requires us to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain, and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. We evaluate our estimates and assumptions on an ongoing basis and we base these estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
OurThis critical accounting policies include those that addresspolicy addresses the adequacy of the allowance for loancredit losses for loans and allowance for unfunded credit commitments, measurements of fair value, the valuation of equity warrant assets and the recognition and measurement of income tax assets and liabilities.commitments. Our senior management has discussed and reviewed the development, selection, application and disclosure of thesethis critical accounting policiespolicy with the Audit Committee of our Board of Directors.
We disclose our method and approach for each of our criticalthis accounting policiespolicy in Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Allowance for LoanCredit Losses and Allowance for Unfunded Credit Commitments
Allowance for Loan Losses
The allowance for loan losses is management's estimate of credit losses inherent in the loan portfolio at the balance sheet date. We consider ourthis accounting policy for the allowance for loan losses to be critical as our estimation of the allowanceexpected credit losses involves material management estimates by us and is particularly susceptible to significant changes in the near-term. Determining the allowance for loancredit losses for loans and unfunded credit commitments requires us to make forecasts that are highly uncertain and require a high degree of judgment. Our loan loss reserve methodology is applied to our loan portfolio and we maintain the allowance for loan losses at levels that we believe are appropriate to absorb estimated probable losses inherent in our loan portfolio. A committee comprised of senior management evaluates the adequacy of the allowance for credit losses for loans, which includes review of loan losses.portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
OurExpected Credit Losses Estimate for Loans and Unfunded Credit Commitments
The methodology for estimating the amount of expected credit losses ("ECL") reported in the allowance for credit losses is the sum of two main components: (1) ECL assessed on a collective basis for pools of loans and unfunded credit commitments that share similar risk characteristics and (2) ECL assessed for individual loans and unfunded credit commitments that do not share similar risk characteristics with other loans. Estimating the amount of ECL involves significant judgment on various matters including the assessment of risk characteristics, assignment of risk ratings, development and weighting of macroeconomic forecasts, and incorporation of historical loss experience.
We derive an estimated ECL using three predictive metrics: (1) probability of default ("PD"), (2) loss given default ("LGD") and (3) exposure at default ("EAD"), over the estimated life of the exposure. PD and LGD assumptions are developed based on quantitative models and inherent risk of credit loss, both of which involve significant judgment. One of the most significant areas of judgment involved in estimating the allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses. The selection of variables used in our econometric models varies by loan portfolio, but typically includes real gross domestic product ("GDP") growth and unemployment rates. Changes in management’s assumptions and forecasts could significantly affect its estimate of expected credit losses across various risk-based segments. For example, macroeconomic conditions and forecasts related to the duration and severity of the economic downturn caused by the COVID-19 pandemic have been rapidly changing and remain highly uncertain. Alternative forecasts considered could have significant impact on the ECL.
To the extent the remaining contractual lives of loans in the portfolio extend beyond this three-year period, we revert to historical averages using an autoregressive method of mean reversion that will continue to gradually trend towards the mean historical loss over the remaining contractual lives of loans, adjusted for prepayments. The macroeconomic scenarios are reviewed on a quarterly basis.
We also apply certain qualitative factor adjustments to the results obtained through our quantitative ECL models to consider model imprecision, emerging risk assessments, trends and other subjective factors that may not be adequately represented in the quantitative ECL models. These adjustments to historical loss information are for asset specific risk characteristics, and also reflect our assessment of the extent that current conditions and reasonable and supportable forecasts differ from conditions that existed during the period over which historical information was evaluated. Given the current processes and risk monitoring by the Bank, management believes the combination of the quantitative model results and the qualitative factor adjustment represents a reasonable and appropriate estimate of ECL.
Allowance for Loan Losses and Allowance for Unfunded Credit Commitments
For our method and approach for our critical accounting policy related to the allowance for loan losses is established for loan losses that are probable and incurred but not yet realized. The process of anticipating loan losses is inherently imprecise. We apply a systematic process for the evaluation of individual loans and pools of loans for inherent risk of loan losses. At the time of approval, each loan in our portfolio is assigned a credit risk rating through an evaluation process, which includes consideration of such factors as payment status, the financial condition of the borrower, borrower compliance with loan covenants, underlying collateral values, potential loan concentrations, and general economic conditions. The credit risk ratings for each loan are monitored and updated on an ongoing basis.
The allowance for loan losses is based on a formula allocation for similarly risk-rated loansunfunded credit commitments, which were superseded by client industry sector and individually for impaired loans. Our formula allocation is determined on a quarterly basis by utilizing a historical loan loss migration model, which is a statistical model used to estimate an appropriate allowance for outstanding loan balances by calculating the likelihood of a loan being charged-off based on its credit risk rating using historical loan performance data from our portfolio. The formula allocation provides the average loan loss experience for each portfolio segment, which considers our quarterly historical loss experience since the year 2000, both by risk-rating category and client industry sector. The resulting loan loss factors for each risk-rating category and client industry sector are ultimately applied to the respective period-end client loan balances for each corresponding risk-rating category by client industry sector to provide an estimation of the allowance for loan losses.
We also supplement our allowance by applying qualitative allocations to the results we obtained through our historical loan loss migration model to ascertain the total allowance for loan losses. These qualitative allocations are based upon management's assessment of the risks that may lead to a loan loss experience different from our historical loan loss experience. These risks are aggregated to become our qualitative allocation. Referrecently adopted accounting standards in 2020, please refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report forreport.
Adoption of New Accounting Standards
Financial Instruments - Credit Losses
In June 2016, the FASB issued a summarynew Accounting Standard Update (ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), which amends the factors management considers for its qualitative allocation as part of management's estimate of the changing risksincurred loss impairment methodology in the lending
environment. In 2016, we made certain enhancements to factors included in our qualitative allocation. We changed from a total loan portfolio weighted average loss factor to a portfolio segment specific loss factor for our estimated reserve floor for portfolio segments that would not draw a minimum reserve based on the lack of historical loan loss experience. Additionally, in response to increased average borrowing amounts by our clients, we increased our definition of a large loan used for our qualitative reserve for large funded loan exposure. These enhancements were applied during the fourth quarter of 2016.
Allowance for Unfunded Credit Commitments
The allowance for unfunded credit commitments is determined usingcurrent GAAP with a methodology that is inherently similar to the methodology used for calculating the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and exposure at funding. Our reserve methodology for unfunded loan commitments applies segment specific historicalreflects a current expected credit loss experience for our funded loan portfolio and segment specific probability of funding factorsmeasurement to estimate the allowance for unfunded credit commitments. The allowance forlosses over the contractual life of the financial assets (including loans, unfunded credit commitments also includes certain qualitative allocations as deemed appropriate by management. We consider our accounting policy forand HTM securities) and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. While the CECL model does not apply to available-for-sale debt securities, ASU 2016-13 does require entities to record an allowance for unfunded credit commitmentslosses when recognizing credit losses for available-for-sale securities, rather than reduce the amortized cost of the securities by direct write-offs, which allows for reversal of credit impairments in future periods based on improvements in credit. We adopted the guidance on January 1, 2020, using a modified retrospective approach. We recognized the cumulative effect of initially applying CECL as an adjustment to the opening balance of retained earnings, net of tax. The comparative information has not been restated and continues to be criticalreported under the accounting standards in effect for those periods.
We completed a comprehensive implementation process that included loss forecasting model development, evaluation of technical accounting topics, updates to our allowance for credit loss accounting policies, reporting processes and related internal controls, overall operational readiness for our adoption of CECL as estimationwell as parallel runs for CECL alongside our previous allowance process. We provided quarterly updates to senior management and to the Audit and Credit Committees of the reserve involves material estimates by management and is susceptible to changes inBoard of Directors throughout the near term. Theimplementation process. For additional details regarding our allowance for unfunded credit commitments equals management’s best estimate of probable credit losses that are inherent in the portfolio at the balance sheet date.
Fair Value Measurements
We use fair value measurements to record fair valuemethodology, see Note 9—“Loans and Allowance for certain financial instrumentsCredit Losses: Loans and to determine fair value disclosures. We disclose our method and approach for fair value measurements of assets and liabilities in Note 2—“Summary of Significant Accounting Policies”Unfunded Credit Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
ASC 820, Fair Value MeasurementsBased on our loan, unfunded credit commitment and Disclosures, establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the significant inputs to the valuation methodology used for measurement are observable or unobservable and the significance of the level of the input to the entire measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels for measuring fair value are defined in Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value (Level 1 measurements). When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring and provide more weighting to price quotes that are based upon orderly transactions (Level 2 measurements). In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement (Level 3 measurements). Significant judgment is required to determine whether certain assets measured at fair value are included in Level 2 or Level 3. When making this judgment, we consider available information and our understanding of the valuation techniques and significant inputs used. The classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the Level 3 inputs to the instrument's fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3. Accordingly, the degree of judgment exercised by management in determining fair value is greater for financial assets and liabilities categorized as Level 3.
The following table summarizes our financial assets and liabilities that are measured at fair value on a recurring basis and the amounts measured using significant Level 3 inputsHTM security portfolios composition at December 31, 20172019, and 2016:the then current economic environment, the cumulative effect of the changes to our consolidated balance sheets at January 1, 2020, for the adoption of CECL were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Balance at December 31, 2019 | | Adjustments Due to Adoption of ASC 326 | | Balance at
January 1, 2020 | | | | | | |
| Assets: | | | | | | | | | | | | |
| Allowance for credit losses: loans | | $ | 304,924 | | | $ | 25,464 | | | $ | 330,388 | | | | | | | |
| Allowance for credit losses: held-to-maturity securities | | — | | | 174 | | | 174 | | | | | | | |
| Deferred tax assets | | 28,433 | | | 13,415 | | | 41,848 | | | | | | | |
| Liabilities: | | | | | | | | | | | | |
| Allowance for credit losses: unfunded credit commitments | | 67,656 | | | 22,826 | | | 90,482 | | | | | | | |
| Stockholders' equity: | | | | | | | | | | | | |
| Retained earnings, net of tax | | 4,575,601 | | | (35,049) | | | 4,540,552 | | | | | | | |
Recent Accounting Pronouncements
In March 2020, the FASB issued a new Accounting Standard Update (ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting). This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting
|
| | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| (Dollars in thousands) | | Total Balance | | Level 3 | | Total Balance | | Level 3 |
| Assets carried at fair value | | $ | 11,481,237 |
| | $ | 122,250 |
| | $ | 12,974,923 |
| | $ | 130,853 |
|
| As a percentage of total assets | | 22.4 | % | | 0.2 | % | | 29.0 | % | | 0.3 | % |
| Liabilities carried at fair value | | $ | 108,581 |
| | $ | — |
| | $ | 64,438 |
| | $ | — |
|
| As a percentage of total liabilities | | 0.2 | % | | — | % | | 0.2 | % | | — | % |
| As a percentage of assets carried at fair value | |
|
| | 1.1 |
| | | | 1.0 |
|
Financial assets valued using Level 3 measurements consistburdens of our non-marketable securities (investments in venture capitalthe expected market transition from LIBOR and other investmentinterbank offered rates to alternative reference rates, such as SOFR. For instance, entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met, an entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination; (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met; and (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities in sharesthat reference an interest rate affected by reference rate reform. This guidance became effective on March 12, 2020 and an entity may elect to prospectively apply each category of public company stock subject to certain sales restrictions for which the sales restriction has not been lifted) and equity warrant assets (rights to shares of private and public company capital stock). The valuation techniques of our non-marketable securities carried under fair value accounting and equity warrant assets involve a significant degree of management judgment. Refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for a summary of the valuation techniques and significant inputs used for each class of Level 3 assets.
The inherent uncertaintyexemption independently, either in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material. The timing and amount of changes in fair value, if any, of these financial instruments depend upon factors beyond our control, including the performance of the underlying companies, fluctuations in the market prices of the preferred or common stock of the underlying companies, general volatility and interest rate market factors, and legal and contractual restrictions. The timing and amount of actual net proceeds, if any, from the disposition of these financial instruments depend upon factors beyond our control, including investor demand for IPOs, levels of M&A activity, legal and contractual restrictions on our ability to sell, and the perceived and actual performance of portfolio companies. All of these factors are difficult to predict and there can be no assurances that we will realize the full value of these securities, which could result in significant losses.
During 2017, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $55.2 million (which is inclusive of noncontrolling interest), primarily due to gains on exercised warrant assets. During 2016 and 2015, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $38.1 million and $72.6 million (which is inclusive of noncontrolling interest), respectively.
Derivative Assets-Equity Warrant Assets
As discussed above, the valuation of our equity warrant assets is a Level 3 measurement, which requires a significant degree of management judgment in order to value the assets. Our equity warrant asset policy is also considered a critical policy due to the variability of returns from our shares of private and public companies and due to the degree of management judgment in selecting a valuation technique for our equity warrant assets.
The timing and value realized from the disposition of equity warrant assets depend upon factors beyond our control, including the performance of the underlying portfolio companies, investor demand for IPOs, fluctuations in the price of the underlying common stock of these private and public companies, levels of M&A activity, and legal and contractual restrictions on our ability to sell the underlying securities. All of these factors are difficult to predict. Many equity warrant assets may be terminated or may expire without compensation and may incur valuation losses from lower-priced funding rounds. We are unable to predict future gains or losses with accuracy, and gains or losses could vary materially from period to period.
Additionally, while management has selected the valuation methodology that it believes provides the best estimate of fair value, there are several acceptable valuation techniques as well as alternative approaches for the calculation of significant inputs for the valuation technique. In the event that a different valuation technique or approach for calculating a significant input were to be used, then the estimated values of these assets could differ significantly from the existing values recorded. Further, the inherent uncertainty of valuing assets for which a ready market is unavailable may cause our estimated values of these assets to differ significantly from the values that would have been derived had a ready market for the assets existed, and those differences could be material and ultimately, the recorded fair value of equity warrant assets may never be realized, which could result in significant losses.
Income Taxes
We are subject to income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which we operate. Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax-basis carrying amount. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in theinterim period that includes March 12, 2020, or in a subsequent period through December 31, 2022. The effective guidance did not have an impact on our consolidated financial position or results of operations nor to the enactment date. A valuation allowancedisclosures in the notes to our consolidated financial statements for the year ended December 31, 2020. We have implemented a process to assess the population of contracts that will be impacted by this ASU and to evaluate expedients we will use and when we might apply them. We are currently evaluating the impact this guidance will have on our financial position, results of operations, cash flows and disclosures.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which is provided when management assesses available evidence and exercises their judgment that it is more likely than not that some portionpart of the deferred tax asset will not be realized.
We consider ourFASB’s initiative to reduce cost and complexity related to accounting policy relatingfor income taxes. The ASU eliminates certain exceptions to income taxes to be critical as the determinationgeneral principles of currentASC 740, Income Taxes, and deferred income taxes is based on analyses of many factors including interpretation of federal, state and foreignsimplifies income tax laws,accounting in several areas. The amendments are effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2020, with early adoption permitted. The ASU allows entities to adopt this provision on a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the difference between tax and financial reporting basesbeginning of assets and liabilities (temporary differences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial accounting standards. Actual results could differ significantly from the estimates due to tax law interpretations used in determining the current and deferred income tax liabilities. Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by federal and state taxing authorities.
In establishing a provision for income tax expense, we must make judgments and interpretations about the application of tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions, both domestic and foreign. We evaluate our uncertain tax positions in accordance with ASC 740, Income Taxes. We believe that our unrecognized tax benefits, including related interest and penalties, are adequate in relation to the potential for additional tax assessments.
We are also subject to routine corporate tax audits by the various tax jurisdictions. In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws as well as foreign tax laws. We review our uncertain tax positions quarterly, and we may adjust these unrecognized tax benefits in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.of adoption. We do not anticipate a material impact from this ASU on our financial position, results of operations, cash flows and disclosures.
Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis)
Net interest income is defined as the difference between: (i) interest earned fromon loans, fixed income investments in our available-for-sale and held-to-maturity securities portfolios and short-term investment securities and (ii) interest paid on funding sources. Net interest margin is defined as net interest income, on a fully taxable equivalent basis, as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the applicable federal statutory tax rate of 35.0 percent.rate.
Analysis of Net Interest Income Changes Due to Volume and Rate (Fully Taxable Equivalent Basis)
Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume change.” Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.” The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the amount of simultaneous changes attributable to both volume and rate changes for the years indicated. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.
| | | | | 2017 compared to 2016 | | 2016 compared to 2015 | | | 2020 compared to 2019 | | 2019 compared to 2018 |
| | | Change due to | | Change due to | | | Change due to | | Change due to |
| (Dollars in thousands) | | Volume | | Rate | | Total | | Volume | | Rate | | Total | (Dollars in thousands) | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
| Interest income: | | | | | | | | | | | | | Interest income: | | | | | | | | | | | | |
| Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | $ | 3,952 |
| | $ | 7,483 |
| | $ | 11,435 |
| | $ | 1,073 |
| | $ | 2,930 |
| | $ | 4,003 |
| Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | $ | 13,175 | | | $ | (84,073) | | | $ | (70,898) | | | $ | 50,581 | | | $ | 10,651 | | | $ | 61,232 | |
| Fixed income investment portfolio (taxable) | | 27,671 |
| | 37,525 |
| | 65,196 |
| | (12,947 | ) | | 15,238 |
| | 2,291 |
| Fixed income investment portfolio (taxable) | | 99,431 | | | (33,290) | | | 66,141 | | | (22,833) | | | 50,079 | | | 27,246 | |
| Fixed income investment portfolio (non-taxable) | | 6,627 |
| | (1,274 | ) | | 5,353 |
| | (919 | ) | | (113 | ) | | (1,032 | ) | Fixed income investment portfolio (non-taxable) | | 24,433 | | | (4,049) | | | 20,384 | | | 12,596 | | | 488 | | | 13,084 | |
| Loans, net of unearned income | | 139,416 |
| | 52,217 |
| | 191,633 |
| | 160,623 |
| | (19,615 | ) | | 141,008 |
| |
| Loans, amortized cost | | Loans, amortized cost | | 299,786 | | | (378,930) | | | (79,144) | | | 229,091 | | | 11,594 | | | 240,685 | |
| Increase (decrease) in interest income, net | | 177,666 |
| | 95,951 |
| | 273,617 |
| | 147,830 |
| | (1,560 | ) | | 146,270 |
| Increase (decrease) in interest income, net | | 436,825 | | | (500,342) | | | (63,517) | | | 269,435 | | | 72,812 | | | 342,247 | |
| Interest expense: | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | |
| Interest bearing checking and savings accounts | | 90 |
| | (2 | ) | | 88 |
| | 46 |
| | (85 | ) | | (39 | ) | |
| Interest-bearing checking and savings accounts | | Interest-bearing checking and savings accounts | | 5,589 | | | 749 | | | 6,338 | | | (72) | | | 33 | | | (39) | |
| Money market deposits | | (5 | ) | | 3,071 |
| | 3,066 |
| | (231 | ) | | 745 |
| | 514 |
| Money market deposits | | 14,381 | | | (120,121) | | | (105,740) | | | 79,243 | | | 45,945 | | | 125,188 | |
| Money market deposits in foreign offices | | 22 |
| | (4 | ) | | 18 |
| | (16 | ) | | 7 |
| | (9 | ) | Money market deposits in foreign offices | | 149 | | | 83 | | | 232 | | | (11) | | | (1) | | | (12) | |
| Time deposits | | (11 | ) | | — |
| | (11 | ) | | (34 | ) | | (50 | ) | | (84 | ) | Time deposits | | 1,256 | | | (644) | | | 612 | | | 560 | | | 600 | | | 1,160 | |
| Sweep deposits in foreign offices | | (86 | ) | | (10 | ) | | (96 | ) | | (247 | ) | | 29 |
| | (218 | ) | Sweep deposits in foreign offices | | (629) | | | (18,266) | | | (18,895) | | | 10,137 | | | 11,932 | | | 22,069 | |
| Total increase (decrease) in deposits expense | | 10 |
| | 3,055 |
| | 3,065 |
| | (482 | ) | | 646 |
| | 164 |
| Total increase (decrease) in deposits expense | | 20,746 | | | (138,199) | | | (117,453) | | | 89,857 | | | 58,509 | | | 148,366 | |
| Short-term borrowings | | (1,922 | ) | | 1,378 |
| | (544 | ) | | 972 |
| | 73 |
| | 1,045 |
| Short-term borrowings | | 2,119 | | | (2,399) | | | (280) | | | (12,408) | | | 1,421 | | | (10,987) | |
| 3.50% Senior Notes | | 12 |
| | — |
| | 12 |
| | 994 |
| | 27 |
| | 1,021 |
| 3.50% Senior Notes | | 13 | | | — | | | 13 | | | 12 | | | — | | | 12 | |
| 3.125% Senior Notes | | 3.125% Senior Notes | | 9,184 | | | — | | | 9,184 | | | — | | | — | | | — | |
| 5.375% Senior Notes | | 32 |
| | — |
| | 32 |
| | 59 |
| | (28 | ) | | 31 |
| 5.375% Senior Notes | | (18,945) | | | — | | | (18,945) | | | (505) | | | — | | | (505) | |
| 7.0% Junior Subordinated Debentures | | (106 | ) | | (122 | ) | | (228 | ) | | (11 | ) | | 10 |
| | (1 | ) | |
| 6.05% Subordinated Notes | | (693 | ) | | 254 |
| | (439 | ) | | (33 | ) | | 306 |
| | 273 |
| |
| Total (decrease) increase in borrowings expense | | (2,677 | ) | | 1,510 |
| | (1,167 | ) | | 1,981 |
| | 388 |
| | 2,369 |
| Total (decrease) increase in borrowings expense | | (7,629) | | | (2,399) | | | (10,028) | | | (12,901) | | | 1,421 | | | (11,480) | |
| Increase (decrease) in interest expense, net | | (2,667 | ) | | 4,565 |
| | 1,898 |
| | 1,499 |
| | 1,034 |
| | 2,533 |
| Increase (decrease) in interest expense, net | | 13,117 | | | (140,598) | | | (127,481) | | | 76,956 | | | 59,930 | | | 136,886 | |
| Increase (decrease) in net interest income | | $ | 180,333 |
| | $ | 91,386 |
| | $ | 271,719 |
| | $ | 146,331 |
| | $ | (2,594 | ) | | $ | 143,737 |
| Increase (decrease) in net interest income | | $ | 423,708 | | | $ | (359,744) | | | $ | 63,964 | | | $ | 192,479 | | | $ | 12,882 | | | $ | 205,361 | |
Net Interest Income (Fully Taxable Equivalent Basis)
2017 compared to 2016
Net interest income increased by $271.7$64.0 million to $1.4$2.2 billion in 2017,2020, compared to $1.2$2.1 billion in 2016.2019. Overall, the increase in our net interest income was due primarily to both higheran increase in interest earned from growth in our average loanfixed income securities and investment portfolioloan balances as well as higherdecreases in interest rates.
The main factors affectingpaid on deposits due to market interest rate decreases. These increases were partially offset by lower interest earned on cash and cash equivalents, fixed income investments and interest expense for 2017, compared to 2016, are discussed below:
Interest income for 2017 increased by $273.6 million primarily due to:
| |
◦
| A $191.6 million increase in interest income from loans to $1.0 billion in 2017, compared to $834.2 million in 2016. This increase was reflective of an increase in average loan balances of $2.9 billion and an increase in the overall yield on our loan portfolio of 29 basis points to 4.85 percent from 4.56 percent. Gross loan yields, excluding loan interest recoveries and loan fees, increased to 4.22 percent from 3.97 percent, reflective of the benefit of interest rate increases, partially offset by the strong growth of our lower yielding private equity/ venture capital and Private Bank loan portfolios. Our private equity/venture capital portfolio represented 42.8 percent and 38.7 percent of our total gross loan portfolio at December 31, 2017 and 2016, respectively. Our Private Bank loan portfolio represented 11.3 percent and 10.8 percent of our total gross loan portfolio at December 31, 2017 and 2016, respectively.
|
| |
◦ | A $70.5 million increase in interest income from our fixed income investment securities to $420.9 million in 2017, compared to $350.4 million in 2016. The increase was primarily reflective of an increase in our fixed income investment securities yield of 25 basis points to 1.88 percent from 1.63 percent resulting primarily from higher reinvestment yields on maturing fixed income investments as well as higher yields on new purchases due to interest rate increases. Interest income from our fixed income securities also benefited from an increase of $0.9 billion in average investment security balances as a result of strong deposit growth in 2017.
|
| |
◦ | An $11.4 million increase in interest income from our Federal Reserve deposits to $21.5 million, compared to $10.1 million in 2016. The increase was due primarily to higher yields as a result of rate increases in 2017, as well as higher average interest-earning cash balances in 2017.
|
Interest expense for 2017 increased to $44.8 million, compared to $42.9 million for 2016, primarily due to:
| |
◦ | A $3.1 million increase in deposits interest expense, due primarily to an increase in interest paid on our interest-bearing money market deposits as a result of market rate adjustments. |
| |
◦ | A $1.2 million decrease in borrowings interest expense, due to the repayment of our 6.05% Subordinated Notes and the redemption of our Junior Subordinated Debentures in 2017. |
2016 compared to 2015
Net interest income increased by $143.7 million to $1.2 billionloans reflective of the three 25 basis point Federal Funds rate decreases in 2016, compared to $1.0 billionthe latter half of 2019 as well as the aggregate 150 basis point decrease in 2015. Overall, the increase in our net interest income was due primarily to higher average loan balances.March 2020 as well as lower LIBOR rates.
The main factors affecting interest income and interest expense for 2016,2020, compared to 2015,2019, are discussed below:
•Interest income for 2016 increased2020 decreased by $146.3$63.5 million primarily due to:
| |
◦ | A $141.0 million increase in interest income on◦A $79.1 million decrease in interest income from loans to $834.2 million in 2016, compared to $693.1 million in 2015. This increase was reflective of an increase in average loan balances of $3.5 billion, partially offset by a decrease of 14 basis points in the overall yield on our loan portfolio. The decrease in loan portfolio yield was reflective of a continued shift in the mix of our overall loan portfolio as well as lower loan fee yields, partially offset by the 25 basis point increase in the Federal Funds target rate in December 2015. Our loan growth in 2016 came primarily from our private equity/venture capital and Private Bank loan portfolios which, on average, tend to have higher credit quality, but lower loan yields. Our yields were also impacted by increased price competition. |
| |
◦ | A $1.3 million increase in interest income from our fixed income investment securities to $350.4 million in 2016, compared to $349.1 million in 2015 with the increase due to an $11.7 million decrease in premium amortization expense, net, as a result of new investment purchases at a net discount and lower prepayment estimates following the increase in market interest rates during the fourth quarter of 2016. This was mostly offset by lower interest income as a result of a decrease in average fixed income investment securities of $0.7 billion as a result of our sales of investment securities during the first and second quarters of 2016 to fund loans and repay short-term borrowings. Our overall yields from investment securities increased six basis points to 1.63 percent, primarily attributable to the change in premium amortization. |
| |
◦ | A $4.0 million increase in interest income from our Federal Reserve deposits to $10.1 million, compared to $6.1 million in 2015. The increase was due primarily to the full year impact of the 25 basis point increase in the Federal Funds target rate in December 2015 as well as higher average interest-earning cash balances in 2016. |
Interest expense for 2016 increased to $42.9$1.5 billion in 2020, compared to $1.6 billion in 2019. This decrease was reflective of a decrease in the overall yield on our loan portfolio of 127 basis points to 4.08 percent from 5.35 percent partially offset by an increase in average loan balances of $7.3 billion. Gross loan yields, excluding loan interest recoveries and loan fees, decreased by 122 basis points to 3.57 percent from 4.79 percent, reflective primarily of the impact of the decreases in Federal Funds rates as discussed above, partially offset by an increase reflective of the impact of the reclassification of unrealized gains on interest rate swap cash flow hedges that were terminated in the first quarter of 2020 and protection from effective loan floors, and
◦A $70.9 million decrease in interest income from our interest earning cash and short-term investment securities to $25.5 million, compared to $40.3$96.4 million in 2019. The decrease was due primarily to the decrease in Federal Funds interest rates as discussed above, partially offset by growth in average balances of $6.3 billion.
These decreases were offset by the following:
◦An $86.5 million increase in interest income from our fixed income investment securities to $712.3 million in 2020, compared to $625.8 million in 2019. The increase was due primarily to the increase of $7.5 billion in average fixed income investment securities, partially offset by declines in yields earned on these
investments reflective of the lower interest rate market environment, net of an acceleration of discount accretion due to an increase in expected prepayments for fixed rate commercial mortgaged-backed securities in our held-to-maturity portfolio.
•Interest expense for 2020 decreased to $85.3 million, compared to $212.8 million for 2015,2019, primarily due to:
◦A $117.5 million decrease in interest expense on deposits due primarily to:to a decrease in interest paid on our interest-bearing money market and on-balance sheet sweep deposits reflective of the decreases in market rates. These decreases were partially offset by interest expense from $8.5 billion of growth in average balances for our interest-bearing money markets deposits.
◦A $10.0 million decrease in interest expense on borrowings due primarily to the extinguishment of our 5.375% Senior Notes, partially offset by interest expense for our 3.125% Senior Notes issued towards the end of the second quarter of 2020.
| |
◦ | A $1.0 million increase in short-term borrowings interest expense due primarily to borrowings from our available line of credit with the Federal Home Loan Bank ("FHLB") in 2016 in order to support loan growth and the liquidity needs of the Bank. |
| |
◦ | A $1.0 million increase in interest expense on long-term debt related to the full year impact of the $350 million issuance of our 3.50% Senior Notes (the "3.50% Senior Notes") in late January 2015. |
Net Interest Margin (Fully Taxable Equivalent Basis)
Our net interest margin increaseddecreased by 3384 basis points to 3.052.67 percent in 2017,2020, compared to 2.723.51 percent in 2016 and 2.57 percent in 2015.
2017 compared to 20162019.
The increasedecrease in our net interest margin in 20172020 was reflective primarily of the impact of rising interestdecreases in the Federal Funds and lower LIBOR rates andas discussed above, as well as a shift in the mix of averagethe growth in our interest-earning assets towardsto lower-yielding short-term investment securities portfolio relative to the growth in our higher yielding loan portfolio.portfolio driven by growth in our average deposits, partially offset by gains from our interest rate swap cash flow hedges which were terminated in the first quarter of 2020 and protection from effective loan floors. For the year ended December 31, 2017,2020, our loan portfolio comprised 4546 percent of our average interest-earning assets, an increasea decrease from 4350 percent for the year ended December 31, 2016.2019.
2016 compared to 2015
The increase in our net interest margin in 2016 was reflective primarily of a shift in the mix of average interest-earning assets towards our higher yielding loan portfolio as a result of our sales of investment securities during the first and second quarters of 2016 to fund loans and repay short-term borrowings. For the year ended December 31, 2016, our loan portfolio comprised 43 percent of our average interest-earning assets, an increase from 38 percent for the year ended December 31, 2015. Our net interest margin also increased as a result of the 25 basis point increase in the Federal Funds target rate in December 2015.
Average Balances, Yields and Rates Paid (Fully Taxable Equivalent Basis)
The average yield earned on interest-earning assets is the amount of fully taxable equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is the amount of interest expense expressed as a percentage of average funding sources. The following tables set forth average assets, liabilities, noncontrolling interests, preferred stock and SVBFG common stockholders’ equity, interest income, interest expense, annualized yields and rates and the composition of our net interest margin in 2017, 20162020, 2019 and 2015:2018:
Average Balances, Yields and Rates Paid for the Years Ended December 31,
2017, 20162020, 2019 and
20152018 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | Average Balance | | Interest Income/ Expense | | Yield/ Rate |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
| Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1) | | $ | 3,109,840 |
| | $ | 21,505 |
| | 0.69 | % | | $ | 2,538,362 |
| | $ | 10,070 |
| | 0.40 | % | | $ | 2,267,953 |
| | $ | 6,067 |
| | 0.27 | % |
| Investment Securities: (2) | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | |
| Taxable | | 12,424,137 |
| | 199,423 |
| | 1.61 |
| | 13,331,315 |
| | 185,981 |
| | 1.40 |
| | 14,436,140 |
| | 189,859 |
| | 1.32 |
|
| Held-to-maturity securities: | | | | | | | | | | | | | | | | | | |
| Taxable | | 9,732,869 |
| | 212,710 |
| | 2.19 |
| | 8,130,221 |
| | 160,956 |
| | 1.98 |
| | 7,750,649 |
| | 154,787 |
| | 2.00 |
|
| Non-taxable (3) | | 251,741 |
| | 8,790 |
| | 3.49 |
| | 61,962 |
| | 3,437 |
| | 5.55 |
| | 78,528 |
| | 4,469 |
| | 5.69 |
|
| Total loans, net of unearned income (4) (5) | | 21,159,394 |
| | 1,025,788 |
| | 4.85 |
| | 18,283,591 |
| | 834,155 |
| | 4.56 |
| | 14,762,941 |
| | 693,147 |
| | 4.70 |
|
| Total interest-earning assets | | 46,677,981 |
| | 1,468,216 |
| | 3.15 |
| | 42,345,451 |
| | 1,194,599 |
| | 2.82 |
| | 39,296,211 |
| | 1,048,329 |
| | 2.67 |
|
| Cash and due from banks | | 374,811 |
| | | | | | 325,415 |
| | | | | | 301,529 |
| | | | |
| Allowance for loan losses | | (247,004 | ) | |
| | | | (236,936 | ) | |
| | | | (188,904 | ) | |
| | |
| Other assets (6) | | 1,574,484 |
| | | | | | 1,553,521 |
| | | | | | 1,437,541 |
| | | | |
| Total assets | | $ | 48,380,272 |
| | | | | | $ | 43,987,451 |
| | | | | | $ | 40,846,377 |
| | | | |
Funding sources: | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
| Interest bearing checking and savings accounts | | $ | 433,966 |
| | $ | 334 |
| | 0.08 | % | | $ | 318,381 |
| | $ | 246 |
| | 0.08 | % | | $ | 259,462 |
| | $ | 285 |
| | 0.11 | % |
| Money market deposits | | 5,743,083 |
| | 7,771 |
| | 0.14 |
| | 5,746,892 |
| | 4,705 |
| | 0.08 |
| | 6,029,150 |
| | 4,191 |
| | 0.07 |
|
| Money market deposits in foreign offices | | 203,775 |
| | 84 |
| | 0.04 |
| | 152,388 |
| | 66 |
| | 0.04 |
| | 190,176 |
| | 75 |
| | 0.04 |
|
| Time deposits | | 48,818 |
| | 59 |
| | 0.12 |
| | 58,071 |
| | 70 |
| | 0.12 |
| | 86,115 |
| | 154 |
| | 0.18 |
|
| Sweep deposits in foreign offices | | 1,080,306 |
| | 428 |
| | 0.04 |
| | 1,294,109 |
| | 524 |
| | 0.04 |
| | 1,906,176 |
| | 742 |
| | 0.04 |
|
| Total interest-bearing deposits | | 7,509,948 |
| | 8,676 |
| | 0.12 |
| | 7,569,841 |
| | 5,611 |
| | 0.07 |
| | 8,471,079 |
| | 5,447 |
| | 0.06 |
|
| Short-term borrowings | | 48,505 |
| | 543 |
| | 1.12 |
| | 220,251 |
| | 1,087 |
| | 0.49 |
| | 23,226 |
| | 42 |
| | 0.18 |
|
| 3.50% Senior Notes | | 347,128 |
| | 12,574 |
| | 3.62 |
| | 346,810 |
| | 12,562 |
| | 3.62 |
| | 319,944 |
| | 11,540 |
| | 3.61 |
|
| 5.375% Senior Notes | | 347,862 |
| | 19,415 |
| | 5.58 |
| | 347,277 |
| | 19,383 |
| | 5.58 |
| | 346,724 |
| | 19,352 |
| | 5.58 |
|
| 7.0% Junior Subordinated Debentures | | 52,775 |
| | 3,096 |
| | 5.87 |
| | 54,588 |
| | 3,324 |
| | 6.09 |
| | 54,764 |
| | 3,326 |
| | 6.07 |
|
| 6.05% Subordinated Notes | | 19,178 |
| | 467 |
| | 2.44 |
| | 47,627 |
| | 906 |
| | 1.90 |
| | 49,416 |
| | 633 |
| | 1.28 |
|
| Total interest-bearing liabilities | | 8,325,396 |
| | 44,771 |
| | 0.54 |
| | 8,586,394 |
| | 42,873 |
| | 0.50 |
| | 9,265,153 |
| | 40,340 |
| | 0.44 |
|
| Portion of noninterest-bearing funding sources | | 38,352,585 |
| | | | | | 33,759,057 |
| | | | | | 30,031,058 |
| | | | |
| Total funding sources | | 46,677,981 |
| | 44,771 |
| | 0.10 |
| | 42,345,451 |
| | 42,873 |
| | 0.10 |
| | 39,296,211 |
| | 40,340 |
| | 0.10 |
|
Noninterest-bearing funding sources: | | | | | | | | | | | | | | | | | | |
| Demand deposits | | 35,235,200 |
| | | | | | 31,189,218 |
| | | | | | 27,822,283 |
| | | | |
| Other liabilities | | 721,432 |
| | | | | | 571,205 |
| | | | | | 541,096 |
| | | | |
| SVBFG stockholders’ equity | | 3,961,405 |
| | | | | | 3,509,526 |
| | | | | | 3,075,371 |
| | | | |
| Noncontrolling interests | | 136,839 |
| | | | | | 131,108 |
| | | | | | 142,474 |
| | | | |
| Portion used to fund interest-earning assets | | (38,352,585 | ) | | | | | | (33,759,057 | ) | | | | | | (30,031,058 | ) | | | | |
| Total liabilities and total equity | | $ | 48,380,272 |
| | | | | | $ | 43,987,451 |
| | | | | | $ | 40,846,377 |
| | | | |
| Net interest income and margin | | | | $ | 1,423,445 |
| | 3.05 | % | | | | $ | 1,151,726 |
| | 2.72 | % | | | | $ | 1,007,989 |
| | 2.57 | % |
| Total deposits | | $ | 42,745,148 |
| | | | | | $ | 38,759,059 |
| | | | | | $ | 36,293,362 |
| | | | |
Reconciliation to reported net interest income: | | | | | | | | | | | | | | | | | | |
| Adjustments for taxable equivalent basis | | | | (3,076 | ) | | | | | | (1,203 | ) | | | | | | (1,564 | ) | | |
| Net interest income, as reported | | | | $ | 1,420,369 |
| | | | | | $ | 1,150,523 |
| | | | | | $ | 1,006,425 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | 2020 | | 2019 | | 2018 |
| (Dollars in thousands) | | Average
Balance | | Interest
Income/
Expense | | Yield/
Rate | | Average
Balance | | Interest
Income/
Expense | | Yield/
Rate | | Average
Balance | | Interest
Income/
Expense | | Yield/
Rate |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
| Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities (1) | | $ | 12,251,754 | | | $ | 25,542 | | | 0.21 | % | | $ | 5,932,146 | | | $ | 96,440 | | | 1.63 | % | | $ | 2,820,883 | | | $ | 35,208 | | | 1.25 | % |
| Investment Securities: (2) | | | | | | | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | | | |
| Taxable | | 18,652,580 | | | 336,732 | | | 1.81 | | | 9,597,712 | | | 217,650 | | | 2.27 | | | 9,789,211 | | | 185,120 | | | 1.89 | |
| | | | | | | | | | | | | | | | | | |
| Held-to-maturity securities: | | | | | | | | | | | | | | | | | | |
| Taxable | | 10,728,035 | | | 298,260 | | | 2.78 | | | 13,041,160 | | | 351,201 | | | 2.69 | | | 13,727,745 | | | 356,485 | | | 2.60 | |
| Non-taxable (3) | | 2,385,265 | | | 77,285 | | | 3.24 | | | 1,631,182 | | | 56,901 | | | 3.49 | | | 1,270,101 | | | 43,817 | | | 3.45 | |
| Total loans, amortized cost (4) (5) | | 37,265,976 | | | 1,520,021 | | | 4.08 | | | 29,916,207 | | | 1,599,165 | | | 5.35 | | | 25,630,520 | | | 1,358,480 | | | 5.30 | |
| Total interest-earning assets | | 81,283,610 | | | 2,257,840 | | | 2.77 | | | 60,118,407 | | | 2,321,357 | | | 3.86 | | | 53,238,460 | | | 1,979,110 | | | 3.71 | |
| Cash and due from banks | | 1,021,483 | | | | | | | 592,196 | | | | | | | 480,900 | | | | | |
| Allowance for credit losses: loans | | (508,786) | | | | | | | (306,800) | | | | | | | (282,489) | | | | | |
| Other assets (6) | | 3,995,352 | | | | | | | 2,807,827 | | | | | | | 1,792,189 | | | | | |
| Total assets | | $ | 85,791,659 | | | | | | | $ | 63,211,630 | | | | | | | $ | 55,229,060 | | | | | |
Funding sources: | | | | | | | | | | | | | | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
| Interest-bearing checking and savings accounts | | $ | 2,873,714 | | | $ | 6,762 | | | 0.24 | % | | $ | 498,606 | | | $ | 424 | | | 0.09 | % | | $ | 583,295 | | | $ | 463 | | | 0.08 | % |
| Money market deposits | | 19,741,042 | | | 47,161 | | | 0.24 | | | 13,721,076 | | | 152,901 | | | 1.11 | | | 6,609,873 | | | 27,713 | | | 0.42 | |
| Money market deposits in foreign offices | | 330,512 | | | 296 | | | 0.09 | | | 164,693 | | | 64 | | | 0.04 | | | 192,128 | | | 76 | | | 0.04 | |
| Time deposits | | 335,724 | | | 1,883 | | | 0.56 | | | 111,806 | | | 1,271 | | | 1.14 | | | 62,570 | | | 111 | | | 0.18 | |
| Sweep deposits in foreign offices | | 1,541,796 | | | 4,117 | | | 0.27 | | | 1,777,299 | | | 23,012 | | | 1.29 | | | 994,360 | | | 943 | | | 0.09 | |
| Total interest-bearing deposits | | 24,822,788 | | | 60,219 | | | 0.24 | | | 16,273,480 | | | 177,672 | | | 1.09 | | | 8,442,226 | | | 29,306 | | | 0.35 | |
| Short-term borrowings | | 401,159 | | | 3,312 | | | 0.83 | | | 144,545 | | | 3,592 | | | 2.49 | | | 643,886 | | | 14,579 | | | 2.26 | |
| 3.125% Senior Notes | | 284,113 | | | 9,184 | | | 3.23 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 3.50% Senior Notes | | 348,153 | | | 12,611 | | | 3.62 | | | 347,799 | | | 12,598 | | | 3.62 | | | 347,458 | | | 12,586 | | | 3.62 | |
| 5.375% Senior Notes | | — | | | — | | | — | | | 337,646 | | | 18,945 | | | 5.61 | | | 348,480 | | | 19,450 | | | 5.58 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total interest-bearing liabilities | | 25,856,213 | | | 85,326 | | | 0.33 | | | 17,103,470 | | | 212,807 | | | 1.24 | | | 9,782,050 | | | 75,921 | | | 0.78 | |
| Portion of noninterest-bearing funding sources | | 55,427,397 | | | | | | | 43,014,937 | | | | | | | 43,456,410 | | | | | |
| Total funding sources | | 81,283,610 | | | 85,326 | | | 0.10 | | | 60,118,407 | | | 212,807 | | | 0.35 | | | 53,238,460 | | | 75,921 | | | 0.14 | |
Noninterest-bearing funding sources: | | | | | | | | | | | | | | | | | | |
| Demand deposits | | 50,192,642 | | | | | | | 38,783,470 | | | | | | | 39,633,118 | | | | | |
| Other liabilities | | 2,168,299 | | | | | | | 1,483,737 | | | | | | | 937,199 | | | | | |
| Preferred stock | | 340,146 | | | | | | | 17,751 | | | | | | | — | | | | | |
| SVBFG common stockholders’ equity | | 7,079,356 | | | | | | | 5,674,531 | | | | | | | 4,734,417 | | | | | |
| Noncontrolling interests | | 155,003 | | | | | | | 148,671 | | | | | | | 142,276 | | | | | |
| Portion used to fund interest-earning assets | | (55,427,397) | | | | | | | (43,014,937) | | | | | | | (43,456,410) | | | | | |
| Total liabilities and total equity | | $ | 85,791,659 | | | | | | | $ | 63,211,630 | | | | | | | $ | 55,229,060 | | | | | |
| Net interest income and margin | | | | $ | 2,172,514 | | | 2.67 | % | | | | $ | 2,108,550 | | | 3.51 | % | | | | $ | 1,903,189 | | | 3.57 | % |
| Total deposits | | $ | 75,015,430 | | | | | | | $ | 55,056,950 | | | | | | | $ | 48,075,344 | | | | | |
Reconciliation to reported net interest income: | | | | | | | | | | | | | | | | | | |
| Adjustments for taxable equivalent basis | | | | (16,230) | | | | | | | (11,949) | | | | | | | (9,201) | | | |
| Net interest income, as reported | | | | $ | 2,156,284 | | | | | | | $ | 2,096,601 | | | | | | | $ | 1,893,988 | | | |
(1)Includes average interest-earning deposits in other financial institutions of $1.1 billion, $0.9 billion and $0.8 billion in 2020, 2019 and 2018, respectively. For 2020, 2019 and 2018, balances also include $9.9 billion, $4.1 billion and $1.6 billion, respectively, deposited at the FRB, earning interest at the Federal Funds target rate.
| |
(2)Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income. (3)Interest income on non-taxable investment securities is presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21.0 percent for all periods presented. (4)Nonaccrual loans are reflected in the average balances of loans. (5)Interest income includes loan fees of $190.9 million, $167.6 million and $136.6 million in 2020, 2019 and 2018, respectively.
(6)Average investment securities of $2.0 billion, $1.1 billion, and $0.8 billion in 2020, 2019 and 2018, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable and other equity securities. (1)
| Includes average interest-earning deposits in other financial institutions of $1.1 billion, $671 million and $480 million in 2017, 2016 and 2015, respectively. For 2017, 2016 and 2015, balances also include $1.9 billion, $1.8 billion and $1.7 billion, respectively, deposited at the FRB, earning interest at the Federal Funds target rate.
|
| |
(2)
| Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income. |
| |
(3) | Interest income on non-taxable investment securities is presented on a fully taxable equivalent basis using the federal statutory income tax rate of 35.0 percent for all periods presented. |
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(4) | Nonaccrual loans are reflected in the average balances of loans. |
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(5) | Interest income includes loan fees of $128.1 million, $104.9 million and $98.1 million in 2017, 2016 and 2015, respectively.
|
| |
(6) | Average investment securities of $0.7 billion in 2017 and $0.8 billion in each of 2016and2015, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable and other securities.
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Provision for Credit Losses
The following table summarizes our allowance for credit losses for loans, unfunded credit commitments and HTM securities for 2020, 2019 and 2018, respectively:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Allowance for credit losses for loans, beginning balance | | $ | 304,924 | | | $ | 280,903 | | | $ | 255,024 | |
| Day one impact of adopting ASC 326 | | 25,464 | | | — | | | — | |
| Provision for loans | | 189,226 | | | 94,183 | | | 84,292 | |
| Gross loan charge-offs | | (102,904) | | | (92,603) | | | (67,917) | |
| Loan recoveries | | 29,018 | | | 21,038 | | | 11,636 | |
| Foreign currency translation adjustments | | 2,037 | | | 1,403 | | | (2,132) | |
| Allowance for credit losses for loans, ending balance | | $ | 447,765 | | | $ | 304,924 | | | $ | 280,903 | |
| Allowance for credit losses for unfunded credit commitments, beginning balance | | 67,656 | | | 55,183 | | | 51,770 | |
| Day one impact of adopting ASC 326 | | 22,826 | | | — | | | — | |
| Provision for unfunded credit commitments | | 30,066 | | | 12,233 | | | 3,578 | |
| Foreign currency translation adjustments | | 248 | | | 240 | | | (165) | |
| Allowance for credit losses for unfunded credit commitments, ending balance (1) | | $ | 120,796 | | | $ | 67,656 | | | $ | 55,183 | |
| Allowance for credit losses for HTM securities, beginning balance | | — | | | — | | | — | |
| Day one impact of adopting ASC 326 | | 174 | | | — | | | — | |
| Provision for HTM securities | | 218 | | | — | | | — | |
| Allowance for credit losses for HTM securities, ending balance (2) | | $ | 392 | | | $ | — | | | $ | — | |
| Ratios and other information: | | | | | | |
| Provision for loans as a percentage of period-end total loans (3) | | 0.42 | % | | 0.28 | % | | 0.30 | % |
| Gross loan charge-offs as a percentage of average total loans | | 0.28 | | | 0.31 | | | 0.26 | |
| Net loan charge-offs as a percentage of average total loans | | 0.20 | | | 0.24 | | | 0.22 | |
| Allowance for credit losses for loans as a percentage of period-end total loans (3) | | 0.99 | | | 0.91 | | | 0.99 | |
| Provision for credit losses | | $ | 219,510 | | | $ | 106,416 | | | $ | 87,870 | |
| Period-end total loans (3) | | 45,181,488 | | | 33,327,704 | | | 28,511,312 | |
| Average total loans (3) | | 37,265,976 | | | 30,077,343 | | | 25,790,949 | |
| Allowance for credit losses for nonaccrual loans | | 54,029 | | | 44,859 | | | 37,941 | |
| Nonaccrual loans | | 104,244 | | | 102,669 | | | 94,142 | |
(1)The “allowance for credit losses for unfunded credit commitments” is included as a component of “Other liabilities.”
(2)The "allowance for credit losses for HTM securities" is included as a component of "HTM securities" and presented net in our consolidated financial statements.
(3)For the year ended December 31, 2020, loan amounts are disclosed, and ratios are calculated, using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed, and ratios are calculated, using the gross basis in accordance with previous methodology.
The provision for credit losses andis the allowancecombination of (i) the provision for loans, (ii) the provision for unfunded credit commitments and (iii) the provision for 2017, 2016HTM securities for the year ending December 31, 2020. For the years ending December 31, 2019 and 2015, respectively:
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| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Allowance for loan losses, beginning balance | | $ | 225,366 |
| | $ | 217,613 |
| | $ | 165,359 |
|
| Provision for loan losses (1) | | 85,939 |
|
| 95,697 |
|
| 97,629 |
|
| Gross loan charge-offs | | (66,682 | ) |
| (96,857 | ) |
| (50,968 | ) |
| Loan recoveries | | 8,538 |
|
| 12,212 |
|
| 6,209 |
|
| Foreign currency translation adjustments | | 1,863 |
| | (3,299 | ) | | (616 | ) |
| Allowance for loan losses, ending balance | | $ | 255,024 |
| | $ | 225,366 |
| | $ | 217,613 |
|
| Allowance for unfunded credit commitments, beginning balance | | 45,265 |
| | 34,415 |
| | 36,419 |
|
| Provision for (reduction of) unfunded credit commitments (1) | | 6,365 |
| | 10,982 |
| | (1,946 | ) |
| Foreign currency translation adjustments | | 140 |
| | (132 | ) | | (58 | ) |
| Allowance for unfunded credit commitments, ending balance (2) | | $ | 51,770 |
| | $ | 45,265 |
| | $ | 34,415 |
|
| Ratios and other information: | | | | | | |
| Provision for loan losses as a percentage of total gross loans | | 0.37 | % | | 0.48 | % | | 0.58 | % |
| Gross loan charge-offs as a percentage of average total gross loans | | 0.31 |
| | 0.53 |
| | 0.34 |
|
| Net loan charge-offs as a percentage of average total gross loans | | 0.27 |
| | 0.46 |
| | 0.30 |
|
| Allowance for loan losses as a percentage of period-end total gross loans | | 1.10 |
| | 1.13 |
| | 1.29 |
|
| Provision for credit losses (1) | | $ | 92,304 |
| | $ | 106,679 |
| | $ | 95,683 |
|
| Period-end total gross loans | | 23,254,153 |
| | 20,024,662 |
| | 16,857,131 |
|
| Average total gross loans | | 21,287,336 |
| | 18,396,256 |
| | 14,870,269 |
|
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(1) | Our consolidated statements of income were modified from prior periods’ presentation to conform to2018, the current period presentation, which reflect our provision for loan losses and provision for unfunded credit commitments together as our “provision for credit losses.” |
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(2) | The “allowance for unfunded credit commitments” is included as a component of “other liabilities.” |
The provision for credit losses is the combination of both the provision for loan losses and the provision for unfunded credit commitments. Our provision for loan losses is a function of our reserve methodology, which is used to determine an appropriate allowance for loan losses for the period. Our reserve methodology is based on our evaluation of the existing allowance for loan losses in relation to total gross loans using historical and other objective information, and on our qualitative assessment of the inherent and identified credit risk of the loan portfolio. Our provision for unfunded credit commitments is determined using a methodology that is similar to the methodology used for calculating the allowance for loan losses, adjusted for factors specific to binding commitments, including the probability of funding and exposure at funding. Our provision for credit losses equals our best estimate of probable credit losses that are inherent in the portfolios at the balance sheet date. For a more detailed discussion of credit quality and the allowance for loancredit losses, see “Critical Accounting Policies and Estimates” above, “Consolidated Financial Condition-Credit Quality and the Allowance for Loan Losses”Credit Losses for Loans and for Unfunded Credit Commitments” below and Note 9—“Loans Allowance for Loan Losses and Allowance for
Credit Losses: Loans and Unfunded Credit Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further details on our allowance for loancredit losses.
Provision for Loan LossesLoans
We had a provision for loan lossesloans of $85.9$189.2 million in 2017,2020, compared to a provision of $95.7$94.2 million in 2016 and a2019.The provision for loans of $97.6$189.2 million in 2015. 2020 was driven primarily by $56.6 million in additional reserves for our performing loans based on our forecast models of the current economic environment under the CECL methodology adopted January 1, 2020, including the impact of the COVID-19 pandemic, as well as changes in loan composition within our portfolio segments, $59.8 million in net new nonaccrual loans, $49.2 million for charge-offs not specifically reserved for at December 31, 2019 and $54.6 million in additional reserves for period-end loan growth, partially offset by $29.0 million of recoveries.
The provision for loan losses of $85.9$94.2 million in 20172019, under the previous incurred loss methodology, was reflective primarily of $62.7$38.7 million from period-end loan growth, $56.3 million in net new specific reserves for nonaccrual loans and $29.1$43.2 million from period-end loan growth,charge-offs not specifically reserved for, partially offset by a benefit from overall improved credit qualitydecrease of our loan portfolio reflective of the increase of our private equity/venture capital loans, which tend to be of higher credit quality.
The provision of $95.7 million in 2016 was reflective primarily of $37.9$23.0 million for charge-offs that did not previously have a specific reserve, $30.9 million for specific reserves on new nonaccrual loans, $29.5 million for period-end loan growth of $3.2 billion, partially offset by a $7.9 million decrease due to enhancements to our loan loss reserve methodology during the fourth quarter of 2016.
The provision of $97.6 million in 2015 was driven primarily by net charge-offs of $43.9 million, a $36.8 million increase in the reserve for nonaccrualperforming loans and an additional reserve$21.0 million of $21.6 million for period-end loan growth of $2.4 billion, offset by a reserve release of $4.6 million due to the improvement of the credit quality of our overall loan portfolio.recoveries.
Provision for (Reduction of) Unfunded Credit Commitments
We recorded a provision for unfunded credit commitments of $6.4$30.1 million in 2017,2020, compared to a provision of $12.2 million in 2019. Our provision for unfunded credit commitments in 2020 was driven primarily by the forecast models of the current economic environment under the CECL methodology adopted January 1, 2020, including the impact of the COVID-19 pandemic, as well as growth in unfunded credit commitments.
We recorded a provision for unfunded credit commitments of $11.0$12.2 million in 2016 and a reduction of the allowance for unfunded credit commitments of $1.9 million in 2015.2019. Our provision for unfunded credit commitments in 20172019 was driven primarily by qualitative allocations based on our loan portfolio being comprised of larger loans and additional reserves as a result of the increasegrowth in unfunded credit commitments.commitments of $5.3 billion.
Provision for HTM Securities
We recorded a provision for HTM securities of $0.2 million in 2020 under the CECL methodology adopted January 1, 2020, compared to a provision of zero under the previous incurred loss methodology. Our provision for unfunded credit commitments in 2016 reflected enhancements in factors used to estimate our allowance for unfunded credit commitments. These enhancements were applied duringHTM securities was driven primarily by the fourth quarterforecast models of 2016 and increased our allowance for unfunded credit commitments by $8.1 million, net. The increasethe current economic environment, including the impact of the COVID-19 pandemic. Our HTM portfolio as of December 31, 2020 was primarily due to higher loss and conversion factors for our software and internet and hardware loan portfolios, partially offset by lower loss factors for our private equity/venture capital loan portfolio.entirely made up of Aa2 or better rated bonds, all considered high quality.
Our allowance for unfunded credit commitments decreased in 2015, due primarily to a change in the composition of our unfunded credit commitment portfolio, which resulted in a decrease in the reserve rate. The decrease was partially offset by growth in total loan commitments available for funding and commercial and standby letters of credit, which increased by $0.9 billion to $15.6 billion in 2015.
Noninterest Income
For the year ended December 31, 2017,2020, noninterest income was $557.2 million,$1.84 billion, compared to $456.6 million and $472.8 million$1.22 billion for the comparable 2016 and 2015 periods, respectively.2019 period. For the year ended December 31, 2017,2020, non-GAAP noninterest income, net of noncontrolling interests was $527.8 million,$1.75 billion, compared to $448.5 million and $441.1 million$1.17 billion for the comparable 2016 and 2015 periods, respectively.2019 period. For the year ended December 31, 2017,2020, non-GAAP core fee income was $379.0$603.2 million, compared to $316.2 million and $265.4$641.8 million for the comparable 2016 and 2015 periods, respectively.2019 period. For the year ended December 31, 2020, non-GAAP SVB Leerink revenue was $480.6 million, compared to $251.5 million for the comparable 2019 period. (See reconciliations of non-GAAP measures used below under "Use of Non-GAAP Financial Measures".)
Use of Non-GAAP Financial Measures
To supplement our audited consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance (including, but not limited to, non-GAAP core fee income, non-GAAP SVB Leerink revenue, non-GAAP core fee income plus SVB Leerink revenue, non-GAAP noninterest income and non-GAAP net gains on investment securities). These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.
We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding items that represent income attributable to investors other than us and our subsidiaries and certain other certain non-recurring items. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, and not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.
Included in noninterest income is income and expense attributable to noncontrolling interests. We recognize, as part of our investment funds management business through SVB Capital, the entire income or loss from funds consolidated in accordance with ASC Topic 810 as discussed in Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report. We are required under GAAP to consolidate 100% of the results of these entities, even though we may own less than 100% of such entities. The relevant amounts attributable to investors other than us are reflected under “Net Income Attributable to Noncontrolling Interests” on our statements of income. Where applicable, the tables below for noninterest income and net gains on investment securities exclude noncontrolling interests.
Core fee income is a non-GAAP financial measure, which represents GAAP noninterest income, but excludes (i) SVB Leerink revenue, (ii) certain line items where performance is typically subject to market or other conditions beyond our control, primarily our net gains (losses) on investment securities and equity warrant assets.assets, and (iii) other noninterest income. Core fee income includesrepresents client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees client investment fees and letters of credit and standby letters of credit fees.
SVB Leerink revenue is a non-GAAP financial measure, which represents noninterest income but excludes (i) Core fee income, and (ii) certain line items where performance is typically subject to market or other conditions beyond our control, primarily our net gains (losses) on investment securities and equity warrant assets, and other noninterest income. SVB Leerink revenue represents investment banking revenue and commissions.
Core fee income plus SVB Leerink revenue is a non-GAAP measure, which represents GAAP noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control, primarily our net gains (losses) on investment securities and equity warrant assets, and other noninterest income. Core fee income plus SVB Leerink revenue represents core fee income plus investment banking revenue and commissions.
The following table provides a reconciliation of GAAP noninterest income to non-GAAP noninterest income, net of noncontrolling interests for 2017, 20162020, 2019 and 2015,2018, respectively:
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| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| GAAP noninterest income | | $ | 557,231 |
| | $ | 456,552 |
| | 22.1 | % | | $ | 472,794 |
| | (3.4 | )% |
| Less: income attributable to noncontrolling interests, including carried interest allocation | | 29,452 |
| | 8,039 |
| | NM |
| | 31,736 |
| | (74.7 | ) |
| Non-GAAP noninterest income, net of noncontrolling interests | | $ | 527,779 |
| | $ | 448,513 |
| | 17.7 |
| | $ | 441,058 |
| | 1.7 |
|
NM—Not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| GAAP noninterest income | | $ | 1,840,148 | | | $ | 1,221,479 | | | 50.6 | % | | $ | 744,984 | | | 64.0 | % |
| Less: income attributable to noncontrolling interests, including carried interest allocation | | 86,375 | | | 48,624 | | | 77.6 | | | 38,000 | | | 28.0 | |
| Non-GAAP noninterest income, net of noncontrolling interests | | $ | 1,753,773 | | | $ | 1,172,855 | | | 49.5 | | | $ | 706,984 | | | 65.9 | |
The following table provides a reconciliation of GAAP noninterest income to non-GAAP core fee income for 2017, 20162020, 2019 and 2015,2018, respectively:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| GAAP noninterest income | | $ | 557,231 |
| | $ | 456,552 |
| | 22.1 | % | | $ | 472,794 |
| | (3.4 | )% |
| Less: gains on investment securities, net | | 64,603 |
| | 51,740 |
| | 24.9 |
| | 89,445 |
| | (42.2 | ) |
| Less: gains on equity warrant assets, net | | 54,555 |
| | 37,892 |
| | 44.0 |
| | 70,963 |
| | (46.6 | ) |
| Less: other noninterest income | | 59,110 |
| | 50,750 |
| | 16.5 |
| | 47,004 |
| | 8.0 |
|
| Non-GAAP core fee income (1) | | $ | 378,963 |
| | $ | 316,170 |
| | 19.9 |
| | $ | 265,382 |
| | 19.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| GAAP noninterest income | | $ | 1,840,148 | | | $ | 1,221,479 | | | 50.6 | % | | $ | 744,984 | | | 64.0 | % |
| Less: gains on investment securities, net | | 420,752 | | | 134,670 | | | NM | | 88,094 | | | 52.9 | |
| Less: gains on equity warrant assets, net | | 237,428 | | | 138,078 | | | 72.0 | | | 89,142 | | | 54.9 | |
| Less: other noninterest income | | 98,145 | | | 55,370 | | | 77.3 | | | 51,858 | | | 6.8 | |
| Non-GAAP core fee income plus SVB Leerink revenue (1) | | $ | 1,083,823 | | | $ | 893,361 | | | 21.3 | | | $ | 515,890 | | | 73.2 | |
| Investment banking revenue | | 413,985 | | | 195,177 | | | 112.1 | | | — | | | — | |
| Commissions | | 66,640 | | | 56,346 | | | 18.3 | | | — | | | — | |
| Non-GAAP SVB Leerink revenue (2) | | $ | 480,625 | | | $ | 251,523 | | | 91.1 | | | $ | — | | | — | |
| Non-GAAP core fee income (3) | | $ | 603,198 | | | $ | 641,838 | | | (6.0) | | | $ | 515,890 | | | 24.4 | |
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(1) | Non-GAAP core fee income represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control and includes foreign exchange fees, credit card fees, deposit service charges, lending related fees, client investment fees and letters of credit fees. |
NM—Not meaningful
(1)Non-GAAP core fee income plus SVB Leerink revenue represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control and other noninterest income. Core fee income plus SVB Leerink revenue is non-GAAP core fee income (as defined in footnote (3) below) with the addition of investment banking revenue and commissions.
(2)Non-GAAP SVB Leerink revenue represents investment banking revenue and commissions, but excludes certain line items where performance is typically subject to market or other conditions beyond our control and other noninterest income.
(3)Non-GAAP core fee income represents noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control, (ii) our investment banking revenue and commissions and (iii) other noninterest income. Non-GAAP core fee income represents client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees and letters of credit and standby letters of credit fees.
Gains on Investment Securities, Net
Net gains on investment securities include both gains and losses from our non-marketable and other equity securities, which include public equity securities held as a result of exercised equity warrant assets, as well as gains and losses from sales of our AFS debt securities portfolio, when applicable.
Our AFS securities portfolio represents primarily interest-earning fixed income investment securities and is managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and addressing our asset/liability management objectives. Sales of equity securities held as a result of our exercised warrants, result in net gains or losses on investment securities. These sales are conducted pursuant to our investment policy related to the management of our liquidity position and interest rate risk. Though infrequent, sales of fixed income investment securities in our AFS securities portfolio may result in net gains or losses and are also conducted pursuant to our investment policy.
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, ourincluding a joint venture bank in China, debt funds, the newly acquired managed credit platform, private and public portfolio companies and investments in qualified affordable housing projects. We experience variability in the performance of our non-marketable and other equity securities from period to period, which results in net gains or losses on investment securities (both realized and unrealized). This variability is due to a number of
factors, including unrealized changes in the values of our investments, changes in the amount of realized gains and losses from distributions, changes in liquidity events and general economic and market conditions. Unrealized gains or losses from non-marketable and other equity securities for any single period are typically driven by valuation changes, and are therefore subject to potential increases or decreases in future periods. Such variability may lead to volatility in the gains or losses from investment securities. As such, our results for a particular period are not necessarily indicative of our expected performance in a future period.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of certain sales restrictions to which these equity securities may be subject to (i.e.(e.g. lock-up agreements), changes in prevailing market prices, market conditions, the actual sales or distributions of securities and the timing of such actual sales or distributions, which, to the extent such securities are managed by our managed funds, are subject to our funds' separate discretionary sales/distributions and governance processes.
Our AFS securities portfolio is a fixed income investment portfolio that is managed with the objective of earning an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. Though infrequent, sales of debt securities in our AFS securities portfolio may result in net gains or losses and are conducted pursuant to the guidelines of our investment policy related to the management of our liquidity position and interest rate risk.
In 2017,2020, we had net gains on investment securities of $64.6$420.8 million, compared to $51.7 million and $89.4$134.7 million in 2016 and 2015, respectively.2019. Non-GAAP net gains on investment securities, net of noncontrolling interests were $35.4$334.3 million in 2017,2020, compared to $43.4 million and $57.3$86.2 million in 2016 and 2015,2019, respectively.Net gains on investment securities, net of noncontrolling interests of $35.4$334.3 million in 20172020 were driven by the following:
•Gains of $17.9$89.9 million from our managed funds of funds portfolio and managed direct venture funds, related primarily to net unrealized valuation increases in investments held by the funds in the portfolio,
•Gains of $66.0 million from our strategic and other investments portfolio, primarily driven by distribution gains fromnet unrealized valuation increases in both private and public company investments held in our strategic venture capital fund investmentsfunds,
•Gains of $94.8 million from gains from our public equity securities, primarily driven by $72.0 million from unrealized gains for the 2.4 million common shares held as of December 31, 2020 in BigCommerce Holdings, Inc ("BigCommerce") and $3.4$14.7 million related torealized gains for the sale of certainBigCommerce equity shares, relating to one of our direct equity investments,
•Gains of $13.0$61.2 million from our AFS debt securities portfolio, resulting from the sale of $2.6 billion of U.S. Treasury securities during the quarter, and
•Gains of $16.0 million from carried interest on our managed credit funds, acquired from WRG which closed on December 23, 2020. Performance fees earned from the arrangement existing prior to the acquisition of the debt fund business from WRG were previously recorded in other noninterest income and exchanged for carried interest as part of the acquisition. As a result, we recorded unrealized gains of $16.0 million net of noncontrolling interest related to carried interest on the managed credit funds. These gains were primarily driven by the IPO of BigCommerce.
Net gains on investment securities, net of noncontrolling interests of $86.2 million in 2019 were driven by the following:
•Gains of $37.9 million from our managed funds of funds portfolio, related primarily to net unrealized valuation increases in theboth private and public company investments held by the funds driven by IPO, M&A and private equity-backed financing activity,
in the portfolio,•Gains of $9.0 million from our debt funds portfolio, related to net unrealized valuation increases in the investments held by the funds primarily driven by gains of $9.5 million related to the fund's holdings of Roku, Inc. ("Roku"), which had an IPO during the third quarter of 2017, and
Losses of $5.2 million from our AFS securities portfolio primarily reflective of $8.8 million of net losses on the sale of approximately $0.6 billion of mortgage-backed securities during the fourth quarter of 2017, partially offset by net gains on sales of shares from exercised warrants in public companies upon expiration of lock-up periods during the quarter.
In 2016, we had net gains on investment securities of $51.7 million, compared to $89.4 million in 2015. Non-GAAP net gains on investment securities, net of noncontrolling interests were $43.4 million in 2016, compared to $57.3 million in 2015. Net gains on investment securities, net of noncontrolling interests of $43.4 million in 2016 were driven by the following:
Gains of $28.6$33.1 million from our strategic and other investments portfolio, primarily driven by continued distributions fromnet unrealized valuation increases in both private and public company investments held in our strategic venture capital fund investments reflective of IPOfunds, and M&A activity as well as unrealized valuation increases from certain investments due to market activity,
•Gains of $12.2 million from our AFS securities portfolio, primarily reflective of $13.8 million of net gains on the sale of approximately $2.9 billion in U.S. Treasury securities, partially offset by $1.6 million of net losses on sales of shares from exercised warrants in public companies upon expiration of lock-up periods during 2016, and
•Gains of $1.9$7.9 million from our managed direct venture funds, of funds portfolio,related primarily related to net unrealized valuation increases.
increases in investments held by the funds in the portfolio.
The following table provides a reconciliation of GAAP total gains (losses) on investment securities, net, to non-GAAP net gains (losses) on investment securities, net of noncontrolling interests, for 2017, 20162020, 2019 and 2015:2018:
| | | (Dollars in thousands) | | Managed Funds of Funds | | Managed Direct Venture Funds | | Debt Funds | | Available- For-Sale Securities | | Strategic and Other Investments | | Total | (Dollars in thousands) | | Managed
Funds of
Funds | | Managed
Direct
Venture
Funds | | Managed
Credit Funds | | Public Equity Securities | | Sales of AFS Debt
Securities | | Debt
Funds | | Strategic
and Other
Investments | | SVB Leerink | | Total |
| Year ended December 31, 2017 | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | Year ended December 31, 2020 | | | | | | | | | | | | | | | | | | |
| GAAP gains (losses) on investment securities, net | | $ | 41,140 |
| | $ | 1,823 |
| | $ | 8,950 |
| | $ | (5,189 | ) | | $ | 17,879 |
| | $ | 64,603 |
| GAAP gains (losses) on investment securities, net | | $ | 116,104 | | | $ | 56,195 | | | $ | 19,127 | | | $ | 94,758 | | | $ | 61,165 | | | $ | (403) | | | $ | 66,017 | | | $ | 7,789 | | | $ | 420,752 | |
| Less: gains attributable to noncontrolling interests, including carried interest allocation | | 28,108 |
| | 1,079 |
| | — |
| | — |
| | — |
| | 29,187 |
| Less: gains attributable to noncontrolling interests, including carried interest allocation | | 54,837 | | | 27,584 | | | 3,150 | | | — | | | — | | | — | | | — | | | 898 | | | 86,469 | |
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 13,032 |
| | $ | 744 |
| | $ | 8,950 |
| | $ | (5,189 | ) | | $ | 17,879 |
| | $ | 35,416 |
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 61,267 | | | $ | 28,611 | | | $ | 15,977 | | | $ | 94,758 | | | $ | 61,165 | | | $ | (403) | | | $ | 66,017 | | | $ | 6,891 | | | $ | 334,283 | |
| Year ended December 31, 2016 | | | | | | | | | | | | | |
| Year ended December 31, 2019 | | Year ended December 31, 2019 | | | | | | | | | | | | | | | | | | |
| GAAP gains (losses) on investment securities, net | | $ | 10,139 |
| | $ | (171 | ) | | $ | 948 |
| | $ | 12,195 |
| | $ | 28,629 |
| | $ | 51,740 |
| GAAP gains (losses) on investment securities, net | | $ | 74,939 | | | $ | 17,982 | | | $ | — | | | $ | 5,421 | | | $ | (3,905) | | | $ | 1,647 | | | $ | 33,101 | | | $ | 5,485 | | | $ | 134,670 | |
| Less: gains attributable to noncontrolling interests, including carried interest allocation | | 8,220 |
| | 92 |
| | — |
| | — |
| | — |
| | 8,312 |
| Less: gains attributable to noncontrolling interests, including carried interest allocation | | 37,087 | | | 10,089 | | | — | | | — | | | — | | | — | | | — | | | 1,325 | | | 48,501 | |
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 1,919 |
| | $ | (263 | ) | | $ | 948 |
| | $ | 12,195 |
| | $ | 28,629 |
| | $ | 43,428 |
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 37,852 | | | $ | 7,893 | | | $ | — | | | $ | 5,421 | | | $ | (3,905) | | | $ | 1,647 | | | $ | 33,101 | | | $ | 4,160 | | | $ | 86,169 | |
| Year ended December 31, 2015 | | | | | | | | | | | | | |
| GAAP gains on investment securities, net | | $ | 40,827 |
| | $ | 13,873 |
| | $ | 3,337 |
| | $ | 1,201 |
| | $ | 30,207 |
| | $ | 89,445 |
| |
| Year ended December 31, 2018 | | Year ended December 31, 2018 | | | | | | | | | | | | | | | | | | |
| GAAP gains (losses) on investment securities, net | | GAAP gains (losses) on investment securities, net | | $ | 62,019 | | | $ | 11,502 | | | $ | — | | | $ | (25,158) | | | $ | (740) | | | $ | 541 | | | $ | 39,930 | | | $ | — | | | $ | 88,094 | |
| Less: gains attributable to noncontrolling interests, including carried interest allocation | | 23,802 |
| | 8,313 |
| | — |
| | — |
| | — |
| | 32,115 |
| Less: gains attributable to noncontrolling interests, including carried interest allocation | | 32,938 | | | 5,245 | | | — | | | — | | | — | | | — | | | — | | | — | | | 38,183 | |
| Non-GAAP net gains on investment securities, net of noncontrolling interests | | $ | 17,025 |
| | $ | 5,560 |
| | $ | 3,337 |
| | $ | 1,201 |
| | $ | 30,207 |
| | $ | 57,330 |
| |
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 29,081 | | | $ | 6,257 | | | $ | — | | | $ | (25,158) | | | $ | (740) | | | $ | 541 | | | $ | 39,930 | | | $ | — | | | $ | 49,911 | |
Gains on Equity Warrant Assets, Net
Gains on equity warrant assets, net, were $54.6$237.4 million in 2017,2020, compared to $37.9$138.1 million in 2016 and $71.0 million in 2015.2019. Net gains on equity warrant assets of $54.6$237.4 million in 20172020 were primarily due to the following:
•Net gains on $48.3of $179.6 million from the exercises of equity warrant assets in 2017, compared to net gains of $31.2 million in 2016,2020 driven by net gains of $20.7robust IPO, special purpose acquisition company ("SPAC") and M&A activity during 2020, including $10.8 million from Roku warrantsour exercised warrant position in BigCommerce, and from increased M&A and IPO activity during 2017, and
•Net gains of $10.7$59.7 million from changes in warrant valuations in 2017, compared to net gains of $9.7 million in 2016,2020 driven by changesvaluation increases in valuations from our private company warrant portfolio during 2017.
portfolio.Gains on equity warrant assets, net, of $37.9$138.1 million in 20162019 were primarily due to the following:
•Net gains of $31.2$107.2 million from the exercises of equity warrant assets in 2016, compared to net gains of $41.5 million in 2015, reflective of2019, driven by increased IPO and M&A activity during 2019, and
•Net gains of $9.7$34.4 million from changes in warrant valuations in 2016, compared to net gains of $30.5 million2019, driven by valuation increases in 2015, driven primarily by changes in valuations from our private company warrant portfolio.
A summary of gains on equity warrant assets, net, for 2017, 20162020, 2019 and 20152018 is as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Equity warrant assets (1): | | | | | | | | | | |
| Gains on exercises, net | | $ | 48,275 |
| | $ | 31,197 |
| | 54.7 | % | | $ | 41,455 |
| | (24.7 | )% |
| Cancellations and expirations | | (4,422 | ) | | (3,015 | ) | | 46.7 |
| | (1,040 | ) | | 189.9 |
|
| Changes in fair value, net | | 10,702 |
| | 9,710 |
| | 10.2 |
| | 30,548 |
| | (68.2 | ) |
| Gains on equity warrant assets, net | | $ | 54,555 |
| | $ | 37,892 |
| | 44.0 |
| | $ | 70,963 |
| | (46.6 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Equity warrant assets (1): | | | | | | | | | | |
| Gains on exercises, net | | $ | 179,648 | | | $ | 107,168 | | | 67.6 | % | | $ | 58,186 | | | 84.2 | % |
| Terminations | | (1,948) | | | (3,502) | | | (44.4) | | | (5,964) | | | (41.3) | |
| Changes in fair value, net | | 59,728 | | | 34,412 | | | 73.6 | | | 36,920 | | | (6.8) | |
| Total gains on equity warrant assets, net | | $ | 237,428 | | | $ | 138,078 | | | 72.0 | | | $ | 89,142 | | | 54.9 | |
| |
(1) | At December 31, 2017, we held warrants in 1,868 companies, compared to 1,739 companies at December 31, 2016 and 1,652 companies at December 31, 2015. The total value of our warrant portfolio was $123.8 million at December 31, 2017, $131.1 million at December 31, 2016, and $137.1 million at December 31, 2015. Warrants in 14 companies each had fair values greater than $1.0 million and collectively represented $29.1 million, or 24 percent, of the fair value of the total warrant portfolio at December 31, 2017.
|
(1)At December 31, 2020, we held warrants in 2,602 companies, compared to 2,268 companies at December 31, 2019. The total value of our warrant portfolio was $203.4 million at December 31, 2020 and $165.5 million at December 31, 2019. Warrants in 25 companies each had fair values greater than $1.0 million and collectively represented $75.9 million, or 37.3 percent, of the fair value of the total warrant portfolio at December 31, 2020.
InvestmentsInvestment in Roku,Root, Inc.
We hold, directly (through the exercise of warrants previously held by us) and indirectly (through our interests in certain fund investments), approximately 1.7 million shares of the common stock of Roku. As mentioned above, for the full year ended December 31, 2017, we recognized total gains of $29.8 million from both equity warrant assets and investment securities in our consolidated statements of income. As of December 31, 2017, an additional $40.52020, we held investments in Root, Inc. (“Root”) of approximately 14.0 million of unrealized gains were also recorded in equity on our balance sheet as a result of the exercise of the Roku equity warrants in early October 2017 and is reflective of the increase in Roku’s common stock from the dateshares directly held by two of exercise through its closing stock priceour SVB Capital funds (in which SVBFG holds certain carried interests), of $51.78 on December 31, 2017.
Any gains (or losses), realized or unrealized,which we estimated to be recorded forentitled to approximately $24.8 million before taxes in the first quarterform of 2018 willcarried interest subject to the fund's performance and assuming the fund exceeds certain performance targets. Carried interest may be subject to change to the extent fund performance levels fluctuate.
Investment in BigCommerce
As of December 31, 2020, we held an investment in BigCommerce of approximately 2.4 million common shares pursuant to our exercise of certain warrants and debt conversion and 1.4 million shares held through our SVB Capital Funds (in which SVBFG holds certain carried interests), of which we estimate to be entitled to approximately $11.5 million before taxes in the form of carried interest subject to the fund's performance and assuming the fund exceeds certain performance targets. Carried interest may be subject to change to the extent fund performance levels fluctuate.
Gains (or losses) related to our equity securities in public companies such as Root and BigCommerce are based on valuation changes in Roku’sor the sale of any securities, and are subject to such companies' stock price, which are subject to market conditions and recorded in our consolidated statements of income under new accounting standards for financial instruments (see “Recent Accounting Pronouncements” in Note 2—“Summary of Significant Accounting Policies” ofvarious other factors. Additionally, the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details.) Additionally,public equity investment expected gains and losses, and the extent to which our current unrealizedsuch gains (or losses) will become realized is subject to a variety of factors, including among other things, the expiration of applicable lock-up agreements,factors, changes in prevailing market prices and the timing of any actual sales of securities, which are subject to our securities sales and governance process as well as certain sales restrictions (e.g. lock-up agreements). The lock up agreement for common stock shares held in Root is scheduled to expire during April 2021 and the lock up agreement for common shares held in BigCommerce expired in February 2021.
As of the date of this filing, we have sold all of our common shares of BigCommerce subsequent to the lock-up expiration resulting in pre-tax gains on investment securities by us, changesof approximately $43.0 million to be recorded during the first quarter of 2021. Additionally, all BigCommerce shares held through our SVB Capital Funds were distributed to the limited partners subsequent to the lock-up expiration. The distribution to fund investors did not result in a realized gain or loss to SVB Financial Group and there was no distribution of carried interest to the marketGeneral Partner. We do not anticipate the price of BigCommerce common shares upon distribution will have a material impact on the securities, and other market conditions.amount of expected carried interest previously disclosed above. Carried interest may be subject to change to the extent fund performance levels fluctuate.
Non-GAAP Core Fee Income and Non-GAAP SVB Leerink Revenue
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Non-GAAP core fee income (1): | | | | | | | | | | |
| Foreign exchange fees | | $ | 115,760 |
| | $ | 104,183 |
| | 11.1 | % | | $ | 87,007 |
| | 19.7 | % |
| Credit card fees | | 76,543 |
| | 68,205 |
| | 12.2 |
| | 56,657 |
| | 20.4 |
|
| Deposit service charges | | 58,715 |
| | 52,524 |
| | 11.8 |
| | 46,683 |
| | 12.5 |
|
| Client investment fees | | 56,136 |
| | 32,219 |
| | 74.2 |
| | 21,610 |
| | 49.1 |
|
| Lending related fees | | 43,265 |
| | 33,395 |
| | 29.6 |
| | 32,536 |
| | 2.6 |
|
| Letters of credit and standby letters of credit fees | | 28,544 |
| | 25,644 |
| | 11.3 |
| | 20,889 |
| | 22.8 |
|
| Total non-GAAP core fee income (1) | | $ | 378,963 |
| | $ | 316,170 |
| | 19.9 |
| | $ | 265,382 |
| | 19.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Non-GAAP core fee income (1): | | | | | | | | | | |
| Client investment fees | | $ | 132,200 | | | $ | 182,068 | | | (27.4) | % | | $ | 130,360 | | | 39.7 | % |
| Foreign exchange fees | | 178,733 | | | 159,262 | | | 12.2 | | | 138,812 | | | 14.7 | |
| Credit card fees | | 97,737 | | | 118,719 | | | (17.7) | | | 94,072 | | | 26.2 | |
| Deposit service charges | | 90,336 | | | 89,200 | | | 1.3 | | | 76,097 | | | 17.2 | |
| Lending related fees | | 57,533 | | | 49,920 | | | 15.3 | | | 41,949 | | | 19.0 | |
| Letters of credit and standby letters of credit fees | | 46,659 | | | 42,669 | | | 9.4 | | | 34,600 | | | 23.3 | |
| Total non-GAAP core fee income (1) | | $ | 603,198 | | | $ | 641,838 | | | (6.0) | | | $ | 515,890 | | | 24.4 | |
| Investment banking revenue | | 413,985 | | | 195,177 | | | 112.1 | | | — | | | — | |
| Commissions | | 66,640 | | | 56,346 | | | 18.3 | | | — | | | — | |
| Total non-GAAP SVB Leerink revenue (2) | | $ | 480,625 | | | $ | 251,523 | | | 91.1 | | | $ | — | | | — | |
| Total non-GAAP core fee income plus SVB Leerink revenue (3) | | $ | 1,083,823 | | | $ | 893,361 | | | 21.3 | | | $ | 515,890 | | | 73.2 | |
| |
(1) | This non-GAAP measure represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control. See "Use of Non-GAAP Measures" above. |
Foreign Exchange Fees
Foreign exchange fees were $115.8 million in 2017, compared to $104.2 million and $87.0 million in 2016 and 2015, respectively. The increases in foreign exchange fees were due primarily to increased trade volumes driven by the continuing increase in the number of clients actively managing currency exposure.
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Foreign exchange fees by instrument type: | | | | | | | | | | |
| Spot contract commissions | | $ | 104,344 |
| | $ | 89,354 |
| | 16.8 | % | | $ | 80,564 |
| | 10.9 | % |
| Forward contract commissions | | 10,934 |
| | 14,004 |
| | (21.9 | ) | | 6,414 |
| | 118.3 |
|
| Option premium fees | | 482 |
| | 825 |
| | (41.6 | ) | | 29 |
| | NM |
|
| Total foreign exchange fees | | $ | 115,760 |
| | $ | 104,183 |
| | 11.1 |
| | $ | 87,007 |
| | 19.7 |
|
NM—Not meaningful(1)Non-GAAP core fee income represents noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control, (ii) our investment banking revenue and commissions and (iii) other noninterest income. See “Use of Non-GAAP Measures” above.
(2)Non-GAAP SVB Leerink revenue represents noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control, (ii) non-GAAP core fee income, and (iii) other noninterest income. See “Use of Non-GAAP Measures” above.
Credit Card Fees
Credit card fees were $76.5 million in 2017, compared(3)Non-GAAP core fee income plus SVB Leerink revenue represents noninterest income, but excludes (i) certain line items where performance is typically subject to $68.2 millionmarket or other conditions beyond our control, and $56.7 million in 2016 and 2015, respectively. The increases reflect increased client utilization(ii) other noninterest income. See “Use of our credit card products and custom payment solutions provided to new and existing clients. The increases were partially offset by higher rebate/rewards expense.
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Credit card fees by instrument type: | | | | | | | | | | |
| Card interchange fees, net | | $ | 60,224 |
| | $ | 51,513 |
| | 16.9 | % | | $ | 46,185 |
| | 11.5 | % |
| Merchant service fees | | 11,584 |
| | 12,783 |
| | (9.4 | ) | | 7,346 |
| | 74.0 |
|
| Card service fees | | 4,735 |
| | 3,909 |
| | 21.1 |
| | 3,126 |
| | 25.0 |
|
| Total credit card fees | | $ | 76,543 |
| | $ | 68,205 |
| | 12.2 |
| | $ | 56,657 |
| | 20.4 |
|
Deposit Service Charges
Deposit service charges were $58.7 million in 2017, compared to $52.5 million and $46.7 million in 2016 and 2015, respectively. The increases were reflective of the increase in the number of deposit clients as well as increases in transaction volumes from existing clients.Non-GAAP Measures” above.
Client Investment Fees
We offer a variety of investment products on which we earn fees. These products include money market mutual funds, overnight repurchase agreements and sweep money market funds available through the Bank;Bank, client-directed accounts offered through our broker-dealer, SVB Securities, our broker dealer subsidiary, orWealth Advisory, and fixed income management services offered through SVB Asset Management, and SVB Wealth Advisory, our investment advisory subsidiaries.subsidiary.
Client investment fees were $56.1$132.2 million in 2017,2020, compared to $32.2 million and $21.6$182.1 million in 2016 and 2015, respectively.2019. The increases weredecrease in client investment fees is reflective of the large increasea reduction in average client investment funds driven by our clients’ increased utilizationfee margin resulting from lower short-term market rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Client investment fees by type: | | | | | | | | | | |
| Sweep money market fees | | $ | 74,176 | | | $ | 104,236 | | | (28.8) | % | | $ | 75,654 | | | 37.8 | % |
| Asset management fees | | 42,768 | | | 28,665 | | | 49.2 | | | 23,882 | | | 20.0 | |
| Repurchase agreement fees | | 15,256 | | | 49,167 | | | (69.0) | | | 30,824 | | | 59.5 | |
| Total client investment fees | | $ | 132,200 | | | $ | 182,068 | | | (27.4) | | | $ | 130,360 | | | 39.7 | |
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Client investment fees by type: | | | | | | | | | | |
| Sweep money market fees | | $ | 28,485 |
| | $ | 15,147 |
| | 88.1 | % | | $ | 9,347 |
| | 62.1 | % |
| Asset management fees (1) | | 16,831 |
| | 15,389 |
| | 9.4 |
| | 12,263 |
| | 25.5 |
|
| Client directed investment fees (2) | | 10,820 |
| | 1,683 |
| | NM |
| | — |
| | NM |
|
| Total client investment fees | | $ | 56,136 |
| | $ | 32,219 |
| | 74.2 |
| | $ | 21,610 |
| | 49.1 |
|
NM—Not meaningful
| |
(1) | These funds represent investments in third party money market mutual funds and fixed income securities managed by SVB Asset Management. |
| |
(2) | Comprised of mutual funds and Repurchase Agreement Program assets. |
The following table summarizes average client investment funds for 2017, 20162020, 2019 and 2015:2018:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in millions) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Sweep money market funds | | $ | 19,718 |
| | $ | 15,122 |
| | 30.4 | % | | $ | 11,411 |
| | 32.5 | % |
| Client investment assets under management (1) | | 25,417 |
| | 21,287 |
| | 19.4 |
| | 19,934 |
| | 6.8 |
|
| Client directed investment assets (2) | | 6,390 |
| | 6,948 |
| | (8.0 | ) | | 7,881 |
| | (11.8 | ) |
| Total average client investment funds (3) | | $ | 51,525 |
| | $ | 43,357 |
| | 18.8 |
| | $ | 39,226 |
| | 10.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in millions) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Sweep money market funds | | $ | 50,828 | | | $ | 40,667 | | | 25.0 | % | | $ | 32,232 | | | 26.2 | % |
| Client investment assets under management (1) | | 56,473 | | | 41,887 | | | 34.8 | | | 34,754 | | | 20.5 | |
| Repurchase agreements | | 10,079 | | | 9,079 | | | 11.0 | | | 8,086 | | | 12.3 | |
| Total average client investment funds (2) | | $ | 117,380 | | | $ | 91,633 | | | 28.1 | | | $ | 75,072 | | | 22.1 | |
| |
(1) | These funds represent investments in third party money market mutual funds and fixed-income securities managed by SVB Asset Management. |
| |
(2) | Comprised of mutual funds and Repurchase Agreement Program assets. |
| |
(3) | Client investment funds are maintained at third party financial institutions and are not recorded on our balance sheet. |
(1)These funds represent investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)Client investment funds are maintained at third-party financial institutions and are not recorded on our balance sheet.
The following table summarizes period-end client investment funds at December 31, 2017, 20162020, 2019 and 2015:2018:
|
| | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in millions) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Sweep money market funds | | $ | 23,911 |
| | $ | 17,173 |
| | 39.2 | % | | $ | 14,011 |
| | 22.6 | % |
| Client investment assets under management (1) | | 29,344 |
| | 23,115 |
| | 26.9 |
| | 22,454 |
| | 2.9 |
|
| Client directed investment assets (2) | | 7,074 |
| | 5,510 |
| | 28.4 |
| | 7,527 |
| | (26.8 | ) |
| Total period-end client investment funds (3) | | $ | 60,329 |
| | $ | 45,798 |
| | 31.7 |
| | $ | 43,992 |
| | 4.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in millions) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Sweep money market funds | | $ | 59,844 | | | $ | 43,226 | | | 38.4 | % | | $ | 38,348 | | | 12.7 | % |
| Client investment assets under management (1) | | 70,671 | | | 46,904 | | | 50.7 | | | 39,214 | | | 19.6 | |
| Repurchase agreements | | 10,538 | | | 9,062 | | | 16.3 | | | 8,422 | | | 7.6 | |
| Total period-end client investment funds (2) | | $ | 141,053 | | | $ | 99,192 | | | 42.2 | | | $ | 85,984 | | | 15.4 | |
(1)These funds represent investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)Client investment funds are maintained at third-party financial institutions and are not recorded on our balance sheet.
Foreign Exchange Fees
Foreign exchange fees were $178.7 million in 2020, compared to $159.3 million in 2019. The increase in foreign exchange fees was primarily due to increased foreign currency risk hedging as well as private equity activity. The increase is due primarily to the overall increase in the number of clients executing spot contracts resulting in higher trade volumes from the previous year reflective of our global expansion initiative and increased client engagement efforts. Foreign exchange fees have been, and may further be, impacted by effects of the COVID-19 pandemic.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Foreign exchange fees by instrument type: | | | | | | | | | | |
| Spot contract commissions | | $ | 157,852 | | | $ | 145,915 | | | 8.2 | % | | $ | 127,459 | | | 14.5 | % |
| Forward contract commissions | | 19,849 | | | 13,068 | | | 51.9 | | | 10,940 | | | 19.5 | |
| Option premium fees | | 1,032 | | | 279 | | | NM | | 413 | | | (32.4) | |
| Total foreign exchange fees | | $ | 178,733 | | | $ | 159,262 | | | 12.2 | | | $ | 138,812 | | | 14.7 | |
| |
(1) | These funds represent investments in third party money market mutual funds and fixed-income securities managed by SVB Asset Management. |
| |
(2) | Comprised of mutual funds and Repurchase Agreement Program assets. |
| |
(3) | Client investment funds are maintained at third party financial institutions and are not recorded on our balance sheet. |
NM—Not meaningful
Credit Card Fees
Credit card fees were $97.7 million in 2020, compared to $118.7 million in 2019. The decrease was primarily due to lower transaction volumes starting in March of 2020 reflective of the COVID-19 pandemic interrupting normal business activity and reduced client spending. A summary of credit card fees by instrument type for 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Credit card fees by instrument type: | | | | | | | | | | |
| Card interchange fees, net | | $ | 75,562 | | | $ | 93,553 | | | (19.2) | % | | $ | 74,381 | | | 25.8 | % |
| Merchant service fees | | 17,732 | | | 18,355 | | | (3.4) | | | 14,420 | | | 27.3 | |
| Card service fees | | 4,443 | | | 6,811 | | | (34.8) | | | 5,271 | | | 29.2 | |
| Total credit card fees | | $ | 97,737 | | | $ | 118,719 | | | (17.7) | | | $ | 94,072 | | | 26.2 | |
Deposit Service Charges
Deposit service charges were $90.3 million in 2020, compared to $89.2 million in 2019. The increase was attributable to higher deposit client counts as well as higher volumes of our transaction-based fee products. However, client activity was impacted by a slower macro-economic environment resulting from the COVID-19 pandemic
Lending Related Fees
Lending related fees were $43.3$57.5 million in 2017,2020, compared to $33.4 million and $32.5$49.9 million in 2016 and 2015, respectively.2019. The increase was primarily due to increases were due primarily to an adjustment of $4.5 million related toin fees earned in prior periods from unused lines of credit with the remaining increase attributable primarilydue to higher loan syndication fee incomestrong client liquidity. A summary of lending related fees by type for 2020, 2019 and unfunded commitments. Unused loan commitments were $15.5 billion at December 31, 2017, $15.0 billion at December 31, 2016 and $14.1 billion at December 31, 2015.2018 is as follows:
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 | (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Lending related fees by instrument type: | | | | | | | | | | | Lending related fees by instrument type: | | | | | | | | | | |
| Unused commitment fees | | $ | 34,110 |
| | $ | 25,654 |
| | 33.0 | % | | $ | 24,025 |
| | 6.8 | % | Unused commitment fees | | $ | 42,399 | | | $ | 34,829 | | | 21.7 | % | | $ | 32,452 | | | 7.3 | % |
| Other | | 9,155 |
| | 7,741 |
| | 18.3 |
| | 8,511 |
| | (9.0 | ) | Other | | 15,134 | | | 15,091 | | | 0.3 | | | 9,497 | | | 58.9 | |
| Total lending related fees | | $ | 43,265 |
| | $ | 33,395 |
| | 29.6 |
| | $ | 32,536 |
| | 2.6 |
| Total lending related fees | | $ | 57,533 | | | $ | 49,920 | | | 15.3 | | | $ | 41,949 | | | 19.0 | |
Letters of Credit and Standby Letters of Credit Fees
Letters of credit and standby letters of credit fees were $28.5$46.7 million in 2017,2020, compared to $25.6 million and $20.9$42.7 million in 2016 and 2015, respectively.2019. The increases wereincrease was primarily driven by increases in deferred fee income reflective of larger letter of credit issuances.
Investment Banking Revenue
Investment banking revenue, attributable to the acquisition of SVB Leerink in January 2019, was $414.0 million in 2020, compared to $195.2 million in 2019. The increase was due to exceptional levels of funding activity in the life science/healthcare secondary markets and by the increase in public equity underwriting fees. A summary of investment banking revenue by type for 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Investment banking revenue: | | | | | | | | | | |
| Underwriting fees | | $ | 352,951 | | | $ | 153,306 | | | 130.2 | % | | $ | — | | | — | % |
| Advisory fees | | 40,006 | | | 37,846 | | | 5.7 | | | — | | | — | |
| Private placements and other | | 21,028 | | | 4,025 | | | NM | | — | | | — | |
| Total investment banking revenue | | $ | 413,985 | | | $ | 195,177 | | | 112.1 | | | $ | — | | | — | |
NM—Not meaningful
Commissions
Commissions were $66.6 million in 2020, compared to $56.3 million in 2019. Commissions include commissions received from clients for the execution of agency-based brokerage transactions in listed and over-the-counter equities. The increase was driven by client trading activity, consistent with market volumes.
Other Noninterest Income
Total other noninterest income was $59.1$98.1 million in 2017,2020, compared to income of $50.8$55.4 million in 2016 and $47.0 million in 2015.2019. The increase of $8.3was primarily driven by the $30.0 million in other noninterest income in 2017 was due torecognized gain upon the following:
Higher fund management fees of $21.2 million, as compared to fees of $19.2 million for the comparable 2016 period, attributable primarily to the addition of new managed funds at SVB Capital,
An increase of $6.7 million from correspondent bank rebate incomeexercise and FHLB/FRB stock dividend income, and
Service-based fee income decreased $4.1 million during 2017 as compared to 2016 primarily due to the saleconversion of our equity valuation services businessconvertible debt option for BigCommerce during the third quarter of 2017.2020.
The increase of $3.8 million in 2016 was due to the following:
Higher fund management fees of $19.2 million, as compared to fees of $15.9 million for the comparable 2015 period, attributable primarily to the addition of new managed funds at SVB Capital, and
An increase of $3.3 million from carried interest income and other fee income partially offset by decreases in correspondent bank rebate income and FHLB/FRB stock dividend income.
A summary of other noninterest income for 2017, 20162020, 2019 and 20152018 is as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Fund management fees | | $ | 21,214 |
| | $ | 19,195 |
| | 10.5 | % | | $ | 15,941 |
| | 20.4 | % |
| Valuation fee income | | 3,860 |
| | 7,962 |
| | (51.5 | ) | | 8,767 |
| | (9.2 | ) |
| Gains on revaluation of client foreign currency instruments, net (1) | | 10,882 |
| | 4,215 |
| | 158.2 |
| | 115 |
| | NM |
|
| (Losses) gains on client foreign exchange forward contracts, net (1) | | (9,969 | ) | | (5,674 | ) | | 75.7 |
| | 694 |
| | NM |
|
| Gains (losses) on revaluation of internal foreign currency instruments, net (2) | | 33,161 |
| | (16,676 | ) | | NM |
| | (12,735 | ) | | 30.9 |
|
| (Losses) gains on internal foreign exchange contracts, net (2) | | (32,286 | ) | | 16,136 |
| | NM |
| | 12,377 |
| | 30.4 |
|
| Other service revenue (3) | | 32,248 |
| | 25,592 |
| | 26.0 |
| | 21,845 |
| | 17.2 |
|
| Total other noninterest income | | $ | 59,110 |
| | $ | 50,750 |
| | 16.5 |
| | $ | 47,004 |
| | 8.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Other noninterest income by instrument type: | | | | | | | | | | |
| Fund management fees | | $ | 38,960 | | | $ | 32,522 | | | 19.8 | % | | $ | 23,016 | | | 41.3 | % |
| Net (losses) gains on revaluation of foreign currency instruments, net of foreign exchange forward contracts (1) | | (926) | | | 345 | | | NM | | 666 | | | (48.2) | |
| Gains from conversion of convertible debt options | | 30,018 | | | — | | | — | | | — | | | — | |
| Losses on extinguishment of debt | | — | | | (8,960) | | | (100.0) | | | — | | | — | |
| Other service revenue (2) | | 30,093 | | | 31,463 | | | (4.4) | | | 28,176 | | | 11.7 | |
| Total other noninterest income | | $ | 98,145 | | | $ | 55,370 | | | 77.3 | | | $ | 51,858 | | | 6.8 | |
NM—Not meaningful(1)Represents the net revaluation of client and internal foreign currency denominated financial instruments. We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client and internal foreign currency denominated financial instruments.
| |
(1) | Represents the net revaluation of client foreign currency denominated financial instruments. We enter into client foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client foreign currency denominated financial instruments. |
| |
(2) | Represents the net revaluation of foreign currency denominated financial instruments issued and held by us, primarily loans, deposits and cash. We enter into internal foreign exchange forward contracts to economically reduce our foreign exchange exposure related to these foreign currency denominated financial instruments issued and held by us. |
| |
(3) | Includes dividends on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest and other fee income. |
(2)Includes dividends on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest, valuation fee income and other fee income.
Noninterest Expense
A summary of noninterest expense for 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Compensation and benefits | | $ | 1,318,457 | | | $ | 989,734 | | | 33.2 | % | | $ | 726,980 | | | 36.1 | % |
| Professional services | | 247,084 | | | 205,479 | | | 20.2 | | | 158,835 | | | 29.4 | |
| Premises and equipment | | 127,125 | | | 96,770 | | | 31.4 | | | 77,918 | | | 24.2 | |
| Net occupancy | | 100,889 | | | 69,279 | | | 45.6 | | | 54,753 | | | 26.5 | |
| Business development and travel | | 23,724 | | | 68,912 | | | (65.6) | | | 48,180 | | | 43.0 | |
| FDIC and state assessments | | 27,587 | | | 18,509 | | | 49.0 | | | 34,276 | | | (46.0) | |
| Other | | 190,175 | | | 152,579 | | | 24.6 | | | 87,251 | | | 74.9 | |
| Total noninterest expense | | $ | 2,035,041 | | | $ | 1,601,262 | | | 27.1 | | | $ | 1,188,193 | | | 34.8 | |
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Compensation and benefits | | $ | 606,402 |
| | $ | 514,270 |
| | 17.9 | % | | $ | 473,841 |
| | 8.5 | % |
| Professional services | | 121,935 |
| | 94,982 |
| | 28.4 |
| | 82,839 |
| | 14.7 |
|
| Premises and equipment | | 71,753 |
| | 65,502 |
| | 9.5 |
| | 51,927 |
| | 26.1 |
|
| Net occupancy | | 48,397 |
| | 39,928 |
| | 21.2 |
| | 34,674 |
| | 15.2 |
|
| Business development and travel | | 41,978 |
| | 40,130 |
| | 4.6 |
| | 39,524 |
| | 1.5 |
|
| FDIC and state assessments | | 35,069 |
| | 30,285 |
| | 15.8 |
| | 25,455 |
| | 19.0 |
|
| Correspondent bank fees | | 12,976 |
| | 12,457 |
| | 4.2 |
| | 13,415 |
| | (7.1 | ) |
| Other | | 72,145 |
| | 62,243 |
| | 15.9 |
| | 58,287 |
| | 6.8 |
|
| Total noninterest expense (1) | | $ | 1,010,655 |
| | $ | 859,797 |
| | 17.5 |
| | $ | 779,962 |
| | 10.2 |
|
| |
(1) | Our consolidated statements of income were modified from prior periods’ presentation to conform to the current period presentation, which reflect 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 separately as a component of noninterest expense. |
Included in noninterest expense is expense attributable to noncontrolling interests. See below for a description and reconciliation of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio, both of which exclude noncontrolling interests.
Non-GAAP Noninterest Expense
We use and report non-GAAP noninterest expense, non-GAAP taxable equivalent revenue and non-GAAP core operating efficiency ratio, which excludes noncontrolling interests.interests, SVB Leerink and other non-recurring expenses. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by: (i) excluding certain items that represent expenses attributable to investors other than us and our subsidiaries, or certain items that do not occur every reporting period; or (ii) providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these
non-GAAP financial measures should be considered in addition to, not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.
The table below provides a summary of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio, both net of noncontrolling interests:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| Non-GAAP operating efficiency ratio, net of noncontrolling interests (Dollars in thousands, except ratios) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| GAAP noninterest expense | | $ | 1,010,655 |
| | $ | 859,797 |
| | 17.5 | % | | $ | 779,962 |
| | 10.2 | % |
| Less: expense attributable to noncontrolling interests | | 813 |
| | 524 |
| | 55.2 |
| | 828 |
| | (36.7 | ) |
| Non-GAAP noninterest expense, net of noncontrolling interests | | $ | 1,009,842 |
| | $ | 859,273 |
| | 17.5 |
| | $ | 779,134 |
| | 10.3 |
|
| | | | | | | | | | | |
| GAAP net interest income | | $ | 1,420,369 |
| | $ | 1,150,523 |
| | 23.5 |
| | $ | 1,006,425 |
| | 14.3 |
|
| Adjustments for taxable equivalent basis | | 3,076 |
| | 1,203 |
| | 155.7 |
| | 1,564 |
| | (23.1 | ) |
| Non-GAAP taxable equivalent net interest income | | $ | 1,423,445 |
| | $ | 1,151,726 |
| | 23.6 |
| | $ | 1,007,989 |
| | 14.3 |
|
| Less: income attributable to noncontrolling interests | | 33 |
| | 66 |
| | (50.0 | ) | | 8 |
| | NM |
|
| Non-GAAP taxable equivalent net interest income, net of noncontrolling interests | | $ | 1,423,412 |
| | $ | 1,151,660 |
| | 23.6 |
| | $ | 1,007,981 |
| | 14.3 |
|
| | | | | | | | | | | |
| GAAP noninterest income | | $ | 557,231 |
| | $ | 456,552 |
| | 22.1 |
| | $ | 472,794 |
| | (3.4 | ) |
| Less: income attributable to noncontrolling interests | | 29,452 |
| | 8,039 |
| | NM |
| | 31,736 |
| | (74.7 | ) |
| Non-GAAP noninterest income, net of noncontrolling interests | | $ | 527,779 |
| | $ | 448,513 |
| | 17.7 |
| | $ | 441,058 |
| | 1.7 |
|
| | | | | | | | | | | |
| GAAP total revenue | | $ | 1,977,600 |
| | $ | 1,607,075 |
| | 23.1 |
| | $ | 1,479,219 |
| | 8.6 |
|
| Non-GAAP taxable equivalent revenue, net of noncontrolling interests | | $ | 1,951,191 |
| | $ | 1,600,173 |
| | 21.9 |
| | $ | 1,449,039 |
| | 10.4 |
|
| GAAP operating efficiency ratio | | 51.11 | % | | 53.50 | % | | (4.5 | ) | | 52.73 | % | | 1.5 |
|
| Non-GAAP operating efficiency ratio (1) | | 51.76 |
| | 53.70 |
| | (3.6 | ) | | 53.77 |
| | (0.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| Non-GAAP core operating efficiency ratio (Dollars in thousands, except ratios) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| GAAP noninterest expense | | $ | 2,035,041 | | | $ | 1,601,262 | | | 27.1 | % | | $ | 1,188,193 | | | 34.8 | % |
| Less: expense attributable to noncontrolling interests | | 475 | | | 835 | | | (43.1) | | | 522 | | | 60.0 | |
| Non-GAAP noninterest expense, net of noncontrolling interests | | 2,034,566 | | | 1,600,427 | | | 27.1 | | | 1,187,671 | | | 34.8 | |
| Less: expense attributable to SVB Leerink | | 378,970 | | | 252,677 | | | 50.0 | | | — | | | — | |
| Less: real estate expenses | | 29,317 | | | — | | | — | | | — | | | — | |
| Less: charitable donation of net PPP loan origination fees | | 20,000 | | | — | | | — | | | — | | | — | |
| Non-GAAP noninterest expense, net of noncontrolling interests, SVB Leerink and other non-recurring expenses | | $ | 1,606,279 | | | $ | 1,347,750 | | | 19.2 | | | $ | 1,187,671 | | | 13.5 | |
| | | | | | | | | | |
| GAAP net interest income | | $ | 2,156,284 | | | $ | 2,096,601 | | | 2.8 | | | $ | 1,893,988 | | | 10.7 | |
| Adjustments for taxable equivalent basis | | 16,230 | | | 11,949 | | | 35.8 | | | 9,201 | | | 29.9 | |
| Non-GAAP taxable equivalent net interest income | | 2,172,514 | | | 2,108,550 | | | 3.0 | | | 1,903,189 | | | 10.8 | |
| Less: income attributable to noncontrolling interests | | 26 | | | 72 | | | (63.9) | | | 30 | | | 140.0 | |
| Non-GAAP taxable equivalent net interest income, net of noncontrolling interests | | 2,172,488 | | | 2,108,478 | | | 3.0 | | | 1,903,159 | | | 10.8 | |
| Less: net interest income attributable to SVB Leerink | | 578 | | | 1,252 | | | (53.8) | | | — | | | — | |
| Non-GAAP taxable equivalent net interest income, net of noncontrolling interests and SVB Leerink | | $ | 2,171,910 | | | $ | 2,107,226 | | | 3.1 | | | $ | 1,903,159 | | | 10.7 | |
| | | | | | | | | | |
| GAAP noninterest income | | $ | 1,840,148 | | | $ | 1,221,479 | | | 50.6 | | | $ | 744,984 | | | 64.0 | |
| Less: income attributable to noncontrolling interests, including carried interest allocation | | 86,375 | | | 48,624 | | | 77.6 | | | 38,000 | | | 28.0 | |
| Non-GAAP noninterest income, net of noncontrolling interests | | 1,753,773 | | | 1,172,855 | | | 49.5 | | | 706,984 | | | 65.9 | |
| Less: non-GAAP net gains on investment securities, net of noncontrolling interests | | 334,283 | | | 86,169 | | | NM | | 49,911 | | | 72.6 | |
| Less: net gains on equity warrant assets | | 237,428 | | | 138,078 | | | 72.0 | | | 89,142 | | | 54.9 | |
| Less: investment banking revenue | | 413,985 | | | 195,177 | | | 112.1 | | | — | | | — | |
| Less: commissions | | 66,640 | | | 56,346 | | | 18.3 | | | — | | | — | |
| Non-GAAP noninterest income, net of noncontrolling interests and net of net gains on investment securities, net gains on equity warrant assets, investment banking revenue and commissions | | $ | 701,437 | | | $ | 697,085 | | | 0.6 | | | $ | 567,931 | | | 22.7 | |
| | | | | | | | | | |
| GAAP total revenue | | $ | 3,996,432 | | | $ | 3,318,080 | | | 20.4 | | | $ | 2,638,972 | | | 25.7 | |
| Non-GAAP taxable equivalent revenue, net of noncontrolling interests and SVB Leerink, net gains on investment securities, net gains on equity warrant assets, investment banking revenue and commissions | | $ | 2,873,347 | | | $ | 2,804,311 | | | 2.5 | | | $ | 2,471,090 | | | 13.5 | |
| | | | | | | | | | |
| GAAP operating efficiency ratio | | 50.92 | % | | 48.26 | % | | 5.5 | | | 45.02 | % | | 7.2 | |
| Non-GAAP core operating efficiency ratio (1) | | 55.90 | | | 48.06 | | | 16.3 | | | 48.06 | | | — | |
NM—Not meaningful
| |
(1) | The non-GAAP operating efficiency ratio is calculated by dividing non-GAAP noninterest expense, net of noncontrolling interests by non-GAAP total taxable equivalent revenue, net of noncontrolling interests. |
(1)The non-GAAP core operating efficiency ratio is calculated by dividing noninterest expense after adjusting for noninterest expense attributable to SVB Leerink and other non-recurring expenses by total revenue after adjusting for net interest income attributable to SVB Leerink, net gains or losses on investment securities and equity warrant assets, investment banking revenue and commissions. Additionally, noninterest expense and total revenue are adjusted for income or losses and expenses attributable to noncontrolling interests and adjustments to net interest income for a taxable equivalent basis.
Compensation and Benefits Expense
The following table provides a summary of our compensation and benefits expense:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except employees) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Compensation and benefits: | | | | | | | | | | |
| Salaries and wages | | $ | 277,148 |
| | $ | 244,470 |
| | 13.4 | % | | $ | 214,310 |
| | 14.1 | % |
| Incentive compensation | | 144,626 |
| | 119,589 |
| | 20.9 |
| | 121,948 |
| | (1.9 | ) |
| ESOP | | 4,720 |
| | 3,159 |
| | 49.4 |
| | 8,585 |
| | (63.2 | ) |
| Other employee compensation and benefits (1) | | 179,908 |
| | 147,052 |
| | 22.3 |
| | 128,998 |
| | 14.0 |
|
| Total compensation and benefits | | $ | 606,402 |
| | $ | 514,270 |
| | 17.9 |
| | $ | 473,841 |
| | 8.5 |
|
| Period-end full-time equivalent employees | | 2,438 |
| | 2,311 |
| | 5.5 |
| | 2,089 |
| | 10.6 |
|
| Average full-time equivalent employees | | 2,396 |
| | 2,225 |
| | 7.7 |
| | 2,004 |
| | 11.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except employees) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Compensation and benefits: | | | | | | | | | | |
| Salaries and wages | | $ | 516,221 | | | $ | 436,500 | | | 18.3 | % | | 324,971 | | | 34.3 | |
| Incentive compensation plans | | 463,831 | | | 288,073 | | | 61.0 | | | 200,871 | | | 43.4 | |
| Other employee incentives and benefits (1) | | 338,405 | | | 265,161 | | | 27.6 | | | 201,138 | | | 31.8 | |
| Total compensation and benefits | | $ | 1,318,457 | | | $ | 989,734 | | | 33.2 | | | $ | 726,980 | | | 36.1 | |
| Period-end full-time equivalent employees | | 4,461 | | 3,564 | | 25.2 | | | 2,900 | | 22.9 | |
| Average full-time equivalent employees | | 4,040 | | 3,362 | | 20.2 | | | 2,685 | | 25.2 | |
| |
(1)Other employee incentives and benefits includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), ESOP, warrant incentive and retention plans, agency fees and other employee-related expenses. (1)
| Other employee compensation and benefits includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), warrant incentive and retention program plans, agency fees and other employee related expenses. |
Compensation and benefits expense was $606.4$1.3 billion in 2020, compared to $989.7 million in 2017, compared to $514.3 million in 2016 and $473.8 million in 2015.2019. The key factors driving the increase in compensation and benefits expense in 20172020 were as follows:
•An increase of $32.9$79.7 million in other employee compensation and benefits, related to various expenses, particularly personnel contracting expenses, to support our growth both domestically and globally, as well as group health and life insurance and employer payroll taxes reflective of our increased headcount since 2016. The increase in other
employee incentives and benefits also includes an increase of $10.4 million in warrant incentive plan expenses reflective of our 2017 equity warrant portfolio performance.
An increase of $32.7 million in salaries and wages expense, reflective primarily of an increase in the number of average FTEs by 171678 to 2,3964,040 in 2017,2020, compared to 2,2253,362 in 2016,2019, driven by strong hiring for in-sourcing, product development and revenue growth, as well as annual pay raises. The increase in headcount was primarily to support our overall growth.
•An increase of $26.6$175.8 million in expenses related to incentive compensation plans and ESOP expense due to our strong 2017 full year performance and reflective of our improved ROE relative to our peers, which is one of our key plan performance metrics.
The increase in compensation and benefits expense of $40.5 million in 2016, as compared to 2015, was dueattributable primarily to the following:
An increase of $30.2 million in salaries and wages expense, primarily due to an increase in the numberSVB Leerink incentive compensation expense as a result of average FTEs. Average FTEs increased by 221 to 2,225 in 2016, compared to 2,004 in 2015, primarily to support our product development, operations, sales and advisory functions, as well as to support our commercial banking initiatives.a strong 2020 full-year financial performance.
•An increase of $18.1$73.2 million in other employee compensationincentives and benefits expense attributable primarily to an increase in warrant incentive plan expense due to higher agency fees, group healthgains on equity warrant assets from exercises in 2020 as compared to 2019 and life insurance expenses and share-basedan increase in deferred compensation expense primarily driven by the appreciation in market valuations in the underlying investment securities in the plan expenses.
A decrease of $5.4 million in ESOP expense, based on higher expenses in 2015 reflective of our strong 2015 performance.2020.
Our variable compensation plans primarily consist of our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, Deferred Compensation Plan, 401(k) and ESOP Plan, SVB Leerink Incentive Compensation Plan and SVB Leerink Retention Program and Warrant Incentive Plan.Award. Total costs incurred under these plans were $183.9$546.5 million in 2017,2020, compared to $145.3$347.3 million in 2016 and $155.5 million in 2015.2019. These amounts are included in total compensation and benefits expense discussed above.
Professional Services
Professional services expense was $121.9$247.1 million in 2017,2020, compared to $95.0$205.5 million in 2016 and $82.8 million in 2015.2019. The increase in 20172020 was primarily related to enhancementscosts to support the PPP during the year 2020 as well as continued investment in our regulatory, risk managementinfrastructure, initiatives, and compliance infrastructureoperating projects to support our growthpresence both domestically and globally, as well as investments made in projects, systems and technology to support our revenue growth and related initiatives and other operating costs.globally.
Premises and Equipment
Premises and equipment expense was $71.8$127.1 million in 2017,2020, compared to $65.5$96.8 million in 2016 and $51.9 million in 2015.2019. The increase was related to investments toin projects, systems and technology to support our revenue growth and related initiatives as well as other operating costs.
Net Occupancy
Net occupancy expense was $48.4$100.9 million in 2017,2020, compared to $39.9$69.3 million in 20162019. The increase was due primarily to impairment and $34.7accelerated depreciation of right of use assets and other fixed assets of $29.3 million related to vacating leased office space in several locations during 2020.
Business Development and Travel
Business development and travel expense was $23.7 million in 2015.2020, compared to $68.9 million in 2019. The increasedecrease was primarily due to lease renewals at higher costs, reflectivethe impact of market conditions,COVID-19 on the global economy and the expansion of certain offices to support our growth.restrictions placed on domestic and international travel beginning March 2020.
FDIC and State Assessments
FDIC and state assessments expense was $35.1$27.6 million in 2017,2020, compared to $30.3$18.5 million in 2016 and $25.5 million in 2015.2019. The increase was due primarily to the increase in our average assets.
Other Noninterest Expense
A summary of other noninterest expense for 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 | (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Lending and other client related processing costs | | $ | 23,768 |
| | $ | 19,867 |
| | 19.6 | % | | $ | 15,944 |
| | 24.6 | % | Lending and other client related processing costs | | $ | 29,783 | | | $ | 28,491 | | | 4.5 | % | | $ | 24,237 | | | 17.6 | % |
| Correspondent bank fees | | Correspondent bank fees | | 15,065 | | | 14,503 | | | 3.9 | | | 13,713 | | | 5.8 | |
| Investment banking activities | | Investment banking activities | | 20,591 | | | 13,733 | | | 49.9 | | | — | | | — | |
| Trade order execution costs | | Trade order execution costs | | 11,144 | | | 10,813 | | | 3.1 | | | — | | | — | |
| Data processing services | | Data processing services | | 14,910 | | | 12,536 | | | 18.9 | | | 10,811 | | | 16.0 | |
| Telephone | | 10,647 |
| | 9,793 |
| | 8.7 |
| | 9,398 |
| | 4.2 |
| Telephone | | 8,591 | | | 9,861 | | | (12.9) | | | 9,404 | | | 4.9 | |
| Data processing services | | 10,251 |
| | 9,014 |
| | 13.7 |
| | 7,316 |
| | 23.2 |
| |
| Dues and publications | | 3,263 |
| | 2,828 |
| | 15.4 |
| | 2,476 |
| | 14.2 |
| Dues and publications | | 4,251 | | | 4,603 | | | (7.6) | | | 4,605 | | | — | |
| Postage and supplies | | 2,797 |
| | 2,851 |
| | (1.9 | ) | | 3,154 |
| | (9.6 | ) | Postage and supplies | | 2,545 | | | 3,198 | | | (20.4) | | | 2,799 | | | 14.3 | |
| Other | | 21,419 |
| | 17,890 |
| | 19.7 |
| | 19,999 |
| | (10.5 | ) | Other | | 83,295 | | | 54,841 | | | 51.9 | | | 21,682 | | | 152.9 | |
| Total other noninterest expense | | $ | 72,145 |
| | $ | 62,243 |
| | 15.9 |
| | $ | 58,287 |
| | 6.8 |
| Total other noninterest expense | | $ | 190,175 | | | $ | 152,579 | | | 24.6 | | | $ | 87,251 | | | 74.9 | |
Other noninterest expense was $72.1$190.2 million in 20172020, compared to $62.2$152.6 million in 2016 and $58.3 million in 2015.2019. The increase was primarily due to the donation of $20.0 million from net PPP fees received from the SBA and a $6.9 million increase in investment banking expenses due to strong investment banking activity.
Operating Efficiency Ratio
The GAAP operating efficiency ratio increased primarily due to $49.3 million of non-recurring expenses related to real estate and charitable donations as well as higher SVB Leerink expenses as a percentage of SVB Leerink revenue. The non-GAAP core operating efficiency ratio increased due primarily to anthe overall increase in lending and other clientexpenses related processing coststo our core business as a resultpercentage of the growth of our credit cardrevenue driven primarily by increased compensation and payment product offerings.benefits expense.
Net Income Attributable to Noncontrolling Interests
Included in net income is income and expense attributable to noncontrolling interests. The relevant amounts allocated to investors in our consolidated subsidiaries, other than us, are reflected under “Net Income Attributable“net income attributable to Noncontrolling Interests”noncontrolling interests” on our consolidated statements of income.
In the table below, noninterest income consists primarily of investment gains and losses from our consolidated funds. Noninterest expense is primarily related to management fees paid by our managed funds to SVB Financial's subsidiaries as the managed funds’ general partners. A summary of net income attributable to noncontrolling interests for 2017, 20162020, 2019 and 20152018 is as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Net interest income (1) | | $ | (33 | ) | | $ | (66 | ) | | (50.0 | )% | | $ | (8 | ) | | NM% |
|
| Noninterest income (1) | | (25,789 | ) | | (5,434 | ) | | NM |
| | (27,648 | ) | | (80.3 | ) |
| Noninterest expense (1) | | 813 |
| | 524 |
| | 55.2 |
| | 828 |
| | (36.7 | ) |
| Carried interest allocation (2) | | (3,663 | ) | | (2,605 | ) | | 40.6 |
| | (4,088 | ) | | (36.3 | ) |
| Net income attributable to noncontrolling interests | | $ | (28,672 | ) | | $ | (7,581 | ) | | NM |
| | $ | (30,916 | ) | | (75.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Net interest income (1) | | $ | (26) | | | $ | (72) | | | (63.9) | % | | $ | (30) | | | 140.0 | % |
| Noninterest income (1) | | (29,441) | | | (20,290) | | | 45.1 | | | (22,342) | | | (9.2) | |
| Noninterest expense (1) | | 475 | | | 835 | | | (43.1) | | | 522 | | | 60.0 | |
| Carried interest allocation (2) | | (56,934) | | | (28,334) | | | 100.9 | | | (15,658) | | | 81.0 | |
| Net income attributable to noncontrolling interests | | $ | (85,926) | | | $ | (47,861) | | | 79.5 | | | $ | (37,508) | | | 27.6 | |
NM—Not meaningful(1)Represents noncontrolling interests’ share in net interest income, noninterest income and noninterest expense.
| |
(1) | Represents noncontrolling interests’ share in net interest income, noninterest income and noninterest expense. |
| |
(2) | Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds. |
(2)Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds.
Net income attributable to noncontrolling interests was $28.7$85.9 million in 2017,2020, compared to $7.6$47.9 million in 2016.2019. Net income attributable to noncontrolling interests of $28.7$85.9 million for 20172020 was primarily a result of the following:
•Net gains on investment securities (including carried interest allocation) attributable to noncontrolling interests of $29.2$86.4 million ($25.529.4 million excluding carried interest allocation) primarily driven by gains in our managed funds of funds portfolio due to unrealized valuation increases driven by IPO, M&A and private equity-backed financing activity, and
Noninterest expense of $0.8 million, primarily related to management fees paid by the noncontrolling interests to our subsidiaries that serve as the general partner.
Net income attributable to noncontrolling interests was $7.6 million in 2016, compared to $30.9 million in 2015. Net income attributable to noncontrolling interests of $7.6 million for 2016 was primarily a result of the following:
Net gains on investment securities (including carried interest allocation) attributable to noncontrolling interests of $8.3 million ($5.7 million excluding carried interest allocation) driven by gains of $8.2 million from our managed funds of funds and our managed direct venture funds portfolios, related primarily due to net unrealized valuation increases in theboth private and public company investments held by the funds in our portfolio,the portfolios, and
•Noninterest expense of $0.5 million, primarily related to management fees paid by the noncontrolling interests to our subsidiaries that serve as the general partner.partner.
Net income attributable to noncontrolling interests was $47.9 million in 2019. Net income attributable to noncontrolling interests of $47.9 million for 2019 was primarily a result of the following: •Net gains on investment securities (including carried interest allocation) attributable to noncontrolling interests of $48.5 million ($20.2 million excluding carried interest allocation) primarily from our managed funds of funds and our managed direct venture funds portfolios, related primarily to net unrealized valuation increases in both private and public company investments held by the funds in the portfolios, and
•Noninterest expense of $0.8 million, primarily related to management fees paid by the noncontrolling interests to our subsidiaries that serve as the general partner.
Income Taxes
On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act (the "TCJ Act"), was signed into law. The TCJ Act amends the Internal Revenue Code to, among other things, reduce tax rates, and make changes to credits and deductions for individuals and businesses. For businesses, the TCJ Act permanently lowers the federal corporate tax rate to 21 percent from the existing maximum rate of 35 percent, effective for tax years including or commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21 percent, U.S. generally accepted accounting principles require companies to re-value their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment.
The Company has also considered the provisions of the TCJ Act related to non-US operations which would potentially impact the Company’s income tax provision. Such provisions include the one-time transition tax (“TT”) on foreign earnings and the new base erosion anti-avoidance tax (“BEAT”). Based on analyses performed the Company as of December 31, 2017, the impact of both of these provisions will have an immaterial impact on the Company’s income tax provision.
Our effective income tax expense rate was 42.027.0 percent in 2017,2020, compared to 39.527.2 percent in 2016 and 39.9 percent in 2015.2019. Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The components of our effective tax rates for 2017, 20162020 and 20152019 are discussed in Note 16—18—“Income Taxes” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
The increasedecrease in our effective tax rate for 2017 was due primarily to one-time increases to tax expense of $33.8 million related to the revaluation of our deferred tax assets and $3.8 million related to investments in low income housing tax credit funds, incorporating the new federal tax rate related to the TCJ Act. The effective tax rate for the 2017 year also included the recognition of a tax benefit of $18.0 million due to the adoption and implementation of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, in the first quarter of 2017. The new guidance requires tax impacts from employee share-based transactions to be recognized in the provision for income taxes rather than additional paid-in-capital in stockholders' equity required under the previous guidance.
The Company has considered the provisions of the TCJ Act, and analyzed for potential impact to its income tax provision. Aside from the items noted above, the Company is not aware of any further items which could materially impact its financial statements for the year ended December 31, 2017.
The decrease in our 2016 effective tax rate from the comparable 2015 rate2020 was primarily attributabledue to a review of and adjustments made to our deferred tax balances recorded during the period as well as an increase in the recognition ofnet tax benefits from net operating loss carryforwards relatedour investments in qualified affordable housing projects as compared to a previously disposed business line.2019.
Operating Segment Results
We have threefour segments for which we report our financial information: Global Commercial Bank (“GCB”), SVB Private Bank, SVB Capital and SVB Capital.Leerink.
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reporting segments. Refer to Note 22—24—“Segment Reporting” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details.
The following is our reportable segment information for 2017, 20162020, 2019 and 2015:2018:
Global Commercial Bank
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 | (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Net interest income | | $ | 1,274,366 |
| | $ | 1,040,712 |
| | 22.5 | % | | $ | 853,882 |
| | 21.9 | % | Net interest income | | $ | 2,025,240 | | | $ | 1,850,391 | | | 9.4 | % | | $ | 1,623,488 | | | 14.0 | % |
| Provision for credit losses | | (81,553 | ) | | (93,885 | ) | | (13.1 | ) | | (94,913 | ) | | (1.1 | ) | Provision for credit losses | | (165,987) | | | (91,814) | | | 80.8 | | | (80,953) | | | 13.4 | |
| Noninterest income | | 366,000 |
| | 320,421 |
| | 14.2 |
| | 272,862 |
| | 17.4 |
| Noninterest income | | 605,733 | | | 637,922 | | | (5.0) | | | 520,302 | | | 22.6 | |
| Noninterest expense | | (706,341 | ) | | (632,264 | ) | | 11.7 |
| | (578,888 | ) | | 9.2 |
| Noninterest expense | | (1,019,995) | | | (874,854) | | | 16.6 | | | (793,159) | | | 10.3 | |
| Income before income tax expense | | $ | 852,472 |
| | $ | 634,984 |
| | 34.3 |
| | $ | 452,943 |
| | 40.2 |
| Income before income tax expense | | $ | 1,444,991 | | | $ | 1,521,645 | | | (5.0) | | | $ | 1,269,678 | | | 19.8 | |
| Total average loans, net of unearned income | | $ | 18,479,793 |
| | $ | 16,047,545 |
| | 15.2 |
| | $ | 12,984,646 |
| | 23.6 |
| |
| Total average loans, amortized cost | | Total average loans, amortized cost | | $ | 31,218,037 | | | $ | 26,031,284 | | | 19.9 | | | $ | 22,354,305 | | | 16.4 | |
| Total average assets | | 46,303,582 |
| | 41,494,321 |
| | 11.6 |
| | 38,438,858 |
| | 7.9 |
| Total average assets | | 75,034,226 | | | 56,043,321 | | | 33.9 | | | 48,854,416 | | | 14.7 | |
| Total average deposits | | 41,043,731 |
| | 37,301,483 |
| | 10.0 |
| | 34,996,194 |
| | 6.6 |
| Total average deposits | | 72,127,148 | | | 53,053,665 | | | 36.0 | | | 46,039,570 | | | 15.2 | |
Income before income tax expense from our GCB increaseddecreased to $852.5 million$1.4 billion in 2017,2020, compared to $635.0 million$1.5 billion in 2016 and $452.9 million in 2015, which reflected the continued growth of our core commercial business and clients.2019. The key components of GCB's performance are discussed below:
2017 compared to 2016below.
Net interest income from GCB increased by $233.7$174.8 million in 2017,2020, due primarily to a $178.2 millionan increase in loan interest income resulting mainly from an increase inhigher average loan balances, partially offset by a decrease in loan yields as a result of rate decreases. In addition, strong deposit growth provided a higher earnings credit and a low rate environment produced a lower earnings charge for funded loans creating a benefit of a higher net FTP earnings credit.
GCB had a provision for credit losses of $166.0 million for the year ended December 31, 2020, compared to a provision of $91.8 million for the comparable 2019 period. The $74.2 million increase is primarily due to the $59.2 million in additional reserves for our performing loans based on our forecast models of the current economic environment under the CECL methodology adopted January 1, 2020, including the impact of the COVID-19 pandemic, as well as changes in loan yields.composition within our portfolio segments. The provision of $166.0 million also consisted of $30.7 million in additional reserves for period-end loan growth, $49.2 million for charge-offs not specifically reserved for at December 31, 2019 and $59.8 million in net new nonaccrual loans, partially offset by $29.0 million of recoveries.
The provision for loan losses of $94.2 million in 2019, under the previous incurred loss methodology, was reflective primarily of $38.7 million from period-end loan growth, $56.3 million in net new specific reserves for nonaccrual loans and $43.2 million from charge-offs not specifically reserved for, partially offset by a decrease of $23.0 million for our performing loans and $21.0 million of recoveries.
Noninterest income increaseddecreased by $45.6$32.2 million in 2017,2020, related primarily to an increaseoverall decrease in our core fees (higher foreign exchange fees,(lower client investment fees and credit card fees offset by increases in foreign exchange fees and lending related fees). The decreases were due primarily to the impact of the federal rate cuts on yield rates affecting client investment fees as well as a decrease in transactional volume on credit cards due to COVID. The increase in foreign exchange fees was due primarily to an increase inincreased trade volumes reflective of our client count as well as volume related toglobal expansion initiative and increased client engagement. The increase in client investment fees was due to higher client investment fund balances, as well as from improved spreads on our client investment funds due to increases in general market rates and the reintroduction of fees that had been previously waived due to the low rate environment. The increase in credit card fees was primarily reflective of increased client utilization of our credit card products and custom payment solutions provided to new and existing clients, partially offset by higher rebate/rewards expense.engagement efforts.
Noninterest expense increased by $74.1$145.1 million in 2017,2020, due primarily to increased expenses for compensation and benefits and professional services.services, partially offset by a decrease in business development and travel expense. Compensation and benefits expenses increased as a result of higher salaries and wages expenses, higher incentive compensation and higher other employee compensation and benefits.wages. The increase in GCB salaries and wages expenses was due primarily to an increase in the average number of FTEs at GCB, which increased by 112524 to 1,8622,874 FTEs in 2017,2020, compared to 1,7502,350 FTEs in 2016. The increase in GCB incentive compensation expense was2019. Professional services expenses increased due to our strong 2017 full year performance and reflective of our improved ROE relative to our peers, which is one of our key plan performance metrics. Professional services expense also increased in 2017 and washigher expenses primarily related to enhancementsour continued effort towards investments in our regulatory, risk managementinfrastructure, initiatives and compliance infrastructureoperating projects to support our growthpresence both domestically and globally as well as investments made in projects, systemsglobally. Business development and technology to support our revenue growth and related initiatives and other operating costs.
2016 compared to 2015
Net interest income from GCB increased by $186.8 million in 2016,travel expense decreased primarily due to a $126.6 million increase in loan interest income resulting mainly from an increase in average loan balances, partially offset by lower loan yields.the impact of COVID-19 on the global economy and our restrictions placed on domestic and international travel beginning March 2020.
Noninterest income increased by $47.6 million in 2016, related primarily to an increase in our core fees (higher foreign exchange fees, credit card fees and lending related fees). The increase in foreign exchange fees was due primarily to an increase in our client count as well as volume related to increased market volatility. The increase in credit card fees was primarily reflective
Noninterest expense increased by $53.4 million in 2016, due primarily to increased expenses for compensation and benefits, premises and equipment and net occupancy. Compensation and benefits expenses increased as a result of higher salaries and wages expenses. The increase in GCB salaries and wages expenses was due primarily to an increase in the average number of FTEs at GCB, which increased by 160 to 1,750 FTEs in 2016, compared to 1,590 FTEs in 2015. Premises and equipment expense increased due to increased spending to enhance and maintain our IT infrastructure. Net occupancy expenses increased due
primarily to lease renewals at higher costs, reflective of market conditions, and the expansion of certain offices, primarily our UK office, to support our growth.
SVB Private Bank
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Net interest income | | $ | 77,490 | | | $ | 51,022 | | | 51.9 | % | | $ | 64,902 | | | (21.4) | % |
| Provision for credit losses | | (21,329) | | | (2,369) | | | NM | | (3,339) | | | (29.1) | |
| Noninterest income | | 3,536 | | | 3,366 | | | 5.1 | | | 2,281 | | | 47.6 | |
| Noninterest expense | | (46,099) | | | (40,151) | | | 14.8 | | | (25,064) | | | 60.2 | |
| Income before income tax expense | | $ | 13,598 | | | $ | 11,868 | | | 14.6 | | | $ | 38,780 | | | (69.4) | |
| Total average loans, amortized cost | | $ | 4,195,804 | | | $ | 3,341,188 | | | 25.6 | | | $ | 2,850,271 | | | 17.2 | |
| Total average assets | | 4,229,818 | | | 3,371,052 | | | 25.5 | | | 2,871,743 | | | 17.4 | |
| Total average deposits | | 2,171,556 | | | 1,524,232 | | | 42.5 | | | 1,502,308 | | | 1.5 | |
|
| | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 |
| Net interest income | | $ | 58,131 |
| | $ | 53,582 |
| | 8.5 | % | | $ | 44,412 |
| | 20.6 | % |
| Provision for credit losses | | (4,386 | ) | | (1,812 | ) | | 142.1 |
| | (2,716 | ) | | (33.3 | ) |
| Noninterest income | | 2,175 |
| | 2,713 |
| | (19.8 | ) | | 2,011 |
| | 34.9 |
|
| Noninterest expense | | (17,693 | ) | | (12,379 | ) | | 42.9 |
| | (12,185 | ) | | 1.6 |
|
| Income before income tax expense | | $ | 38,227 |
|
| $ | 42,104 |
| | (9.2 | ) | | $ | 31,522 |
| | 33.6 |
|
| Total average loans, net of unearned income | | $ | 2,423,078 |
| | $ | 2,025,381 |
| | 19.6 |
| | $ | 1,592,065 |
| | 27.2 |
|
| Total average assets | | 2,449,763 |
| | 2,047,513 |
| | 19.6 |
| | 1,457,461 |
| | 40.5 |
|
| Total average deposits | | 1,303,542 |
| | 1,133,425 |
| | 15.0 |
| | 1,108,411 |
| | 2.3 |
|
NM—Not meaningful
Income before income tax expense from SVB Private Bank decreasedincreased to $38.2$13.6 million in 2017,2020, compared to $42.1$11.9 million in 2016. Income before income tax expense was $31.5 million in 2015.2019. The key drivers of SVB Private Bank's performance are discussed below:
2017 compared to 2016
Net interest income increased by $4.5$26.5 million in 2017,2020, due primarily to an increase in average loans, partially offset by decreases in loan interest income from anyields as a result of overall market rate decreases.
The provision for credit losses increased by $19.0 million due primarily to a $22.8 million increase in average loan balances and higher loan yields.
Noninterest income decreased by $0.5 million in 2017, primarily driven by lower credit card fee income due to the cancellationloan growth partially offset by a $3.4 million decrease in reserves for our performing loans reflective primarily of improved economic scenarios in our consumerforecast models as well as a qualitative adjustment reflective of strong credit card product in 2017.performance.
Noninterest expense increased by $5.3$5.9 million to $46.1 million in 2017, primarily2020 due to an $6.9 million increase in compensation and benefits, partially offset by a $1.1 million decrease in business development and travel expense. Incentive compensation expense increased as a result of highera strong performance during 2020. The increase in salaries and wages expenses as we continuewas due to an increase in the average number of FTEs at SVB Private Bank, and duewhich increased to higher incentive compensation reflective of our strong 2017 full139 FTEs at year performance.
2016 compared to 2015
Net interest income increased by $9.2 million in 2016, due primarily to an increase in loan interest incomeend December 31, 2020, from an increase in average loan balances.
Noninterest income increased by $0.7 million in 2016, primarily driven by increased client investment fee income related to the growth of our Wealth Advisory practice.123 for 2019.
SVB Capital
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change 2017/2016 | | 2015 | | % Change 2016/2015 | (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Net interest income (expense) | | $ | 48 |
| | $ | (49 | ) | | (198.0 | )% | | $ | 3 |
| | NM% |
| |
| Net interest income | | Net interest income | | $ | 30 | | | $ | 38 | | | (21.1) | % | | $ | 23 | | | 65.2 | % |
| Noninterest income | | 58,992 |
| | 49,365 |
| | 19.5 |
| | 70,857 |
| | (30.3 | ) | Noninterest income | | 225,954 | | | 122,394 | | | 84.6 | | | 101,181 | | | 21.0 | |
| Noninterest expense | | (19,340 | ) | | (15,546 | ) | | 24.4 |
| | (14,699 | ) | | 5.8 |
| Noninterest expense | | (50,589) | | | (30,798) | | | 64.3 | | | (22,792) | | | 35.1 | |
| Income before income tax expense | | $ | 39,700 |
| | $ | 33,770 |
| | 17.6 |
| | $ | 56,161 |
| | (39.9 | ) | Income before income tax expense | | $ | 175,395 | | | $ | 91,634 | | | 91.4 | | | $ | 78,412 | | | 16.9 | |
| Total average assets | | $ | 325,939 |
| | $ | 338,848 |
| | (3.8 | ) | | $ | 337,884 |
| | 0.3 |
| Total average assets | | $ | 437,132 | | | $ | 405,152 | | | 7.9 | | | $ | 380,543 | | | 6.5 | |
NM—Not meaningful
SVB Capital’s components of noninterest income primarily include net gains and losses on non-marketable and other equity securities, carried interest and fund management fees. All components of income before income tax expense discussed below are net of noncontrolling interests.
We experience variability in the performance of SVB Capital from period to period due to a number of factors, including changes in the values of our funds’ underlying investments, changes in the amount of distributions and general economic and market conditions. Such variability may lead to volatility in the gains and losses from investment securities and cause our results to differ from period to period.
Income before income tax expense from SVB Capital was $39.7$175.4 million in 2017,2020, compared to $33.8$91.6 million in 2016 and $56.2 million in 2015.2019. The key drivers of SVB Capital's performance are discussed below:below.
2017Noninterest income was $226.0 million in 2020, compared to 2016
Noninterest income increased $9.6$122.4 million to $59.0 millionin 2017 reflective of higher net gains on investment securities and fund management fees compared to 2016.2019. SVB Capital’s components of noninterest income primarily includeincluded the following:
•Net gains on investment securities of $35.8$170.3 million, in 2017, compared to primarily driven by unrealized net gains of $23.5 million in 2016. The net gains on investment securities of $35.8 million in 2017 were related to gains from distributions from our strategic venture capital fund investments and net unrealized valuation increases in thefrom private company investments held by the funds in our managed funds of funds portfolio driven by IPO and M&A activityas well as in 2017, and
our managed direct venture fund portfolio,•Fund management fees of $21.2$35.7 million, for 2017, comparedincluded in other noninterest income, and
•Gains on equity warrant assets of $10.8 million reflective of net valuation increases in equity warrant assets associated with our joint venture bank in China, included in other noninterest income.
Noninterest expense increased $19.8 million to $19.2$50.6 million in 2016.2020 due to an $8.8 million increase in compensation and benefits as a result of higher incentive compensation expense and higher salaries and wages expenses as well as an increase in other noninterest expense. Incentive compensation expense increased as a result of a strong performance during 2020. The increase in salaries and wages was due primarily to an increase in the additionaverage number of new managed fundsFTEs at SVB Capital.
2016 comparedCapital, which increased to 2015
Noninterest income decreased $21.547 FTEs at year end December 31, 2020, from 39 for 2019. Other noninterest expense increased $9.5 million primarily due to $49.4referral expenses associated with the $10.8 million in 2016 reflective of a slowdowngains on equity warrant assets associated with our joint venture bank in IPOs and overall softness in the venture capital-backed exit markets, primarily during the first half of 2016, which drove lower venture capital-related gains. China.
SVB Capital’sLeerink
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change 2020/2019 | | 2018 | | % Change 2019/2018 |
| Net interest income | | $ | 578 | | | $ | 1,252 | | | (53.8) | % | | $ | — | | | — | % |
| Noninterest income | | 495,976 | | | 264,516 | | | 87.5 | | | — | | | — | |
| Noninterest expense | | (378,970) | | | (252,678) | | | 50.0 | | | — | | | — | |
| Income before income tax expense | | $ | 117,584 | | | $ | 13,090 | | | NM | | $ | — | | | — | |
| Total average assets | | $ | 556,778 | | | $ | 397,650 | | | 40.0 | | | $ | — | | | — | |
NM—Not meaningful
SVB Leerink’s components of noninterest income primarily include the following:investment banking revenue, commissions and net gains and losses on non-marketable and other equity securities, carried interest and fund management fees. All components of income before income tax expense discussed below are net of noncontrolling interests.
Net gains on investment securities of $23.5Noninterest income increased $231.5 million to $496.0 million in 2016,2020, primarily due to a $218.8 million increase in investment banking revenues compared to net gains2019. The $218.8 million increase in investment banking revenues was due to record high levels of $51.4funding activity in the life science/healthcare secondary markets and by the increase in public equity underwriting fees.
Noninterest expense increased $126.3 million to $379.0 million in 2015. The net gains on investment securities2020, primarily due to a $131.6 million increase in compensation and benefit expense due to an increase in incentive plan expense as a result of $23.5a strong performance during 2020, partially offset by a $7.7 million decrease in 2016 were comprised of distributions from our strategic venture capital fund investments as well as gains from valuation increases for one of our equity method fund investments and net unrealized valuation increases from our managed funds of funds, and
Fund management fees of $19.2 million for 2016, compared to $15.9 million in 2015. The increase wasbusiness travel expense due primarily to the additionimpact of new managed funds at SVB Capital.
travel restrictions put in place in response to the COVID-19 pandemic towards the end of the first quarter of 2020.Consolidated Financial Condition
Our total assets, and total liabilities and stockholders' equity were $51.2$115.5 billion at December 31, 20172020 and $44.7$71.0 billion at both December 31, 2016 and December 31, 2015.2019. Refer below to a summary of the individual components driving the changes in total assets, total liabilities and stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents totaled $2.9$17.7 billion at December 31, 2017,2020, an increase of $0.4$10.9 billion, or 14.8160.6 percent, compared to $2.5$6.8 billion at December 31, 2016.2019. The increase in period-end cash balances was primarily due todriven by the significant growth in our noninterest-bearing deposit balancesdeposits of $40.2 billion driven primarily by increases during the year endedsecond half of 2020. As of December 31, 2017.
As of December 31, 2017 and December 31, 2016, $0.62020, $13.7 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the FRB and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $1.1$3.0 billion. As of December 31, 2019, $3.7 billion, of our cash and $0.7 billion, respectively.due from banks was deposited at the FRB and was earning interest at the Federal Funds target rate and interest-earning deposits in other financial institutions were $2.1 billion.
Investment Securities
Investment securities totaled $24.4$49.3 billion at December 31, 2017,2020, an increase of $2.7$20.2 billion, or 12.869.6 percent, compared to $21.7$29.1 billion at December 31, 2016, which decreased by $4.1 billion or 16.2 percent, compared to $25.8 billion at December 31, 2015.2019. Our investment securities portfolio consists primarily of: (i) an AFS securities portfolio and a HTM securities portfolio, both of which primarily representconsist of interest-earning fixed income investment securities; and (ii) a non-marketable and other equity securities portfolio, which represents primarily investments managed as part of our funds management business. The increasebusiness, investments in qualified affordable housing projects, as well as public equity securities held as a result of $2.7 billion is primarily due to new purchases of $8.4 billion partially offset by $5.0 billion of paydowns and maturities in our fixed income securities portfolio.exercised equity warrant assets. The major components of the change are explained below.
The following table presents a profile of our investment securities portfolio at December 31, 2017, 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Available-for-sale securities, at fair value: | | | | | | |
| U.S. Treasury securities | | $ | 4,469,728 | | | $ | 6,894,010 | | | $ | 4,738,258 | |
| U.S. agency debentures | | 237,307 | | | 99,547 | | | 1,084,117 | |
| Foreign government debt securities | | 24,492 | | | 9,038 | | | 5,812 | |
| Residential mortgage-backed securities: | | | | | | |
| Agency-issued mortgage-backed securities | | 13,503,681 | | | 4,148,791 | | | — | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 8,106,564 | | | 1,538,343 | | | 1,880,218 | |
| Agency-issued collateralized mortgage obligations—variable rate | | — | | | — | | | 81,638 | |
| Agency-issued commercial mortgage-backed securities | | 4,570,666 | | | 1,325,190 | | | — | |
| Total available-for-sale securities | | 30,912,438 | | | 14,014,919 | | | 7,790,043 | |
| Held-to-maturity securities, at amortized cost: | | | | | | |
| U.S. agency debentures | | 402,265 | | | 518,728 | | | 640,990 | |
| Residential mortgage-backed securities: | | | | | | |
| Agency-issued mortgage-backed securities | | 7,739,763 | | | 6,992,009 | | | 8,103,638 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 1,735,451 | | | 1,608,032 | | | 2,183,204 | |
| Agency-issued collateralized mortgage obligations—variable rate | | 136,913 | | | 178,611 | | | 214,483 | |
| Agency-issued commercial mortgage-backed securities | | 2,942,959 | | | 2,759,615 | | | 2,769,706 | |
| Municipal bonds and notes (1) | | 3,634,802 | | | 1,785,951 | | | 1,575,421 | |
| Total held-to-maturity securities | | 16,592,153 | | | 13,842,946 | | | 15,487,442 | |
| Non-marketable and other equity securities: | | | | | | |
| Non-marketable securities (fair value accounting): | | | | | | |
| Consolidated venture capital and private equity fund investments | | 88,937 | | | 87,180 | | | 118,333 | |
| Unconsolidated venture capital and private equity fund investments | | 184,886 | | | 178,217 | | | 201,098 | |
| Other investments without a readily determinable fair value | | 60,975 | | | 55,255 | | | 25,668 | |
| Other equity securities in public companies (fair value accounting) | | 280,804 | | | 59,200 | | | 20,398 | |
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments | | 362,192 | | | 215,367 | | | 129,485 | |
| Debt funds | | 5,444 | | | 7,271 | | | 5,826 | |
| Other investments | | 202,809 | | | 152,863 | | | 121,721 | |
| Investments in qualified affordable housing projects, net | | 616,188 | | | 458,476 | | | 318,575 | |
| Total non-marketable and other equity securities | | 1,802,235 | | | 1,213,829 | | | 941,104 | |
| Total investment securities | | $ | 49,306,826 | | | $ | 29,071,694 | | | $ | 24,218,589 | |
(1)Amortized cost net of allowance for credit losses of $392 thousand for December 31, 2020 and zero for both December 31, 2019 and 2018.
|
| | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Available-for-sale securities, at fair value: | | | | | | |
| U.S. Treasury securities | | $ | 6,840,502 |
| | $ | 8,909,491 |
| | $ | 11,678,035 |
|
| U.S. agency debentures | | 1,567,128 |
| | 2,078,375 |
| | 2,690,029 |
|
| Residential mortgage-backed securities: | | | | | | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 2,267,035 |
| | 1,152,665 |
| | 1,399,279 |
|
| Agency-issued collateralized mortgage obligations—variable rate | | 373,730 |
| | 474,283 |
| | 607,936 |
|
| Equity securities | | 72,269 |
| | 5,597 |
| | 5,469 |
|
| Total available-for-sale securities | | 11,120,664 |
| | 12,620,411 |
| | 16,380,748 |
|
| Held-to-maturity securities, at amortized cost: | | | | | | |
| U.S. agency debentures | | 659,979 |
| | 622,445 |
| | 545,473 |
|
| Residential mortgage-backed securities: | | | | | | |
| Agency-issued mortgage-backed securities | | 6,304,969 |
| | 2,896,179 |
| | 2,366,627 |
|
| Agency-issued collateralized mortgage obligations—fixed rate | | 2,829,979 |
| | 3,362,598 |
| | 4,225,781 |
|
| Agency-issued collateralized mortgage obligations—variable rate | | 255,782 |
| | 312,665 |
| | 370,779 |
|
| Agency-issued commercial mortgage-backed securities | | 1,868,985 |
| | 1,151,363 |
| | 1,214,716 |
|
| Municipal bonds and notes | | 743,761 |
| | 81,748 |
| | 67,587 |
|
| Total held-to-maturity securities | | 12,663,455 |
| | 8,426,998 |
| | 8,790,963 |
|
| Non-marketable and other securities: | | | | | | |
| Non-marketable securities (fair value accounting): | | | | | | |
| Venture capital and private equity fund investments | | 127,192 |
| | 141,649 |
| | 152,237 |
|
| Other venture capital investments | | 919 |
| | 2,040 |
| | 2,040 |
|
| Other securities (fair value accounting) | | 310 |
| | 753 |
| | 548 |
|
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments | | 89,809 |
| | 82,823 |
| | 85,705 |
|
| Debt funds | | 21,183 |
| | 17,020 |
| | 21,970 |
|
| Other investments | | 111,198 |
| | 123,514 |
| | 118,532 |
|
| Non-marketable securities (cost method accounting): | | | | | | |
| Venture capital and private equity fund investments | | 98,548 |
| | 114,606 |
| | 120,676 |
|
| Other investments | | 27,680 |
| | 27,700 |
| | 18,882 |
|
| Investments in qualified affordable housing projects | | 174,214 |
| | 112,447 |
| | 154,356 |
|
| Total non-marketable and other securities | | 651,053 |
| | 622,552 |
| | 674,946 |
|
| Total investment securities | | $ | 24,435,172 |
| | $ | 21,669,961 |
| | $ | 25,846,657 |
|
Available-for-Sale Securities
Period-end AFS securities were $11.1$30.9 billion at December 31, 2017,2020, compared to $12.6$14.0 billion at December 31, 2016, and $16.4 billion at December 31, 2015.2019. The decreaseincrease of $1.5$16.9 billion in 20172020 was primarily due to $3.3 billion in paydowns, scheduled maturities and called maturities and sales of $0.6 billion of agency backed collateralized mortgage obligations, partially offset by purchases of new investments of $2.4 billion. The$23.2 billion and a $0.6 billion increase in our AFS portfolio reflective of the 150 basis point decrease in Federal Funds interest rates, partially offset by $4.2 billion in paydowns and scheduled maturities, and called maturitiessales of $3.3 billion were comprised of $3.2 billion of fixed-rate securities and $0.1 billion in variable-rate securities. The purchases of new investments of $2.4 billion were primarily comprised of agency backed mortgage securities and U.S. Treasury securities.
Period-end AFS securities at December 31, 2016 decreased $3.8 billion compared to 2015 primarily due to the sale of $2.9$2.7 billion of U.S. Treasury securities and paydowns, scheduled maturities and called maturitiessecurities. Securities classified as available-for-sale are carried at fair value with changes in fair value recorded as unrealized gains or losses in a separate component of $1.4 billion, partially offset by purchases of new investments of $0.4 billion. The paydowns, scheduled maturities and called maturities of $1.4 billion were comprised of $1.3 billion of fixed-rate securities and $0.1 billion in variable-rate securities. The purchases of new investments of $0.4 billion were primarily comprised of fixed-rate U.S. Treasury securities and fixed-rate agency backed collateralized mortgage obligations.stockholders' equity.
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income securities, carried at fair value, classified as AFS as of December 31, 2017.2020. The weighted average yield is computed using the amortized cost of fixed income investment securities, which are reported at fair value. For U.S. Treasury securities, and U.S. agency debentures and foreign government debt securities, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. 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 AFS 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. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | Total | | One Year
or Less | | After One Year to
Five Years | | After Five Years to
Ten Years | | After
Ten Years |
| (Dollars in thousands) | | Carrying
Value | | Weighted
Average
Yield | | Carrying
Value | | Weighted
Average
Yield | | Carrying
Value | | Weighted
Average
Yield | | Carrying
Value | | Weighted
Average
Yield | | Carrying
Value | | Weighted
Average
Yield |
| U.S. Treasury securities | | $ | 4,469,728 | | | 1.86 | % | | $ | 10,092 | | | 0.10 | % | | $ | 3,532,784 | | | 1.85 | % | | $ | 926,852 | | | 1.89 | % | | $ | — | | | — | % |
| U.S. agency debentures | | 237,307 | | | 1.56 | | | — | | | — | | | — | | | — | | | 237,307 | | | 1.56 | | | — | | | — | |
| Foreign government debt securities | | 24,492 | | | (0.70) | | | 24,492 | | | (0.70) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
| Agency-issued mortgage backed securities | | 13,503,681 | | | 1.58 | | | — | | | — | | | — | | | — | | | — | | | — | | | 13,503,681 | | | 1.58 | |
| Agency-issued collateralized mortgage obligations - fixed rate | | 8,106,564 | | | 1.25 | | | — | | | — | | | — | | | — | | | — | | | — | | | 8,106,564 | | | 1.25 | |
| | | | | | | | | | | | | | | | | | | | |
| Agency-issued commercial mortgage-backed securities | | 4,570,666 | | | 1.70 | | | — | | | — | | | — | | | — | | | 1,502,572 | | | 1.77 | | | 3,068,094 | | | 1.66 | |
| Total | | $ | 30,912,438 | | | 1.55 | | | $ | 34,584 | | | (0.47) | | | $ | 3,532,784 | | | 1.85 | | | $ | 2,666,731 | | | 1.79 | | | $ | 24,678,339 | | | 1.48 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
| (Dollars in thousands) | | Carrying Value | | Weighted Average Yield | | Carrying Value | | Weighted
Average
Yield | | Carrying Value | | Weighted
Average
Yield | | Carrying Value | | Weighted
Average
Yield | | Carrying Value | | Weighted
Average
Yield |
| U.S. Treasury securities | | $ | 6,840,502 |
| | 1.49 | % | | $ | 1,967,480 |
| | 1.23 | % | | $ | 4,873,022 |
| | 1.60 | % | | $ | — |
| | — | % | | $ | — |
| | — | % |
| U.S. agency debentures | | 1,567,128 |
| | 2.47 |
| | 481,280 |
| | 1.53 |
| | 1,085,848 |
| | 2.88 |
| | — |
| | — |
| | — |
| | — |
|
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
| Agency-issued collateralized mortgage obligations - fixed rate | | 2,267,035 |
| | 2.54 |
| | — |
| | — |
| | — |
| | — |
| | 88,425 |
| | 2.63 |
| | 2,178,610 |
| | 2.58 |
|
| Agency-issued collateralized mortgage obligations - variable rate | | 373,730 |
| | 0.71 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 373,730 |
| | 0.71 |
|
| Total | | $ | 11,048,395 |
| | 1.82 |
| | $ | 2,448,760 |
| | 1.29 |
| | $ | 5,958,870 |
| | 1.83 |
| | $ | 88,425 |
| | 2.63 |
| | $ | 2,552,340 |
| | 2.31 |
|
Held-to-Maturity Securities
Period-end HTM securities were $12.7$16.6 billion at December 31, 2017,2020, an increase of $4.3$2.8 billion, or 50.319.9 percent, compared to $8.4$13.8 billion at December 31, 2016.2019. The increase was due to new purchases of $6.0$6.8 billion, primarily comprised of agency backed mortgage securities, partially offset by paydowns and scheduled maturities of $1.7$4.0 billion.
Period-end HTM securities were $8.4 billion at December 31, 2016, a decrease of $0.4 billion, or 4.1 percent, compared to $8.8 billion at December 31, 2015. The decrease was due to paydowns and scheduled maturities of $1.7 billion partially offset by purchases of $1.3 billion, primarily comprised of agency backed mortgage securities.
Securities classified as HTM are accounted for at cost with no adjustments for changes in fair value. For securities re-designated as HTM from AFS, the unrealized gains at the date of transfer will continue to be reported as a separate component of shareholders' equity and are being amortized over the life of the securities in a manner consistent with the amortization of a premium or discount.
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income investment securities classified as HTM as of December 31, 2017.2020. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.021.0 percent. The weighted average yield is computed using the amortized cost of fixed income investment securities. For 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 HTM 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. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
| | | | | December 31, 2017 | | | December 31, 2020 |
| | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years | | | Total | | One Year
or Less | | After One Year to
Five Years | | After Five Years to
Ten Years | | After
Ten Years |
| (Dollars in thousands) | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | (Dollars in thousands) | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield | | Amortized Cost | | Weighted
Average
Yield |
| U.S. agency debentures | | $ | 659,979 |
| | 2.37 | % | | $ | — |
| | — | % | | $ | 102,496 |
| | 2.72 | % | | $ | 557,483 |
| | 2.30 | % | | $ | — |
| | — | % | U.S. agency debentures | | $ | 402,265 | | | 2.65 | % | | $ | 4,675 | | | 3.22 | % | | $ | 148,478 | | | 2.59 | % | | $ | 249,112 | | | 2.67 | % | | $ | — | | | — | % |
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | Residential mortgage-backed securities: | |
| Agency-issued mortgage-backed securities | | 6,304,969 |
| | 2.58 |
| | 728 |
| | 7.52 |
| | 226,997 |
| | 2.19 |
| | 56,380 |
| | 2.06 |
| | 6,020,864 |
| | 2.60 |
| Agency-issued mortgage-backed securities | | 7,739,763 | | | 2.19 | | | 4,762 | | | 2.05 | | | 20,389 | | | 1.94 | | | 540,731 | | | 2.47 | | | 7,173,881 | | | 2.17 | |
| Agency-issued collateralized mortgage obligations - fixed rate | | 2,829,979 |
| | 1.78 |
| | — |
| | — |
| | — |
| | — |
| | 462,533 |
| | 1.48 |
| | 2,367,446 |
| | 1.84 |
| Agency-issued collateralized mortgage obligations - fixed rate | | 1,735,451 | | | 1.48 | | | — | | | — | | | 5,952 | | | 1.76 | | | 494,532 | | | 1.62 | | | 1,234,967 | | | 1.42 | |
| Agency-issued collateralized mortgage obligations - variable rate | | 255,782 |
| | 0.74 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 255,782 |
| | 0.74 |
| Agency-issued collateralized mortgage obligations - variable rate | | 136,913 | | | 0.74 | | | — | | | — | | | — | | | — | | | — | | | — | | | 136,913 | | | 0.74 | |
| Agency-issued commercial mortgage-backed securities | | 1,868,985 |
| | 2.49 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,868,985 |
| | 2.49 |
| Agency-issued commercial mortgage-backed securities | | 2,942,959 | | | 2.48 | | | — | | | — | | | — | | | — | | | 102,359 | | | 3.56 | | | 2,840,600 | | | 2.44 | |
| Municipal bonds and notes | | 743,761 |
| | 3.55 |
| | 7,073 |
| | 3.90 |
| | 73,054 |
| | 3.00 |
| | 233,728 |
| | 2.33 |
| | 429,906 |
| | 4.31 |
| |
| Municipal bonds and notes - tax exempt | | Municipal bonds and notes - tax exempt | | 3,635,194 | | | 2.43 | | | 46,292 | | | 2.56 | | | 144,347 | | | 2.61 | | | 669,281 | | | 2.32 | | | 2,775,274 | | | 2.48 | |
| Total | | $ | 12,663,455 |
| | 2.40 |
| | $ | 7,801 |
| | 4.24 |
| | $ | 402,547 |
| | 2.47 |
| | $ | 1,310,124 |
| | 2.01 |
| | $ | 10,942,983 |
| | 2.44 |
| Total | | $ | 16,592,545 | | | 2.35 | | | $ | 55,729 | | | 2.57 | | | $ | 319,166 | | | 2.54 | | | $ | 2,056,015 | | | 2.70 | | | $ | 14,161,635 | | | 2.33 | |
Portfolio duration is a standard measure used to approximate changes in the market value of fixed income instruments due to a change in market interest rates. The measure is an estimate based on the level of current market interest rates, expectations for changes in the path of forward rates and the effect of forward rates on mortgage prepayment speed assumptions. As such, portfolio duration will fluctuate with changes in market interest rates. Changes in portfolio duration are also impacted by changes in the mix of longer versus shorter term-to-maturity securities. At December 31, 2017,2020, our estimated fixed income securities portfolio weighted-average duration was 3.03.7 years, compared to 2.5 and 2.7 years3.9 at December 31, 2016 and 2015, respectively.2019.
Non-Marketable and Other Equity Securities
Non-marketable and other equity securities were $651.1 million$1.8 billion at December 31, 2017,2020, an increase of $28.5 million,$0.6 billion, or 4.648.5 percent, compared to $622.6 million$1.2 billion at December 31, 2016, which decreased by $52.3 million or 7.8 percent, compared to $674.9 million at December 31, 2015.2019. Included in our non-marketable and other equity securities carried under fair value accounting are amounts that are attributable to noncontrolling interests. We are required under GAAP to consolidate certain SVB Capital funds, even though we may own less than 100 percent of such entities. See below for a summary of the carrying value (as reported) of non-marketable and other equity securities compared to the amounts attributable to SVBFG.
The increase in non-marketable and other equity securities of $28.5 million $0.6 billionin 20172020 was related primarily attributable to a $61.8 million net increase in investmentsequity securities from exercised warrants, valuation increases in our other public equity securities, new investments within our qualified affordable housing projects portfolio offset by sales of, and distributionsvaluation increases and additional investment in our strategicventure capital and otherprivate equity funds investments.
The decrease in non-marketable and other securities of $52.3 million in 2016 was primarily related to sales of investments included in our qualified affordable housing projects portfolio totaling $46.5 million.
The following table summarizes the carrying value (as reported) of non-marketable and other equity securities compared to the amounts attributable to SVBFG (which generally represents the carrying value times our ownership percentage) at December 31, 2017, 20162020, 2019 and 2015:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG |
| Non-marketable securities (fair value accounting): | | | | | | | | | | | | |
| Venture capital and private equity fund investments (1) | | $ | 127,192 |
| | $ | 32,945 |
| | $ | 141,649 |
| | $ | 40,464 |
| | $ | 152,237 |
| | $ | 44,485 |
|
| Other venture capital investments (2) | | 919 |
| | 99 |
| | 2,040 |
| | 218 |
| | 2,040 |
| | 218 |
|
| Other securities (fair value accounting) (3) | | 310 |
| | 103 |
| | 753 |
| | 138 |
| | 548 |
| | 124 |
|
| Non-marketable securities (equity method accounting): | | | | | | | | | | | | |
| Venture capital and private equity fund investments | | 89,809 |
| | 64,675 |
| | 82,823 |
| | 64,030 |
| | 85,705 |
| | 69,314 |
|
| Debt funds | | 21,183 |
| | 21,183 |
| | 17,020 |
| | 17,020 |
| | 21,970 |
| | 21,970 |
|
| Other investments (4) | | 111,198 |
| | 111,198 |
| | 123,514 |
| | 123,514 |
| | 118,532 |
| | 118,532 |
|
| Non-marketable securities (cost method accounting): | | | | | | | | | | | | |
| Venture capital and private equity fund investments (5) | | 98,548 |
| | 98,548 |
| | 114,606 |
| | 114,606 |
| | 120,676 |
| | 120,676 |
|
| Other investments | | 27,680 |
| | 27,680 |
| | 27,700 |
| | 27,700 |
| | 18,882 |
| | 18,882 |
|
| Investments in qualified affordable housing projects, net | | 174,214 |
| | 174,214 |
| | 112,447 |
| | 112,447 |
| | 154,356 |
| | 154,356 |
|
| Total non-marketable and other securities | | $ | 651,053 |
| | $ | 530,645 |
| | $ | 622,552 |
| | $ | 500,137 |
| | $ | 674,946 |
| | $ | 548,557 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | | 2020 | | 2019 | | 2018 |
| (Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG |
| Non-marketable and other equity securities: | | | | | | | | | | | | |
| Non-marketable securities (fair value accounting): | | | | | | | | | | | | |
| Consolidated venture capital and private equity fund investments (1) | | $ | 88,937 | | | $ | 22,783 | | | $ | 87,180 | | | $ | 22,482 | | | $ | 118,333 | | | $ | 30,235 | |
| Unconsolidated venture capital and private equity fund investments (2) | | 184,886 | | | 184,886 | | | 178,217 | | | 178,217 | | | 201,098 | | | 201,098 | |
| Other investments without a readily determinable fair value (3) | | 60,975 | | | 60,975 | | | 55,255 | | | 55,255 | | | 25,668 | | | 25,668 | |
| Other equity securities in public companies (fair value accounting) (4) | | 280,804 | | | 280,804 | | | 59,200 | | | 59,056 | | | 20,398 | | | 20,098 | |
| Non-marketable securities (equity method accounting) (5): | | | | | | | | | | | | |
| Venture capital and private equity fund investments | | 362,192 | | | 214,904 | | | 215,367 | | | 131,403 | | | 129,485 | | | 82,921 | |
| Debt funds | | 5,444 | | | 5,444 | | | 7,271 | | | 7,271 | | | 5,826 | | | 5,826 | |
| Other investments | | 202,809 | | | 202,809 | | | 152,863 | | | 152,863 | | | 121,721 | | | 121,721 | |
| Investments in qualified affordable housing projects, net | | 616,188 | | | 616,188 | | | 458,476 | | | 458,476 | | | 318,575 | | | 318,575 | |
| Total non-marketable and other equity securities | | $ | 1,802,235 | | | $ | 1,588,793 | | | $ | 1,213,829 | | | $ | 1,065,023 | | | $ | 941,104 | | | $ | 806,142 | |
(1)The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and amounts attributable to SVBFG for each fund at December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | | 2020 | | 2019 | | 2018 |
| (Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG |
| Strategic Investors Fund, LP | | $ | 4,850 | | | $ | 609 | | | $ | 5,729 | | | $ | 720 | | | $ | 12,452 | | | $ | 1,564 | |
| Capital Preferred Return Fund, LP | | 49,574 | | | 10,684 | | | 45,341 | | | 9,772 | | | 53,957 | | | 11,629 | |
| Growth Partners, LP | | 34,513 | | | 11,490 | | | 35,976 | | | 11,976 | | | 50,845 | | | 16,927 | |
| CP I, LP | | — | | | — | | | 134 | | | 14 | | | 1,079 | | | 115 | |
| Total consolidated venture capital and private equity fund investments | | $ | 88,937 | | | $ | 22,783 | | | $ | 87,180 | | | $ | 22,482 | | | $ | 118,333 | | | $ | 30,235 | |
(2)The carrying values represented investments in 162 and 205 funds (primarily venture capital funds) at December 31, 2020 and December 31, 2019, respectively, where our ownership interest is typically less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships operating activities and financial policies. Our unconsolidated venture capital and private equity fund investments at fair value based on the fund investments' net asset values per share as obtained from the general partners of the funds. For each fund investment, we adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment and significant fund transactions or market events during the reporting period.
(3)Investments classified as "Other investments without a readily determinable fair value" include direct equity investments in private companies. The carrying value is based on the price at which the investment was acquired plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted. For further details on the carrying value of these investments refer to Note 8—“Investment Securities" of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
(4)Investments classified as other equity securities (fair value accounting) represent shares held in public companies as a result of exercising public equity warrant assets and direct equity investments in public companies held by our consolidated funds. Changes in the fair value recognized through net income. This amount includes total unrealized gains of $72.0 million in BigCommerce which was subject to a lock-up agreement as of December 31, 2020. The lock-up expired in February 2021 at which time we sold all of our common shares as discussed above.
(5)The following table shows the carrying value and our ownership percentage of each investment at December 31, 2020, 2019 and 2018 (equity method accounting):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| (Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG |
| Venture capital and private equity fund investments: | | | | | | | | | | | | |
| Strategic Investors Fund II, LP | | $ | 3,705 | | | $ | 3,435 | | | $ | 3,612 | | | $ | 3,387 | | | $ | 4,670 | | | $ | 4,366 | |
| Strategic Investors Fund III, LP | | 16,110 | | | 13,005 | | | 15,668 | | | 12,701 | | | 17,396 | | | 14,059 | |
| Strategic Investors Fund IV, LP | | 25,169 | | | 21,145 | | | 27,064 | | | 22,780 | | | 28,974 | | | 24,388 | |
| Strategic Investors Fund V funds | | 67,052 | | | 35,202 | | | 46,830 | | | 24,586 | | | 28,189 | | | 14,799 | |
| CP II, LP (i) | | 7,887 | | | 4,766 | | | 5,907 | | | 3,567 | | | 7,122 | | | 4,308 | |
| Other venture capital and private equity fund investments | | 242,269 | | | 137,351 | | | 116,286 | | | 64,382 | | | 43,134 | | | 21,001 | |
| Total venture capital and private equity fund investments | | $ | 362,192 | | | $ | 214,904 | | | $ | 215,367 | | | $ | 131,403 | | | $ | 129,485 | | | $ | 82,921 | |
| Debt funds: | | | | | | | | | | | | |
| Gold Hill Capital 2008, LP (ii) | | $ | 3,941 | | | $ | 3,941 | | | $ | 5,525 | | | $ | 5,525 | | | $ | 3,901 | | | $ | 3,901 | |
| Other debt funds | | 1,503 | | | 1,503 | | | 1,746 | | | 1,746 | | | 1,925 | | | 1,925 | |
| Total debt funds | | $ | 5,444 | | | $ | 5,444 | | | $ | 7,271 | | | $ | 7,271 | | | $ | 5,826 | | | $ | 5,826 | |
| Other investments: | | | | | | | | | | | | |
| SPD Silicon Valley Bank Co., Ltd. | | $ | 115,232 | | | $ | 115,232 | | | $ | 74,190 | | | $ | 74,190 | | | $ | 76,412 | | | $ | 76,412 | |
| Other investments | | 87,577 | | | 87,577 | | | 78,673 | | | 78,673 | | | 45,309 | | | 45,309 | |
| Total other investments | | $ | 202,809 | | | $ | 202,809 | | | $ | 152,863 | | | $ | 152,863 | | | $ | 121,721 | | | $ | 121,721 | |
| |
(1) | The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and amounts attributable to SVBFG for each fund at December 31, 2017, 2016 and 2015:
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable
to SVBFG | | Carrying value (as reported) | | Amount attributable
to SVBFG |
| Strategic Investors Fund, LP | | $ | 14,673 |
| | $ | 1,843 |
| | $ | 18,459 |
| | $ | 2,319 |
| | $ | 20,794 |
| | $ | 2,612 |
|
| Capital Preferred Return Fund, LP | | 54,147 |
| | 11,670 |
| | 57,627 |
| | 12,420 |
| | 60,619 |
| | 13,065 |
|
| Growth Partners, LP | | 58,372 |
| | 19,432 |
| | 59,718 |
| | 19,880 |
| | 62,983 |
| | 20,967 |
|
| Other private equity fund (i) | | — |
| | — |
| | 5,845 |
| | 5,845 |
| | 7,841 |
| | 7,841 |
|
| Total venture capital and private equity fund investments | | $ | 127,192 |
| | $ | 32,945 |
| | $ | 141,649 |
| | $ | 40,464 |
| | $ | 152,237 |
| | $ | 44,485 |
|
| |
(i) | On January 3, 2017, the other private equity fund was closed resulting in an immaterial impact on the Company's financial statements. |
| |
(2) | The following table shows the amounts of other venture capital investments held by the following consolidated funds and amounts attributable to SVBFG for each fund at December 31, 2017, 2016 and 2015:
|
(i)Our ownership includes direct ownership interest of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | | Carrying value
(as reported) | | Amount attributable
to SVBFG | | Carrying value
(as reported) | | Amount attributable
to SVBFG | | Carrying value
(as reported) | | Amount attributable
to SVBFG |
| CP I, LP | | $ | 919 |
| | $ | 99 |
| | $ | 2,040 |
| | $ | 218 |
| | $ | 2,040 |
| | $ | 218 |
|
| Total other venture capital investments | | $ | 919 |
| | $ | 99 |
| | $ | 2,040 |
| | $ | 218 |
| | $ | 2,040 |
| | $ | 218 |
|
| |
(3) | Investments classified as other securities (fair value accounting) represent direct equity investments in public companies held by our consolidated funds. |
| |
(4) | The following table shows the amounts of our other investments (equity method accounting) at December 31, 2017, 2016 and 2015:
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | | Carrying value
(as reported) | | Amount attributable
to SVBFG | | Carrying value
(as reported) | | Amount attributable
to SVBFG | | Carrying value
(as reported) | | Amount attributable
to SVBFG |
| Other investments: | |
| | | | | | | | | | |
| SPD Silicon Valley Bank Co., Ltd. | | $ | 75,337 |
| | $ | 75,337 |
| | $ | 75,296 |
| | $ | 75,296 |
| | $ | 78,799 |
| | $ | 78,799 |
|
| Other investments | | 35,861 |
| | 35,861 |
| | 48,218 |
| | 48,218 |
| | 39,733 |
| | 39,733 |
|
| Total other investments | | $ | 111,198 |
| | $ | 111,198 |
| | $ | 123,514 |
| | $ | 123,514 |
| | $ | 118,532 |
| | $ | 118,532 |
|
| |
(5) | These represent venture capital and private equity fund investments recorded at cost for which we recognize distributions or returns received from net accumulated earnings of the investee since the date of acquisition as income. As a result of new accounting standards for financial instruments (see "Recent Accounting Pronouncements" in Note 2 - "Summary of Significant Accounting Policies" of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details), which will be adopted in the first quarter of 2018, these investments will be re-measured at fair value and the difference between cost and fair value will be recorded as a cumulative-effect adjustment to opening retained earnings as of January 1, 2018. As of December 31, 2017, the fair value of these investments was $201.7 million. Any subsequent changes in the fair value of these investments will be recorded as unrealized gains or losses in our consolidated statements of income.
|
Volcker Rule
On June 6, 2017, we received notice that the Board of Governors of the Federal Reserve approved the Company’s application for an extension of the permitted conformance period for the Company’s investments in “illiquid” covered funds. The approval extends the deadline by which the Company must sell, divest, restructure or otherwise conform such investments to the provisions
of the Volcker Rule until the earlier of (i) July 21, 2022 or (ii) the date by which each fund matures by its terms or is otherwise conformed to the Volcker Rule.
As implemented under the Dodd-Frank Act, the Volcker Rule prohibits, subject to certain exceptions, a banking entity, such as the Company, from sponsoring or investing in covered funds, defined to include many venture capital and private equity funds. As noted above, the Company currently maintains certain investments in “illiquid” funds that woulddeemed to be prohibited but are now held under the approved extension.covered fund investments. As of December 31, 2017, such investments had an estimated2020, under current regulations, we estimate that the aggregate carrying value of approximately $153 million (and an aggregateand fair value of venture capital and private equity fund investments deemed to be prohibited covered fund interests, and therefore subject to the Volcker Rule’s restrictions, was approximately $253 million). See$230 million. We are currently assessing the extent of the impact of amendments to the Volcker Rule which provide for certain exclusions from the Volcker Rule restrictions. (For more information, see "Business - Supervision and Regulatory - Proprietary Trading and Certain Relationships with Hedge Funds and Private EquityCertain Funds" under Part I, Item I of this report.)
Loans
The following table details the composition of the loan portfolio, net of unearned income,amortized cost basis, as of the five most recent year-ends:
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Commercial loans: | | | | | | | | | | |
| Software/internet (1) | | $ | 6,172,531 |
| | $ | 5,627,031 |
| | $ | 5,437,915 |
| | $ | 4,954,676 |
| | $ | 4,102,636 |
|
| Hardware (1) | | 1,193,599 |
| | 1,180,398 |
| | 1,071,528 |
| | 1,131,006 |
| | 1,213,032 |
|
| Private equity/venture capital | | 9,952,377 |
| | 7,691,148 |
| | 5,467,577 |
| | 4,582,906 |
| | 2,386,054 |
|
| Life science/healthcare (1) | | 1,808,827 |
| | 1,853,004 |
| | 1,710,642 |
| | 1,289,904 |
| | 1,170,220 |
|
| Premium wine | | 204,105 |
| | 200,156 |
| | 201,175 |
| | 187,568 |
| | 149,841 |
|
| Other (1) | | 365,724 |
| | 393,551 |
| | 312,278 |
| | 234,551 |
| | 288,904 |
|
| Total commercial loans | | 19,697,163 |
| | 16,945,288 |
| | 14,201,115 |
| | 12,380,611 |
| | 9,310,687 |
|
| Real estate secured loans: | | | | | | | | | | |
| Premium wine (2) | | 669,053 |
| | 678,166 |
| | 646,120 |
| | 606,753 |
| | 514,993 |
|
| Consumer loans (3) | | 2,300,506 |
| | 1,926,968 |
| | 1,544,440 |
| | 1,118,115 |
| | 873,255 |
|
| Other | | 42,068 |
| | 43,487 |
| | 44,830 |
| | 39,651 |
| | 30,743 |
|
| Total real estate secured loans | | 3,011,627 |
| | 2,648,621 |
| | 2,235,390 |
| | 1,764,519 |
| | 1,418,991 |
|
| Construction loans (4) | | 68,546 |
| | 64,671 |
| | 78,682 |
| | 78,626 |
| | 76,997 |
|
| Consumer loans | | 328,980 |
| | 241,364 |
| | 226,883 |
| | 160,520 |
| | 99,711 |
|
| Total loans, net of unearned income (5)(6) | | $ | 23,106,316 |
| | $ | 19,899,944 |
| | $ | 16,742,070 |
| | $ | 14,384,276 |
| | $ | 10,906,386 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Global fund banking | | $ | 25,543,198 | | | $ | 17,696,794 | | | $ | 14,125,945 | | | $ | 9,836,939 | | | $ | 7,739,568 | |
| Investor dependent: | | | | | | | | | | |
| Early stage | | 1,485,866 | | | 1,624,221 | | | 1,670,644 | | | 1,409,871 | | | 1,258,394 | |
| Mid stage | | 1,564,870 | | | 1,047,398 | | | 1,353,332 | | | 1,275,654 | | | 1,100,933 | |
| Later stage | | 1,921,082 | | | 1,663,576 | | | 1,382,286 | | | 1,125,453 | | | 786,819 | |
| Total investor dependent (1) | | 4,971,818 | | | 4,335,195 | | | 4,406,262 | | | 3,810,978 | | | 3,146,146 | |
| Cash flow dependent: | | | | | | | | | | |
| Sponsor led buyout | | 1,989,173 | | | 2,185,497 | | | 2,290,957 | | | 2,156,508 | | | 2,362,679 | |
| Other | | 2,945,360 | | | 2,238,741 | | | 1,787,141 | | | 1,793,539 | | | 1,537,129 | |
| Total cash flow dependent (1) | | 4,934,533 | | | 4,424,238 | | | 4,078,098 | | | 3,950,047 | | | 3,899,808 | |
| Private bank (2) (6) | | 4,901,056 | | | 3,492,269 | | | 3,070,675 | | | 2,668,435 | | | 2,211,254 | |
| Balance sheet dependent (1) | | 2,191,023 | | | 1,286,153 | | | 1,373,685 | | | 1,489,002 | | | 1,858,557 | |
| Premium wine (2) (6) | | 1,052,643 | | | 1,062,264 | | | 959,792 | | | 872,932 | | | 879,164 | |
| Other (2) (6) | | 27,687 | | | 867,723 | | | 323,823 | | | 477,983 | | | 165,447 | |
| SBA loans | | 1,559,530 | | | — | | | — | | | — | | | — | |
| Total loans (3) (4) (5) | | $ | 45,181,488 | | | $ | 33,164,636 | | | $ | 28,338,280 | | | $ | 23,106,316 | | | $ | 19,899,944 | |
| |
(1) | Due to the diverse nature of energy and resource innovation products and services, for our loan-related reporting purposes, ERI-related loans are reported under our software/internet, hardware, life science/healthcare and other commercial loan categories, as applicable. |
| |
(2) | Included in our premium wine portfolio are gross construction loans of $100 million, $110 million, $121 million, $112 million and $112 million at December 31, 2017, 2016, 2015, 2014 and 2013, respectively.(1)Due to the diverse nature of energy and resource innovation products and services, for our loan-related reporting purposes, ERI-related loans are reported under the Investor Dependent, Cash Flow Dependent and Balance Sheet Dependent risk-based segments above. (2)As of December 31, 2020, as a result of enhanced portfolio characteristic definitions for our risk-based segments, loans in the amount of $426.6 million and $52.5 million that would have been reported in Other under historical definitions, are now being reported in our Private Bank and Premium Wine risk-based segments, respectively. (3)Total loans at amortized cost is net of unearned income of $226 million, $163 million, $173 million, $148 million and $125 million in 2020, 2019, 2018, 2017 and 2016, respectively. (4)Included within our total loan portfolio are credit card loans of $400 million, $395 million, $335 million, $270 million, and $224 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively, and primarily represent corporate credit cards. (5)Included in our total loan portfolio are construction loans of $118 million, $183 million, $196 million, $169 million and $175 million at December 31, 2020, 2019, 2018, 2017 and 2016, respectively. Construction loans consist of qualified affordable housing project loans made to fulfill our responsibilities under the Community Reinvestment Act and are primarily secured by real estate. (6)Of our total loans, the table below includes those secured by real estate at amortized cost at December 31, 2020, 2019, 2018, 2017 and 2016 and were comprised of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Real estate secured loans: | | | | | | | | | | | | Private bank: | | | | | | | | | | | | Loans for personal residence | | $ | 3,392,237 | | | $ | 2,829,880 | | | $ | 2,251,292 | | | $ | 1,995,840 | | | $ | 1,655,349 | | | Loans to eligible employees | | 481,098 | | | 401,396 | | | 290,194 | | | 243,118 | | | 199,291 | | | Home equity lines of credit | | 42,449 | | | 55,461 | | | 71,485 | | | 61,548 | | | 72,328 | | | Other | | 142,895 | | | 38,880 | | | 40,435 | | | 42,068 | | | 43,487 | | | Total private bank loans secured by real estate | | $ | 4,058,679 | | | $ | 3,325,617 | | | $ | 2,653,406 | | | $ | 2,342,574 | | | $ | 1,970,455 | | | Premium wine | | 824,008 | | | 820,730 | | | 710,397 | | | 669,053 | | | 678,166 | | | Other | | 56,882 | | | — | | | — | | | — | | | — | | | Total real estate secured loans | | $ | 4,939,569 | | | $ | 4,146,347 | | | $ | 3,363,803 | | | $ | 3,011,627 | | | $ | 2,648,621 | |
|
| |
(3) | Consumer loans secured by real estate at December 31, 2017, 2016, 2015, 2014 and 2013 were comprised of the following:
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Loans for personal residence | | $ | 1,995,840 |
| | $ | 1,655,349 |
| | $ | 1,312,818 |
| | $ | 918,629 |
| | $ | 685,327 |
|
| Loans to eligible employees | | 243,118 |
| | 199,291 |
| | 156,001 |
| | 133,568 |
| | 121,548 |
|
| Home equity lines of credit | | 61,548 |
| | 72,328 |
| | 75,621 |
| | 65,918 |
| | 66,380 |
|
| Consumer loans secured by real estate | | $ | 2,300,506 |
| | $ | 1,926,968 |
| | $ | 1,544,440 |
| | $ | 1,118,115 |
| | $ | 873,255 |
|
| |
(4) | Construction loans consist of qualified affordable housing project loans made to fulfill our responsibilities under the Community Reinvestment Act and are primarily secured by real estate. |
| |
(5) | Unearned income, net of deferred costs, was $148 million, $125 million, $115 million, $104 million and $89 million in 2017, 2016, 2015, 2014 and 2013, respectively.
|
| |
(6) | Included within our total loan portfolio are credit card loans of $270 million, $224 million, $177 million, $131 million and $85 million at December 31, 2017, 2016, 2015, 2014 and 2013, respectively, and primarily represent corporate credit cards.
|
Both commercial and consumer loansLoans, amortized cost basis, increased from December 31, 20162019 to December 31, 20172020 with the largest increases coming fromdriven primarily by our private equity/venture capital, software/internetGlobal Fund Banking, SBA and consumer real estate industryPrivate Bank risk-based segments. The growth from our private equity/venture capital clients increase due toin risk-based segments was primarily driven by participation in the Paycheck Protection Program and increased credit line utilization from our capital call lines of credit and the growth in our software/internet segment came primarily from growth in our Accelerator practice. The growth in our consumer real estate came primarily from our Private Bank.as well as new client acquisition.
Loan Concentration
Loan concentrations may exist when there are borrowers engaged in similar activities or types of loans extended to a diverse group of borrowers that could cause those borrowers or portfolios to be similarly impacted by economic or other conditions. A substantial percentage of our loans are commercial in nature. The breakdown of total gross loans and total loans as a percentage of grosstotal loans by industry sectorrisk-based segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | | 2020 | | 2019 |
| (Dollars in thousands) | | Amount | | Percentage | | Amount | | Percentage |
| Global fund banking | | $ | 25,543,198 | | | 56.5 | % | | $ | 17,712,797 | | | 53.1 | % |
| Investor dependent: | | | | | | | | |
| Early stage | | 1,485,866 | | | 3.3 | | | 1,653,425 | | | 5.0 | |
| Mid stage | | 1,564,870 | | | 3.5 | | | 1,066,783 | | | 3.2 | |
| Later stage | | 1,921,082 | | | 4.2 | | | 1,698,676 | | | 5.1 | |
| Total investor dependent | | 4,971,818 | | | 11.0 | | | 4,418,884 | | | 13.3 | |
| Cash flow dependent: | | | | | | | | |
| Sponsor led buyout | | 1,989,173 | | | 4.4 | | | 2,203,020 | | | 6.6 | |
| Other | | 2,945,360 | | | 6.5 | | | 2,252,847 | | | 6.8 | |
| Total cash flow dependent | | 4,934,533 | | | 10.9 | | | 4,455,867 | | | 13.4 | |
| Private bank | | 4,901,056 | | | 10.9 | | | 3,489,219 | | | 10.4 | |
| Balance sheet dependent | | 2,191,023 | | | 4.8 | | | 1,297,304 | | | 3.9 | |
| Premium wine | | 1,052,643 | | | 2.3 | | | 1,063,512 | | | 3.2 | |
| Other | | 27,687 | | | 0.1 | | | 890,121 | | | 2.7 | |
| SBA loans | | 1,559,530 | | | 3.5 | | | — | | | — | |
| Total loans (1) | | $ | 45,181,488 | | | 100.0 | | | $ | 33,327,704 | | | 100.0 | |
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
|
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| (Dollars in thousands) | | Amount | | Percentage | | Amount | | Percentage |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 6,232,725 |
| | 26.8 | % | | $ | 5,668,578 |
| | 28.3 | % |
| Hardware | | 1,200,900 |
| | 5.2 |
| | 1,189,114 |
| | 5.9 |
|
| Private equity/venture capital | | 9,961,121 |
| | 42.8 |
| | 7,747,911 |
| | 38.7 |
|
| Life science/healthcare | | 1,867,960 |
| | 8.0 |
| | 1,866,685 |
| | 9.3 |
|
| Premium wine | | 204,257 |
| | 0.9 |
| | 201,634 |
| | 1.0 |
|
| Other | | 379,431 |
| | 1.6 |
| | 396,458 |
| | 2.0 |
|
| Commercial loans | | 19,846,394 |
| | 85.3 |
| | 17,070,380 |
| | 85.2 |
|
| Real estate secured loans: | | | | | | | | |
| Premium wine | | 670,112 |
| | 2.9 |
| | 678,745 |
| | 3.5 |
|
| Consumer loans | | 2,297,857 |
| | 9.9 |
| | 1,925,620 |
| | 9.6 |
|
| Other | | 42,230 |
| | 0.2 |
| | 43,807 |
| | 0.2 |
|
| Real estate secured loans | | 3,010,199 |
| | 13.0 |
| | 2,648,172 |
| | 13.3 |
|
| Construction loans | | 69,108 |
| | 0.3 |
| | 64,957 |
| | 0.3 |
|
| Consumer loans | | 328,452 |
| | 1.4 |
| | 241,153 |
| | 1.2 |
|
| Total gross loans | | $ | 23,254,153 |
| | 100.0 | % | | $ | 20,024,662 |
| | 100.0 | % |
The following table provides a summary of grosstotal loans by size and category.risk-based segment. The breakout of the categoriesbelow is based on total client balances (individually or in the aggregate) as of December 31, 2017:2020 to any single client:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (Dollars in thousands) | | Less than
Five Million | | Five to Ten
Million | | Ten to Twenty
Million | | Twenty to Thirty Million | | Thirty Million or More | | Total |
| Global fund banking | | $ | 1,052,067 | | | $ | 1,360,621 | | | $ | 2,636,556 | | | $ | 2,777,270 | | | $ | 17,722,678 | | | $ | 25,549,192 | |
| Investor dependent: | | | | | | | | | | | | |
| Early stage | | 1,896,260 | | | 221,258 | | | 100,553 | | | 27,781 | | | — | | | 2,245,852 | |
| Mid stage | | 814,426 | | | 492,856 | | | 277,754 | | | 95,011 | | | 133,321 | | | 1,813,368 | |
| Later stage | | 281,953 | | | 596,965 | | | 692,923 | | | 269,587 | | | 174,159 | | | 2,015,587 | |
| Total investor dependent | | 2,992,639 | | | 1,311,079 | | | 1,071,230 | | | 392,379 | | | 307,480 | | | 6,074,807 | |
| Cash flow dependent: | | | | | | | | | | | | |
| Sponsor led buyout | | 17,821 | | | 66,823 | | | 546,416 | | | 653,706 | | | 714,085 | | | 1,998,851 | |
| Other | | 401,266 | | | 228,336 | | | 535,974 | | | 649,766 | | | 1,486,180 | | | 3,301,522 | |
| Total cash flow dependent | | 419,087 | | | 295,159 | | | 1,082,390 | | | 1,303,472 | | | 2,200,265 | | | 5,300,373 | |
| Private bank | | 3,505,413 | | | 597,344 | | | 319,019 | | | 94,935 | | | 385,270 | | | 4,901,981 | |
| Balance sheet dependent | | 230,787 | | | 332,523 | | | 461,204 | | | 289,502 | | | 926,121 | | | 2,240,137 | |
| Premium wine | | 241,806 | | | 272,506 | | | 300,292 | | | 120,740 | | | 144,924 | | | 1,080,268 | |
| Other | | — | | | 18,673 | | | 16,057 | | | — | | | — | | | 34,730 | |
| Total loans (1) (2) | | $ | 8,441,799 | | | $ | 4,187,905 | | | $ | 5,886,748 | | | $ | 4,978,298 | | | $ | 21,686,738 | | | $ | 45,181,488 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| (Dollars in thousands) | | Less than Five Million | | Five to Ten Million | | Ten to Twenty Million | | Twenty to Thirty Million | | Thirty Million or More | | Total |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 1,558,717 |
| | $ | 974,959 |
| | $ | 1,545,194 |
| | $ | 1,190,247 |
| | $ | 963,608 |
| | $ | 6,232,725 |
|
| Hardware | | 258,586 |
| | 138,254 |
| | 253,978 |
| | 217,425 |
| | 332,657 |
| | 1,200,900 |
|
| Private equity/venture capital | | 697,427 |
| | 807,596 |
| | 1,617,121 |
| | 1,142,818 |
| | 5,696,159 |
| | 9,961,121 |
|
| Life science/healthcare | | 321,738 |
| | 450,445 |
| | 576,926 |
| | 313,656 |
| | 205,195 |
| | 1,867,960 |
|
| Premium wine | | 60,663 |
| | 37,845 |
| | 64,062 |
| | 32,423 |
| | 9,264 |
| | 204,257 |
|
| Other | | 149,825 |
| | 23,096 |
| | 103,989 |
| | 25,599 |
| | 76,922 |
| | 379,431 |
|
| Commercial loans | | 3,046,956 |
| | 2,432,195 |
| | 4,161,270 |
| | 2,922,168 |
| | 7,283,805 |
| | 19,846,394 |
|
| Real estate secured loans: | | | | | | | | | | | | |
| Premium wine | | 150,563 |
| | 187,272 |
| | 220,062 |
| | 89,561 |
| | 22,654 |
| | 670,112 |
|
| Consumer loans | | 1,989,973 |
| | 224,825 |
| | 83,059 |
| | — |
| | — |
| | 2,297,857 |
|
| Other | | 7,763 |
| | — |
| | 14,134 |
| | 20,333 |
| | — |
| | 42,230 |
|
| Real estate secured loans | | 2,148,299 |
| | 412,097 |
| | 317,255 |
| | 109,894 |
| | 22,654 |
| | 3,010,199 |
|
| Construction loans | | 12,178 |
| | 34,029 |
| | — |
| | 22,901 |
| | — |
| | 69,108 |
|
| Consumer loans | | 146,395 |
| | 49,921 |
| | 17,120 |
| | 78,742 |
| | 36,274 |
| | 328,452 |
|
| Total gross loans | | $ | 5,353,828 |
| | $ | 2,928,242 |
| | $ | 4,495,645 |
| | $ | 3,133,705 |
| | $ | 7,342,733 |
| | $ | 23,254,153 |
|
At (1)As of December 31, 2017,2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
(2)Included in total loans at amortized cost is approximately $1.6 billion in PPP loans. The PPP loans consist of loans from all risk-based segments.
At December 31, 2020, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $10.5$26.7 billion,, or 45.359.0 percent of our total loan portfolio. These loans represented 277544 clients, and of these loans, $52$65.0 million were on nonaccrual status as of December 31, 2017.2020.
The following table provides a summary of gross loans by size and category.risk-based segment. The breakout of the categoriesbelow is based on total client balances (individually or in the aggregate) as of December 31, 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| (Dollars in thousands) | | Less than
Five Million | | Five to Ten
Million | | Ten to Twenty
Million | | Twenty to Thirty Million | | Thirty Million
or More | | Total |
| Global fund banking | | $ | 1,016,051 | | | $ | 1,082,201 | | | $ | 2,559,384 | | | $ | 2,029,547 | | | $ | 11,025,614 | | | $ | 17,712,797 | |
| Investor dependent | | | | | | | | | | | | |
| Early stage | | 1,090,852 | | | 260,685 | | | 191,661 | | | 76,542 | | | 33,685 | | | 1,653,425 | |
| Mid stage | | 544,167 | | | 316,617 | | | 156,418 | | | 49,581 | | | — | | | 1,066,783 | |
| Later stage | | 167,500 | | | 348,832 | | | 648,382 | | | 304,373 | | | 229,589 | | | 1,698,676 | |
| Total investor dependent | | 1,802,519 | | | 926,134 | | | 996,461 | | | 430,496 | | | 263,274 | | | 4,418,884 | |
| Cash flow dependent | | | | | | | | | | | | |
| Sponsor led buyout | | 16,034 | | | 97,458 | | | 550,753 | | | 723,737 | | | 815,038 | | | 2,203,020 | |
| Other | | 206,209 | | | 86,929 | | | 465,304 | | | 463,073 | | | 1,031,332 | | | 2,252,847 | |
| Total cash flow dependent | | 222,243 | | | 184,387 | | | 1,016,057 | | | 1,186,810 | | | 1,846,370 | | | 4,455,867 | |
| Private bank | | 2,791,587 | | | 359,429 | | | 191,979 | | | 49,996 | | | 96,228 | | | 3,489,219 | |
| Balance sheet dependent | | 256,247 | | | 269,744 | | | 404,356 | | | 78,197 | | | 288,760 | | | 1,297,304 | |
| Premium wine | | 243,094 | | | 267,389 | | | 261,951 | | | 148,469 | | | 142,609 | | | 1,063,512 | |
| Other | | 526,850 | | | 40,511 | | | 106,247 | | | 112,764 | | | 103,749 | | | 890,121 | |
| Total loans (1) | | $ | 6,858,591 | | | $ | 3,129,795 | | | $ | 5,536,435 | | | $ | 4,036,279 | | | $ | 13,766,604 | | | $ | 33,327,704 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 |
| (Dollars in thousands) | | Less than Five Million | | Five to Ten Million | | Ten to Twenty Million | | Twenty to Thirty Million | | Thirty Million or More | | Total |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 1,317,707 |
| | $ | 779,986 |
| | $ | 1,657,760 |
| | $ | 1,021,486 |
| | $ | 891,639 |
| | $ | 5,668,578 |
|
| Hardware | | 252,339 |
| | 160,534 |
| | 223,781 |
| | 244,988 |
| | 307,472 |
| | 1,189,114 |
|
| Private equity/venture capital | | 635,838 |
| | 668,998 |
| | 1,182,427 |
| | 888,916 |
| | 4,371,732 |
| | 7,747,911 |
|
| Life science/healthcare | | 328,942 |
| | 372,171 |
| | 457,833 |
| | 420,580 |
| | 287,159 |
| | 1,866,685 |
|
| Premium wine | | 76,400 |
| | 25,209 |
| | 76,609 |
| | 15,902 |
| | 7,514 |
| | 201,634 |
|
| Other | | 124,650 |
| | 40,950 |
| | 61,228 |
| | 26,320 |
| | 143,310 |
| | 396,458 |
|
| Commercial loans | | 2,735,876 |
| | 2,047,848 |
| | 3,659,638 |
| | 2,618,192 |
| | 6,008,826 |
| | 17,070,380 |
|
| Real estate secured loans: | | | | | | | | | | | | |
| Premium wine | | 151,759 |
| | 172,975 |
| | 229,750 |
| | 101,387 |
| | 22,874 |
| | 678,745 |
|
| Consumer loans | | 1,664,432 |
| | 196,345 |
| | 64,843 |
| | — |
| | — |
| | 1,925,620 |
|
| Other | | 8,014 |
| | — |
| | 14,660 |
| | 21,133 |
| | — |
| | 43,807 |
|
| Real estate secured loans | | 1,824,205 |
| | 369,320 |
| | 309,253 |
| | 122,520 |
| | 22,874 |
| | 2,648,172 |
|
| Construction loans | | 23,976 |
| | 6,685 |
| | 14,016 |
| | 20,280 |
| | — |
| | 64,957 |
|
| Consumer loans | | 99,119 |
| | 29,092 |
| | 9,473 |
| | 29,089 |
| | 74,380 |
| | 241,153 |
|
| Total gross loans | | $ | 4,683,176 |
| | $ | 2,452,945 |
| | $ | 3,992,380 |
| | $ | 2,790,081 |
| | $ | 6,106,080 |
| | $ | 20,024,662 |
|
At (1)As of December 31, 2016,2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
At December 31, 2019, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $8.9$17.8 billion,, or 44.453.4 percent of our total loan portfolio. These loans represented 233397 clients, and of these loans, $80$37.3 million were on nonaccrual status as of December 31, 2016.2019.
The credit profile of our loan portfolio clients varies based on the nature of the lending we do for different market segments. Our three main market segments areinclude (i) Global Fund Banking (formerly private equity/venture capital), (ii) technology (software/internet and hardware) and life science/healthcare (ii) private equity/venture capital, and (iii) SVB Private Bank.
(i) Technology and Life Science/HealthcareGlobal Fund Banking
Our technology and life science/healthcareGlobal Fund Banking loan portfolios include loans to clients at the various stages of their life cycles and represent the largest segments of our loan portfolio. The primary underwriting method for our technology and life science/healthcare portfolios are classified as investor dependent, balance sheet dependent, or cash flow dependent.
Investor dependent loans represented a relatively small percentage of our overall portfolio at 11 percent of total gross loans at both December 31, 2017 and December 31, 2016. These loans are made to companies in both our Accelerator (early-stage) and Growth practices. Investor dependent loans typically have modest or negative cash flows and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or others, or in some cases, a successful sale to a third party or an IPO. Venture capital firms may provide financing selectively, at reduced amounts, or on less favorable terms, which may have an adverse effect on our borrowers' ability to repay their loans to us. When repayment is dependent upon the next round of venture investment and there is an indication that further investment is unlikely or will not occur, it is often likely that the company would need to be sold to repay debt in full. If reasonable efforts have not yielded a likely buyer willing to repay all debt at the close of the sale or on commercially viable terms, the account will most likely be deemed to be impaired.
Balance sheet dependent loans, which includes asset-based loans, represented 10percent of total gross loans at December 31, 2017 compared to 13 percent at December 31, 2016. Balance sheet dependent loans are structured to require constant current asset coverage (i.e. cash, cash equivalents, accounts receivable and, to a much lesser extent, inventory) in an amount that exceeds the outstanding debt. These loans are generally made to companies in our Growth and Corporate Finance practices. Our asset-based lending, which includes working capital lines and accounts receivable financing, both represented three percent of total gross loans at December 31, 2017 and five percent and two percent of total gross loans at December 31, 2016, respectively. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business.
Cash flow dependent loans, which include sponsored buyout lending, represents approximately 19 percent of total gross loans at December 31, 2017, compared to 22 percent of total gross loans at December 31, 2016. Cash flow dependent loans require the borrower to maintain cash flow from operations that is sufficient to service all debt. Borrowers must demonstrate normalized cash flow in excess of all fixed charges associated with operating the business. Sponsored buyout loans represented nine percent of total gross loans at December 31, 2017, compared to 11 percent of total gross loans at December 31, 2016. These loans are typically used to assist a select group of experienced private equity sponsors with the acquisition of businesses, are larger in size, and repayment is generally dependent upon the cash flows of the acquired company. The acquired companies are typically established, later-stage businesses of scale and characterized by reasonable levels of leverage and loan structures that include meaningful financial covenants. The sponsor's equity contribution is often 50 percent or more of the acquisition price.
(ii) Private Equity/Venture Capital
We also provide financial services to clients in the private equity/venture capital community. At December 31, 2017, ourOur lending to private equity/venture capital firms and funds represented 4357 percent of total gross loans, compared to 39 percent of total gross loans at December 31, 2016.2020 and 53 percent at December 31, 2019. The vast majority of this portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds' remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are often secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.
(ii) Technology and Life Science/Healthcare
Our technology and life science/healthcare loan portfolios include loans to clients at the various stages of their life cycles. The risk-based segments for our technology and life science/healthcare market segments are classified as investor dependent, cash flow dependent or balance sheet dependent for reporting purposes.
Investor dependent loans represented 11 percent of total loans at December 31, 2020 and 13 percent at December 31, 2019. These loans are made to companies in both our Accelerator (early-stage) and Growth practices (mid-stage and later-stage).
Cash flow dependent loans, which include sponsor led buyout lending, represented 11 percent of total loans at December 31, 2020 and 13 percent at December 31, 2019. Sponsor led buyout loans represented 4 percent of total loans at December 31, 2020, compared to 7 percent at December 31, 2019.
Balance sheet dependent loans, which include asset-based loans, represented 5 percent of total loans at December 31, 2020 and 4 percent at December 31, 2019. Working capital lines and accounts receivable financing, both part of our asset-based lending, represented one percent and half a percent of total loans, respectively, at December 31, 2020 and two percent and one percent of total loans, respectively, at December 31, 2019.
(iii) SVB Private Bank
Our SVB Private Bank clients are primarily private equity/venture capital professionals and executive leaders ofand senior investment professionals in the innovation companies.economy. Our lending to SVB Private Bank clients represented 11 percent of total gross loans at both December 31, 2017 2020and 10 percent at December 31, 2016.2019. Many of these clients have mortgages, which represented 8583 percent of this portfolio at December 31, 2017;2020; the balance of this portfolio consisted of home equity lines of credit, restricted and private stock purchase loans, capital call lines of credit, lines of credit against liquid assets and other secured and unsecured lending.lending products. In addition, we provide owner occupied commercial mortgages to Private Bank clients and real estate secured loans to eligible employees through our EHOP.
Paycheck Protection Program
Beginning in April 2020, we accepted applications under the PPP administered by the Small Business Association (“SBA”) under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), as amended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") enacted on December 27, 2020, and have originated loans to qualified small businesses. Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage interest, rent and utility payments. Eligible expenses also include covered operations expenditures, covered property damage costs, covered supplier costs and covered worker protection expenditures. To the extent not forgiven, loans are subject to certain terms including, among others, the following: maximum two-year term for loans issued before June 5, 2020 (unless borrower and lender agree otherwise); a maximum five-year term for loans issued on or after June 5, 2020; an interest rate of 1.0%; deferral of loan payments until a loan forgiveness decision is rendered or until 10 months after the end of a borrower’s forgiveness covered period; and no requirement for any collateral or personal guarantees. PPP borrowers are not required to pay any fees to the government or the lender, and the loans may be repaid by the borrower at any time. The SBA, however, will pay lenders a processing fee based on the size of the PPP loan, ranging from 1% to 5% of the loan for loans made before the enactment of the Economic Aid Act, and thereafter, a processing fee of (1) the lesser of 50% of the loan or $2,500 for loans of not more than $50,000, (2) 5% of the loan for loans above $50,000 but not more than $350,000 and (3) 3% of the loan for loans above $350,000 (and, in case of the first draw PPP loans only, a fee of 1% for the loans at or above $2,000,000). Pursuant to the Economic Aid Act, additional loans may be issued up until March 31, 2021, and certain PPP
borrowers are able to apply for second draw loans in an amount of up to $2 million. We continue to participate in the PPP, including the second draw loan program.
As of December 31, 2020, we have outstanding PPP loans in the amount of $1.6 billion, as approved by the SBA. This funded amount reflects repayments received as of such date.
Additionally, we have donated approximately $20 million in PPP fees received from the SBA, net of our costs incurred, to charitable relief efforts.
Loan Deferral Programs
In April 2020, we implemented three loan payment deferral programs targeted to assist borrowers who were the most impacted by the COVID-19 pandemic. These programs included relief for venture-backed, private bank and wine borrowers who met certain criteria. The three-month private bank and wine deferral programs ended, and payments resumed, in the third quarter of 2020. The six-month venture debt and private bank deferral programs ended, and payments resumed, in the fourth quarter of 2020. As of December 31, 2020, loans modified under these programs had outstanding balances of $768.9 million, $12.6 million and $1.6 million for venture-backed, private bank and wine borrowers, respectively. These amounts reflect repayments received as of December 31, 2020.
For loans modified under these programs, in accordance with the provisions of Section 4013 of the CARES Act, we elected to not apply troubled debt restructuring classifications to borrowers who were current as of December 31, 2019. In addition, for loans modified under these programs that did not meet the CARES Act criteria, we applied the guidance in an interagency statement issued by bank regulatory agencies. Using this guidance, we may find that borrowers are not experiencing financial difficulty that may otherwise result in a TDR classification, in accordance with ASC Subtopic 310-40, if loan modifications are performed in response to the COVID-19 pandemic, provide short-term loan payment deferrals (e.g. six months in duration) and are granted to borrowers who were current as of the implementation date of the loan modification program. We evaluated all loans modified under these programs against the CARES Act and interagency guidance, as applicable, and determined the loan modifications would not be considered TDRs.We did not defer interest income recognition during periods of payment deferral, nor did any qualifying modification trigger nonaccrual status. The effectiveness of our programs is uncertain considering the unknown duration and impact of the COVID-19 pandemic.
State Concentrations
Approximately 26 percent of our outstanding total loan balances as of December 31, 2020 were to borrowers based in California compared to 27 percent as of December 31, 2019. Additionally, as of December 31, 2020, borrowers in New York and Massachusetts increased to 10 percent of our outstanding total gross loan balances each as of December 31, 2017 were to borrowers based in California and New York, respectively,2020, compared to 33nine percent and 11 percenteach as of December 31, 2016.2019. Other than California, and New York and Massachusetts, as of December 31, 2020, there are no states with gross loan balances greater than or equal to 10 percent.
See generally "Risk Factors—Credit Risks" set forth under Part I, Item 1A of this report.
As of December 31, 2017, 912020, 92 percent, or $21.2$41.4 billion, of our outstanding total gross loans were variable-rate loans that adjust at a prescribed measurement date upon a change in our prime-lending rate or other variable indices, compared to 8993 percent, or $17.8$30.9 billion, as of December 31, 2016.2019. The following table sets forth the remaining contractual maturity distribution of our grosstotal loans by industry sectorrisk-based segment at December 31, 2017,2020, for fixed and variable rate loans:
|
| | | | | | | | | | | | | | | | |
| | | Remaining Contractual Maturity of Gross Loans |
| (Dollars in thousands) | | One Year or Less | | After One Year and Through Five Years | | After Five Years | | Total |
| Fixed-rate loans: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 258,226 |
| | $ | 348,368 |
| | $ | 23,008 |
| | $ | 629,602 |
|
| Hardware | | 31,489 |
| | 41,574 |
| | — |
| | 73,063 |
|
| Private equity/venture capital | | 11,352 |
| | 11,310 |
| | 18,083 |
| | 40,745 |
|
| Life science/healthcare | | 46,936 |
| | 98,136 |
| | — |
| | 145,072 |
|
| Premium wine | | 2,791 |
| | 10,340 |
| | 1,507 |
| | 14,638 |
|
| Other | | 136,405 |
| | 2,033 |
| | — |
| | 138,438 |
|
| Total commercial loans | | 487,199 |
| | 511,761 |
| | 42,598 |
| | 1,041,558 |
|
| Real estate secured loans: | | | | | | | | |
| Premium wine | | 10,572 |
| | 178,900 |
| | 360,201 |
| | 549,673 |
|
| Consumer loans | | — |
| | 7,925 |
| | 297,171 |
| | 305,096 |
|
| Other | | — |
| | 3,025 |
| | 39,205 |
| | 42,230 |
|
| Total real estate secured loans | | 10,572 |
| | 189,850 |
| | 696,577 |
| | 896,999 |
|
| Construction loans | | 42,785 |
| | 21,127 |
| | 4,113 |
| | 68,025 |
|
| Consumer loans | | 8,524 |
| | 10,072 |
| | — |
| | 18,596 |
|
| Total fixed-rate loans | | $ | 549,080 |
| | $ | 732,810 |
| | $ | 743,288 |
| | $ | 2,025,178 |
|
| | | | | | | | | |
| Variable-rate loans: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 1,204,683 |
| | $ | 4,299,072 |
| | $ | 99,368 |
| | $ | 5,603,123 |
|
| Hardware | | 279,425 |
| | 716,596 |
| | 131,816 |
| | 1,127,837 |
|
| Private equity/venture capital | | 9,418,522 |
| | 426,295 |
| | 75,559 |
| | 9,920,376 |
|
| Life science/healthcare | | 114,515 |
| | 1,587,468 |
| | 20,905 |
| | 1,722,888 |
|
| Premium wine | | 145,273 |
| | 44,346 |
| | — |
| | 189,619 |
|
| Other | | 66,651 |
| | 174,342 |
| | — |
| | 240,993 |
|
| Total commercial loans | | 11,229,069 |
| | 7,248,119 |
| | 327,648 |
| | 18,804,836 |
|
| Real estate secured loans: | | | | | | | | |
| Premium wine | | 5,550 |
| | 49,129 |
| | 65,760 |
| | 120,439 |
|
| Consumer loans | | 2,065 |
| | 12,179 |
| | 1,978,517 |
| | 1,992,761 |
|
| Other | | — |
| | — |
| | — |
| | — |
|
| Total real estate secured loans | | 7,615 |
| | 61,308 |
| | 2,044,277 |
| | 2,113,200 |
|
| Construction loans | | — |
| | 1,083 |
| | — |
| | 1,083 |
|
| Consumer loans | | 89,898 |
| | 166,634 |
| | 53,324 |
| | 309,856 |
|
| Total variable-rate loans | | 11,326,582 |
| | 7,477,144 |
| | 2,425,249 |
| | 21,228,975 |
|
| Total gross loans | | $ | 11,875,662 |
| | $ | 8,209,954 |
| | $ | 3,168,537 |
| | $ | 23,254,153 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining Contractual Maturity of Loans |
| (Dollars in thousands) | | One Year or Less | | After One Year and Through Five Years | | After Five Years | | Total |
| Fixed-rate loans: | | | | | | | | |
| Global fund banking | | $ | 411,569 | | | $ | 7,394 | | | $ | 4,204 | | | $ | 423,167 | |
| Investor dependent: | | | | | | | | |
| Early stage | | 88,648 | | | 15,768 | | | — | | | 104,416 | |
| Mid stage | | 40,964 | | | 18,974 | | | — | | | 59,938 | |
| Later stage | | 40,332 | | | 32,756 | | | — | | | 73,088 | |
| Total investor dependent | | 169,944 | | | 67,498 | | | — | | | 237,442 | |
| Cash flow dependent: | | | | | | | | |
| Sponsor led buyout | | 4,641 | | | 31,389 | | | 44,376 | | | 80,406 | |
| Other | | 184,447 | | | 50,703 | | | — | | | 235,150 | |
| Total cash flow dependent | | 189,088 | | | 82,092 | | | 44,376 | | | 315,556 | |
| Private bank | | 5,881 | | | 130,599 | | | 374,581 | | | 511,061 | |
| Balance sheet dependent | | 32,353 | | | 5,062 | | | — | | | 37,415 | |
| Premium wine | | 22,786 | | | 171,465 | | | 524,745 | | | 718,996 | |
| Other | | 16,940 | | | 6,915 | | | 3,830 | | | 27,685 | |
| SBA loans | | — | | | 1,559,524 | | | — | | | 1,559,524 | |
| Total fixed-rate loans | | $ | 848,561 | | | $ | 2,030,549 | | | $ | 951,736 | | | $ | 3,830,846 | |
| | | | | | | | |
| Variable-rate loans: | | | | | | | | |
| Global fund banking | | $ | 24,390,171 | | | $ | 637,294 | | | $ | 92,566 | | | $ | 25,120,031 | |
| Investor dependent: | | | | | | | | |
| Early stage | | 79,555 | | | 1,273,147 | | | 28,748 | | | 1,381,450 | |
| Mid stage | | 121,908 | | | 1,216,883 | | | 166,141 | | | 1,504,932 | |
| Later stage | | 218,061 | | | 1,629,933 | | | — | | | 1,847,994 | |
| Total investor dependent | | 419,524 | | | 4,119,963 | | | 194,889 | | | 4,734,376 | |
| Cash flow dependent: | | | | | | | | |
| Sponsor led buyout | | 178,733 | | | 1,628,879 | | | 101,155 | | | 1,908,767 | |
| Other | | 865,375 | | | 1,628,452 | | | 216,383 | | | 2,710,210 | |
| Total cash flow dependent | | 1,044,108 | | | 3,257,331 | | | 317,538 | | | 4,618,977 | |
| Private bank | | 154,133 | | | 358,066 | | | 3,877,796 | | | 4,389,995 | |
| Balance sheet dependent | | 518,075 | | | 1,598,199 | | | 37,334 | | | 2,153,608 | |
| Premium wine | | 164,903 | | | 127,954 | | | 40,790 | | | 333,647 | |
| Other | | — | | | — | | | 2 | | | 2 | |
| SBA loans | | 6 | | | — | | | — | | | 6 | |
| Total variable-rate loans | | 26,690,920 | | | 10,098,807 | | | 4,560,915 | | | 41,350,642 | |
| Total loans | | $ | 27,539,481 | | | $ | 12,129,356 | | | $ | 5,512,651 | | | $ | 45,181,488 | |
Upon maturity, loans satisfying our credit quality standards may be eligible for renewal. Such renewals are subject to the normal underwriting and credit administration practices associated with new loans. We do not grant loans with unconditional extension terms.
Loan Administration
The Credit Committee of our Board of Directors oversees our credit risks and strategies, as well as our key credit policies and lending practices.
Subject to the oversight of the Credit Committee, lending authority is delegated to the Chief Credit Officer and our management's Loan Committee, which consists of the Chief Credit Officer and other senior members of our lending management. Requests for new and existing credit extensions that meetmanagement based on certain size and underwriting criteria may be approved outside of our Loan Committee by designated senior lenders or jointly with a senior credit officer or division risk manager.criteria.
Credit Quality Indicators
AtAs of both December 31, 2017,2020 and December 31, 2019, our total criticized loans and impairednonaccrual loans collectively represented fourthree percent of our total gross loans, as compared to six percent of our total gross loans at December 31, 2016.loans. Criticized loans and impairednonaccrual loans to early-stage clients represented 2215 percent and 1523 percent of our total criticized loans and impairednonaccrual loan balances at December 31, 20172020 and December 31, 2016,2019, respectively. Loans to early-stage clients represent a relatively small percentage of our overall portfolio at sixthreeand five percent of total gross loans at both December 31, 20172020 and December 31, 2016.2019, respectively. It is common for an early-stage client’s remaining liquidity to fall temporarily below the threshold for a pass-rated credit during its capital-raising period for a new round of funding. Based on our experience, for most early-stage clients, this situation typically lasts one to two quarters and generally resolves itself with a subsequent round of venture funding, though there are exceptions, from time to time. As a result, we expect that each of our early-stage clients will reside in our criticized portfolio during a portion of their life cycle.
Credit Quality and Allowance for LoanCredit Losses for Loans and for Unfunded Credit Commitments
The following table presents a summary of the activity for the allowance for loancredit losses as of the five most recent year-ends:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Allowance for credit losses, beginning balance | | $ | 304,924 | | | $ | 280,903 | | | $ | 255,024 | | | $ | 225,366 | | | $ | 217,613 | |
| Impact of adopting ASC 326 | | 25,464 | | | — | | | — | | | — | | | — | |
| Charge-offs: | | | | | | | | | | |
| Global fund banking | | — | | | (2,047) | | | (112) | | | (323) | | | — | |
| Investor dependent: | | | | | | | | | | |
| Early stage | | (35,305) | | | (31,568) | | | (32,495) | | | (35,362) | | | (42,576) | |
| Growth stage | | (53,338) | | | (53,255) | | | (16,727) | | | (10,298) | | | (20,454) | |
| Total investor dependent | | (88,643) | | | (84,823) | | | (49,222) | | | (45,660) | | | (63,030) | |
| Cash flow and balance sheet dependent | | (11,187) | | | (3,118) | | | (16,223) | | | (18,956) | | | (33,633) | |
| Private bank | | (1,616) | | | (1,031) | | | (289) | | | (1,566) | | | (102) | |
| Premium wine and other | | (1,458) | | | (1,584) | | | (2,071) | | | (177) | | | (92) | |
| SBA loans | | — | | | — | | | — | | | — | | | — | |
| Total charge-offs | | (102,904) | | | (92,603) | | | (67,917) | | | (66,682) | | | (96,857) | |
| Recoveries: | | | | | | | | | | |
| Global fund banking | | — | | | 2,047 | | | — | | | — | | | — | |
| Investor dependent: | | | | | | | | | | |
| Early stage | | 10,821 | | | 9,088 | | | 6,154 | | | 2,635 | | | 2,963 | |
| Growth stage | | 14,042 | | | 4,945 | | | 2,873 | | | 2,516 | | | 2,001 | |
| Total investor dependent | | 24,863 | | | 14,033 | | | 9,027 | | | 5,151 | | | 4,964 | |
| Cash flow and balance sheet dependent | | 2,846 | | | 4,683 | | | 2,064 | | | 1,807 | | | 6,519 | |
| Private bank | | 30 | | | 255 | | | 486 | | | 1,363 | | | 258 | |
| Premium wine and other | | 1,279 | | | 20 | | | 59 | | | 217 | | | 471 | |
| SBA loans | | — | | | — | | | — | | | — | | | — | |
| Total recoveries | | 29,018 | | | 21,038 | | | 11,636 | | | 8,538 | | | 12,212 | |
| Provision for loans | | 189,226 | | | 94,183 | | | 84,292 | | | 85,939 | | | 95,697 | |
| Foreign currency translation adjustments | | 2,037 | | | 1,403 | | | (2,132) | | | 1,863 | | | (3,299) | |
| Allowance for credit losses, ending balance | | $ | 447,765 | | | $ | 304,924 | | | $ | 280,903 | | | $ | 255,024 | | | $ | 225,366 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Allowance for loan losses, beginning balance | | $ | 225,366 |
| | $ | 217,613 |
| | $ | 165,359 |
| | $ | 142,886 |
| | $ | 110,651 |
|
| Charge-offs: | | | | | | | | | | |
| Commercial loans: | | | | | | | | | | |
| Software/internet | | (45,012 | ) | | (68,784 | ) | | (33,246 | ) | | (21,031 | ) | | (8,861 | ) |
| Hardware | | (10,414 | ) | | (13,233 | ) | | (5,145 | ) | | (15,265 | ) | | (18,819 | ) |
| Venture capital/private equity | | (323 | ) | | — |
| | — |
| | — |
| | — |
|
| Life science/healthcare | | (8,210 | ) | | (9,693 | ) | | (7,291 | ) | | (2,951 | ) | | (6,010 | ) |
| Premium wine | | — |
| | — |
| | — |
| | (35 | ) | | — |
|
| Other | | (1,156 | ) | | (5,045 | ) | | (4,990 | ) | | (3,886 | ) | | (8,107 | ) |
| Total commercial loans | | (65,115 | ) | | (96,755 | ) | | (50,672 | ) | | (43,168 | ) | | (41,797 | ) |
| Consumer loans | | (1,567 | ) | | (102 | ) | | (296 | ) | | — |
| | (869 | ) |
| Total charge-offs | | (66,682 | ) | | (96,857 | ) | | (50,968 | ) | | (43,168 | ) | | (42,666 | ) |
| | | | | | | | | | | |
| Recoveries: | | | | | | | | | | |
| Commercial loans: | | | | | | | | | | |
| Software/internet | | 4,649 |
| | 7,278 |
| | 1,621 |
| | 1,425 |
| | 1,934 |
|
| Hardware | | 487 |
| | 1,667 |
| | 3,332 |
| | 2,238 |
| | 2,677 |
|
| Life science/healthcare | | 189 |
| | 1,129 |
| | 277 |
| | 374 |
| | 1,860 |
|
| Premium wine | | — |
| | — |
| | 7 |
| | 240 |
| | 170 |
|
| Other | | 1,850 |
| | 1,880 |
| | 809 |
| | 1,748 |
| | 2,995 |
|
| Total commercial loans | | 7,175 |
| | 11,954 |
| | 6,046 |
| | 6,025 |
| | 9,636 |
|
| Consumer loans | | 1,363 |
| | 258 |
| | 163 |
| | 379 |
| | 1,572 |
|
| Total recoveries | | 8,538 |
| | 12,212 |
| | 6,209 |
| | 6,404 |
| | 11,208 |
|
| Provision for loan losses | | 85,939 |
| | 95,697 |
| | 97,629 |
| | 59,486 |
| | 63,693 |
|
| Foreign currency translation adjustments | | 1,863 |
| | (3,299 | ) | | (616 | ) | | (249 | ) | | — |
|
| Allowance for loan losses, ending balance | | $ | 255,024 |
| | $ | 225,366 |
| | $ | 217,613 |
| | $ | 165,359 |
| | $ | 142,886 |
|
To determine the ACL for performing loans as of December 31, 2020, we utilized three scenarios, on a weighted basis, from Moody’s Analytics December 2020 forecast in our expected lifetime loss estimates. The baseline scenario, which carries the highest weighting, reflected an unemployment rate of seven percent as of December 31, 2020, as a result of expected business re-openings and the effect of government aid programs, and a GDP growth rate of four percent as of December 31, 2020, reflecting expected economic recovery as well as the ongoing impact of the COVID-19 pandemic. We also utilized a more favorable (Moody’s S1, Upside) and a less favorable (Moody’s S3, Downside) economic forecast scenario, in addition to the baseline.To the extent we identified credit risk considerations that were not captured by the Moody's Analytics December 2020 scenarios, we addressed the risk through management's qualitative adjustments to our ACL for performing loans.
In 2017,2020, total charge-offs decreasedincreased to $66.7$102.9 million compared to $96.9$92.6 million in 2016. The $30.2 million decrease2019. Gross loan charge-offs in total charge-offs was due2020 came primarily to venture capital market recalibration identified in 2016 related primarily to early-stage charge-offs.from our Investor Dependent loan portfolio.
The following table summarizes the allocation of the allowanceACL for loan losses among specific classes of loansour portfolio segments as of the five most recent year-ends:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (Dollars in thousands) | | ALLL Amount | | Percent of Total Loans (1) | | ALLL Amount | | Percent of Total Loans (1) | | ALLL Amount | | Percent of Total Loans (1) | | ALLL Amount | | Percent of Total Loans (1) | | ALLL Amount | | Percent of Total Loans (1) |
| Commercial loans: | | | | | | | | | | | | | | | | | | | | |
| Software/internet | | $ | 96,104 |
| | 26.8 | % | | $ | 97,388 |
| | 28.3 | % | | $ | 103,045 |
| | 32.5 | % | | $ | 80,981 |
| | 34.5 | % | | $ | 64,084 |
| | 37.7 | % |
| Hardware | | 27,614 |
| | 5.2 |
| | 31,166 |
| | 5.9 |
| | 23,085 |
| | 6.4 |
| | 25,860 |
| | 7.9 |
| | 36,553 |
| | 11.1 |
|
| Private equity/venture capital | | 82,468 |
| | 42.8 |
| | 50,299 |
| | 38.7 |
| | 35,282 |
| | 32.7 |
| | 27,997 |
| | 31.9 |
| | 16,385 |
| | 21.9 |
|
| Life science/healthcare | | 24,924 |
| | 8.0 |
| | 25,446 |
| | 9.3 |
| | 36,576 |
| | 10.2 |
| | 15,208 |
| | 9.0 |
| | 11,926 |
| | 10.7 |
|
| Premium wine | | 3,532 |
| | 3.8 |
| | 4,115 |
| | 4.5 |
| | 5,205 |
| | 5.1 |
| | 4,473 |
| | 5.5 |
| | 3,914 |
| | 6.1 |
|
| Other | | 3,941 |
| | 2.1 |
| | 4,768 |
| | 2.5 |
| | 4,252 |
| | 2.6 |
| | 3,253 |
| | 2.4 |
| | 3,680 |
| | 3.7 |
|
| Total commercial loans | | 238,583 |
| | 88.7 |
| | 213,182 |
| | 89.2 |
| | 207,445 |
| | 89.5 |
| | 157,772 |
| | 91.2 |
| | 136,542 |
| | 91.2 |
|
| Consumer loans | | 16,441 |
| | 11.3 |
| | 12,184 |
| | 10.8 |
| | 10,168 |
| | 10.5 |
| | 7,587 |
| | 8.8 |
| | 6,344 |
| | 8.8 |
|
| Total | | $ | 255,024 |
| | 100.0 | % | | $ | 225,366 |
| | 100.0 | % | | $ | 217,613 |
| | 100.0 | % | | $ | 165,359 |
| | 100.0 | % | | $ | 142,886 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (Dollars in thousands) | | ACL Amount | | Percent of Total Loans (1) | | ACL Amount | | Percent of Total Loans (1) | | ACL Amount | | Percent of Total Loans (1) | | ACL Amount | | Percent of Total Loans (1) | | ACL Amount | | Percent of Total Loans (1) |
| Global fund banking | | $ | 45,584 | | | 56.5 | % | | $ | 107,285 | | | 53.1 | % | | $ | 93,781 | | | 49.6 | % | | $ | 82,468 | | | 42.3 | % | | $ | 50,299 | | | 38.7 | % |
| Investor dependent: | | | | | | | | | | | | | | | | | | | | |
| Early stage | | 86,674 | | | 3.3 | | | 26,245 | | | 5.0 | | | 25,885 | | | 6.0 | | | 22,742 | | | 6.2 | | | 21,132 | | | 6.4 | |
| Growth stage | | 126,683 | | | 7.7 | | | 56,125 | | | 8.3 | | | 46,216 | | | 9.8 | | | 38,280 | | | 10.5 | | | 33,086 | | | 9.6 | |
| Total investor dependent | | 213,357 | | | 11.0 | | | 82,370 | | | 13.3 | | | 72,101 | | | 15.8 | | | 61,022 | | | 16.7 | | | 54,218 | | | 16.0 | |
| Total cash flow and balance sheet dependent | | 124,249 | | | 15.7 | | | 80,820 | | | 17.3 | | | 87,735 | | | 19.3 | | | 87,620 | | | 23.6 | | | 99,782 | | | 29.0 | |
| Private bank | | 53,629 | | | 10.9 | | | 21,551 | | | 10.4 | | | 20,583 | | | 10.7 | | | 16,441 | | | 11.5 | | | 12,184 | | | 11.0 | |
| Premium wine and other | | 9,036 | | | 2.4 | | | 12,898 | | | 5.9 | | | 6,703 | | | 4.6 | | | 7,473 | | | 5.9 | | | 8,883 | | | 5.3 | |
| SBA loans | | 1,910 | | | 3.5 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 447,765 | | | 100.0 | % | | $ | 304,924 | | | 100.0 | % | | $ | 280,903 | | | 100.0 | % | | $ | 255,024 | | | 100.0 | % | | $ | 225,366 | | | 100.0 | % |
| |
(1) | Represents loan balances as a percentage of total gross loans at each respective year-end. |
(1)Represents loan balances as a percentage of total loans at each respective year-end. As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
Nonperforming Assets
Nonperforming assets consist of loans on nonaccrual status, loans past due 90 days or more still accruing interest, and Other Real Estate Owned (“OREO”) and other foreclosed assets. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows. The table below sets forth certain data and ratios between nonperforming loans, nonperforming assets and the allowance for loan losses:credit losses for loans and unfunded credit commitments:
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Gross nonperforming, past due, and restructured loans: | | | | | | | | | | |
| Nonaccrual loans | | $ | 119,259 |
| | $ | 118,979 |
| | $ | 123,392 |
| | $ | 38,137 |
| | $ | 51,649 |
|
| Loans past due 90 days or more still accruing interest | | 191 |
| | 33 |
| | — |
| | 1,302 |
| | 99 |
|
| Total nonperforming loans | | 119,450 |
| | 119,012 |
| | 123,392 |
| | 39,439 |
| | 51,748 |
|
| OREO and other foreclosed assets | | — |
| | — |
| | — |
| | 561 |
| | 1,001 |
|
| Total nonperforming assets | | $ | 119,450 |
| | $ | 119,012 |
| | $ | 123,392 |
| | $ | 40,000 |
| �� | $ | 52,749 |
|
| Performing TDRs | | $ | 71,468 |
| | $ | 33,732 |
| | $ | 10,635 |
| | $ | 587 |
| | $ | 403 |
|
| Nonperforming loans as a percentage of total gross loans | | 0.51 | % | | 0.59 | % | | 0.73 | % | | 0.27 | % | | 0.47 | % |
| Nonperforming assets as a percentage of total assets | | 0.23 |
| | 0.27 |
| | 0.28 |
| | 0.10 |
| | 0.20 |
|
| Allowance for loan losses | | $ | 255,024 |
| | $ | 225,366 |
| | $ | 217,613 |
| | $ | 165,359 |
| | $ | 142,886 |
|
| As a percentage of total gross loans | | 1.10 | % | | 1.13 | % | | 1.29 | % | | 1.14 | % | | 1.30 | % |
| As a percentage of total gross nonperforming loans | | 213.50 |
| | 189.36 |
| | 176.36 |
| | 419.28 |
| | 276.12 |
|
| Allowance for loan losses for nonaccrual loans | | $ | 41,793 |
| | $ | 37,277 |
| | $ | 51,844 |
| | $ | 15,051 |
| | $ | 21,277 |
|
| As a percentage of total gross loans | | 0.18 | % | | 0.19 | % | | 0.31 | % | | 0.10 | % | | 0.19 | % |
| As a percentage of total gross nonperforming loans | | 34.99 |
| | 31.32 |
| | 42.02 |
| | 38.16 |
| | 41.12 |
|
| Allowance for loan losses for total gross performing loans | | $ | 213,231 |
| | $ | 188,089 |
| | $ | 165,769 |
| | $ | 150,308 |
| | $ | 121,609 |
|
| As a percentage of total gross loans | | 0.92 | % | | 0.94 | % | | 0.98 | % | | 1.04 | % | | 1.11 | % |
| As a percentage of total gross performing loans | | 0.92 |
| | 0.94 |
| | 0.99 |
| | 1.04 |
| | 1.11 |
|
| Total gross loans | | $ | 23,254,153 |
| | $ | 20,024,662 |
| | $ | 16,857,131 |
| | $ | 14,488,766 |
| | $ | 10,995,268 |
|
| Total gross performing loans | | 23,134,703 |
| | 19,905,650 |
| | 16,733,739 |
| | 14,449,327 |
| | 10,943,520 |
|
| Allowance for unfunded credit commitments (1) | | 51,770 |
| | 45,265 |
| | 34,415 |
| | 36,419 |
| | 29,983 |
|
| As a percentage of total unfunded credit commitments | | 0.30 | % | | 0.27 | % | | 0.22 | % | | 0.25 | % | | 0.26 | % |
| Total unfunded credit commitments (2) | | $ | 17,462,537 |
| | $ | 16,743,196 |
| | $ | 15,614,359 |
| | $ | 14,705,785 |
| | $ | 11,470,722 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Nonperforming, past due, and restructured loans: | | | | | | | | | | |
| Nonaccrual loans | | $ | 104,244 | | | $ | 102,669 | | | $ | 94,142 | | | $ | 119,259 | | | $ | 118,979 | |
| Loans past due 90 days or more still accruing interest | | — | | | 3,515 | | | 1,964 | | | 191 | | | 33 | |
| Total nonperforming loans (1) | | 104,244 | | | 106,184 | | | 96,106 | | | 119,450 | | | 119,012 | |
| OREO and other foreclosed assets | | 1,179 | | | — | | | — | | | — | | | — | |
| Total nonperforming assets | | $ | 105,423 | | | $ | 106,184 | | | $ | 96,106 | | | $ | 119,450 | | | $ | 119,012 | |
| Performing TDRs | | $ | 4,550 | | | $ | 31,990 | | | $ | 31,639 | | | $ | 71,468 | | | $ | 33,732 | |
| Nonperforming loans as a percentage of total loans (1) | | 0.23 | % | | 0.32 | % | | 0.34 | % | | 0.51 | % | | 0.59 | % |
| Nonperforming assets as a percentage of total assets | | 0.09 | | | 0.15 | | | 0.17 | | | 0.23 | | | 0.27 | |
| Allowance for credit losses for loans | | $ | 447,765 | | | $ | 304,924 | | | $ | 280,903 | | | $ | 255,024 | | | $ | 225,366 | |
| As a percentage of total loans (1) | | 0.99 | % | | 0.91 | % | | 0.99 | % | | 1.10 | % | | 1.13 | % |
| As a percentage of total nonperforming loans (1) | | 429.54 | | | 287.17 | | | 292.28 | | | 213.50 | | | 189.36 | |
| Allowance for credit losses for nonaccrual loans | | $ | 54,029 | | | $ | 44,859 | | | $ | 37,941 | | | $ | 41,793 | | | $ | 37,277 | |
| As a percentage of total loans (1) | | 0.12 | % | | 0.13 | % | | 0.13 | % | | 0.18 | % | | 0.19 | % |
| As a percentage of total nonperforming loans (1) | | 51.83 | | | 42.25 | | | 39.48 | | | 34.99 | | | 31.32 | |
| Allowance for credit losses for total performing loans | | $ | 393,736 | | | $ | 260,065 | | | $ | 242,962 | | | $ | 213,231 | | | $ | 188,089 | |
| As a percentage of total loans (1) | | 0.87 | % | | 0.78 | % | | 0.85 | % | | 0.92 | % | | 0.94 | % |
| As a percentage of total performing loans (1) | | 0.87 | | | 0.78 | | | 0.86 | | | 0.92 | | | 0.94 | |
| Total loans (1) | | $ | 45,181,488 | | | $ | 33,327,704 | | | $ | 28,511,312 | | | $ | 23,254,153 | | | $ | 20,024,662 | |
| Total performing loans (1) | | 45,077,244 | | | 33,221,520 | | | 28,415,206 | | | 23,134,703 | | | 19,905,650 | |
| Allowance for credit losses for unfunded credit commitments (2) | | 120,796 | | | 67,656 | | | 55,183 | | | 51,770 | | | 45,265 | |
| As a percentage of total unfunded credit commitments | | 0.38 | % | | 0.28 | % | | 0.29 | % | | 0.30 | % | | 0.27 | % |
| Total unfunded credit commitments (3) | | $ | 31,982,251 | | | $ | 24,521,920 | | | $ | 18,913,021 | | | $ | 17,462,537 | | | $ | 16,743,196 | |
| |
(1)As of December 31, 2020, loan amounts are disclosed, and ratios are calculated, using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed, and ratios calculated, using the gross basis. (2)The “allowance for credit losses for unfunded credit commitments” is included as a component of other liabilities and any provision is included in the "provision for credit losses" in the statement of income. See “Provision for Credit Losses” for a discussion of the changes to the allowance. (3)Includes unfunded loan commitments and letters of credit. (1)
| The “Allowance for unfunded credit commitments” is included as a component of “other liabilities”. See “Provision for Unfunded Credit Commitments” for a discussion of the changes to the reserve. |
| |
(2)
| Includes unfunded loan commitments and letters of credit. |
Our allowance for loancredit losses for loans as a percentage of total gross loans decreased threeincreased eight basis points to 1.100.99 percent at December 31, 2017,2020, compared to 1.130.91 percent at December 31, 2016.2019 under the previous incurred loss methodology. The decreaseincrease was reflective ofdue primarily to a twonine basis point decreaseincrease in the reserves for grossour performing loan reserve as a percentage of total loans and a one basis point decrease in the reserves for nonaccrual loans.
Our reserve percentageallowance for credit losses for performing loans as a percentage of total gross loans decreased to 0.92 percentwas $393.7 million at December 31, 2017,2020, compared to 0.94 percent$260.1 million at December 31, 2016, reflective of the continued shift2019. Included in the mix of our overall loan portfolio to our higher quality private equity/venture capital loan portfolio. Our reserve percentageallowance for nonaccrual loans as a percentage of total gross loans decreased to 0.18 percentcredit losses at December 31, 2017, compared2020 is the day one impact of adopting CECL of $22.4 million driven by an increase in our expected credit loss for our Investor Dependent loan portfolio given the higher relative risk as well as the portfolio's duration, which is taken into account under the CECL methodology, partially offset by a decrease for our Global Fund Banking loan portfolio, given its higher historical credit quality and shorter duration. The remaining $111.2 million increase was due primarily to 0.19 percent at December 31, 2016, primarily as a resultan increase of charge-offs$56.6 million related to the expected credit losses for our performing loan reserves based on our forecast models of previously reserved nonaccrual loans.the current economic environment and $54.6 million related to period-end loan growth of $12.0 billion.
Nonaccrual Loans
The following table presents a detailed composition of nonaccrual loans by industry sectorrisk-based segment as of the five most recent year-ends:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Global fund banking | | $ | 11 | | | $ | — | | | $ | 3,700 | | | $ | 658 | | | $ | — | |
| Investor dependent | | | | | | | | | | |
| Early stage | | 18,340 | | | 11,093 | | | 7,616 | | | 11,575 | | | 22,860 | |
| Mid stage | | 4,056 | | | 17,330 | | | 4,751 | | | 23,932 | | | 9,757 | |
| Later stage | | 28,657 | | | 6,296 | | | 11,385 | | | 7,968 | | | 3,017 | |
| Total investor dependent | | 51,053 | | | 34,719 | | | 23,752 | | | 43,475 | | | 35,634 | |
| Cash flow dependent | | | | | | | | | | |
| Sponsor led buyout | | 39,996 | | | 44,585 | | | 39,534 | | | 50,438 | | | 51,556 | |
| Other | | 6,004 | | | 17,681 | | | 17,156 | | | 20,907 | | | 28,182 | |
| Total cash flow dependent | | 46,000 | | | 62,266 | | | 56,690 | | | 71,345 | | | 79,738 | |
| Private bank | | 6,152 | | | 5,480 | | | 3,919 | | | 2,603 | | | 3,116 | |
| Balance sheet dependent | | — | | | — | | | 5,004 | | | 760 | | | — | |
| Premium wine | | 998 | | | 204 | | | 285 | | | 401 | | | 491 | |
| Other | | 30 | | | — | | | 792 | | | 17 | | | — | |
| SBA loans | | — | | | — | | | — | | | — | | | — | |
| Total nonaccrual loans (1) | | $ | 104,244 | | | $ | 102,669 | | | $ | 94,142 | | | $ | 119,259 | | | $ | 118,979 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 |
| 2016 | | 2015 | | 2014 | | 2013 |
| Commercial loans: | | | | | | | | | | |
| Software/internet | | $ | 78,860 |
| | $ | 76,605 |
| | $ | 77,545 |
| | $ | 33,287 |
| | $ | 27,618 |
|
| Hardware | | 16,185 |
| | 6,581 |
| | 430 |
| | 2,521 |
| | 19,667 |
|
| Private equity/venture capital | | 658 |
| | — |
| | — |
| | — |
| | 40 |
|
| Life science/healthcare | | 20,520 |
| | 31,783 |
| | 44,107 |
| | 475 |
| | 1,278 |
|
| Premium wine | | 401 |
| | 491 |
| | 1,167 |
| | 1,304 |
| | 1,442 |
|
| Other | | 32 |
| | 403 |
| | — |
| | 233 |
| | 690 |
|
| Total commercial loans | | 116,656 |
| | 115,863 |
| | 123,249 |
| | 37,820 |
| | 50,735 |
|
| Consumer loans: | | | | | | | | | | |
| Real estate secured loans | | 2,181 |
| | 1,504 |
| | 143 |
| | 192 |
| | 244 |
|
| Other consumer loans | | 422 |
| | 1,612 |
| | — |
| | 125 |
| | 670 |
|
| Total consumer loans | | 2,603 |
| | 3,116 |
| | 143 |
| | 317 |
| | 914 |
|
| Total nonaccrual loans | | $ | 119,259 |
| | $ | 118,979 |
| | $ | 123,392 |
| | $ | 38,137 |
| | $ | 51,649 |
|
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
The following table presents a summary of changes in nonaccrual loans for the years ended December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Balance, beginning of period (1) | | $ | 102,669 | | | $ | 94,142 | |
| Additions | | 200,776 | | | 165,827 | |
| Paydowns | | (136,441) | | | (101,994) | |
| Charge-offs | | (62,760) | | | (55,224) | |
| Other reductions | | — | | | (82) | |
| Balance, end of period (1) | | $ | 104,244 | | | $ | 102,669 | |
|
| | | | | | | | |
| | | Year ended December 31,
|
| (Dollars in thousands) | | 2017 | | 2016 |
| Balance, beginning of period | | $ | 118,979 |
| | $ | 123,392 |
|
| Additions | | 102,183 |
| | 128,338 |
|
| Paydowns | | (46,825 | ) | | (81,997 | ) |
| Charge-offs | | (55,076 | ) | | (49,622 | ) |
| Other reductions | | (2 | ) | | (1,132 | ) |
| Balance, end of period | | $ | 119,259 |
| | $ | 118,979 |
|
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
Our nonaccrual loans as ofloan balance increased $1.6 million to $104.2 million at December 31, 2017 included $89.42020, compared to $102.7 million from fiveat December 31, 2019. Our nonaccrual loan balance increased $1.6 million primarily driven by $200.8 million in new nonaccrual loans, partially offset by $136.4 million in paydowns and other reductions and $62.8 million charge-offs. New nonaccrual loans were driven primarily by $57.4 million for six clients (three software/internetin our Investor Dependent portfolio, $40.3 million for two clients represented $58.8in our Sponsor Led Buyout portfolio and $14.8 million for one life science/healthcare client represented $19.2in our Balance Sheet Dependent portfolio. Repayments were primarily driven by $34.5 million andfor one hardwareSponsor Led Buyout client represented $11.4 million). Two of these loans are sponsored buyout loans that werewas added to our nonaccrual loan portfolio in 2015, another is a Corporate Finance2019, $11.7 million for one Balance Sheet Dependent client that was added during 2016in 2020 and two are new nonaccrual loans added during 2017 in our Growth practice. The total credit exposure for these five largest nonaccrual loans is $89.7$11.7 million for three Investor Dependent clients two of which were added in 2020 and one in 2019. As of December 31, 2020, we have specifically reserved $26.9 million.$54.0 million for our nonaccrual loans.
Average nonaccrual loans for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 2015, 2014 and 2013 were $85.1 million, $160.3 million, $117.1 million, $123.8 million, $108.7 million, $80.3 million, $24.5 million and $40.8$108.7 million, respectively. The increasedecrease in average nonaccrual loans was attributable to
primarily driven by large paydowns in the increasefirst and third quarters of 2020 and the new nonaccruals occurring in nonaccrual loans from our software/internetthe latter part of the second and hardware loan portfolios partially offset by a decrease in our life sciences/healthcare portfolio.third quarters. If the nonaccrual loans for the years ended December 31, 2020, 2019, 2018, 2017 2016, 2015, 2014 and 20132016 had not been nonperforming, $2.4 million, $5.6 million, $7.4 million, $7.7 million $4.6 million, $4.5 million, $1.2 million and $3.5$4.6 million, respectively, in interest income would have been recorded.
Accrued Interest Receivable and Other Assets
A summary of accrued interest receivable and other assets at December 31, 20172020 and 20162019 is as follows:
|
| | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change |
| Derivative assets, gross (1) | | $ | 232,152 |
| | $ | 210,070 |
| | 10.5 | % |
| Foreign exchange spot contract assets, gross | | 208,738 |
| | 53,058 |
| | NM |
|
| Accrued interest receivable | | 141,773 |
| | 111,222 |
| | 27.5 |
|
| Net deferred tax assets | | 63,845 |
| | 71,840 |
| | (11.1 | ) |
| FHLB and Federal Reserve Bank stock | | 60,020 |
| | 57,592 |
| | 4.2 |
|
| Accounts receivable | | 55,946 |
| | 62,569 |
| | (10.6 | ) |
| Other assets | | 113,772 |
| | 106,337 |
| | 7.0 |
|
| Total accrued interest receivable and other assets | | $ | 876,246 |
| | $ | 672,688 |
| | 30.3 |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change |
| Derivative assets (1) | | $ | 488,269 | | | $ | 332,814 | | | 46.7 | % |
| Foreign exchange spot contract assets, gross | | 2,107,510 | | | 810,275 | | | 160.1 | |
| Accrued interest receivable | | 244,748 | | | 216,962 | | | 12.8 | |
| Net deferred tax assets | | 776 | | | 28,433 | | | (97.3) | |
| FHLB and Federal Reserve Bank stock | | 61,232 | | | 60,258 | | | 1.6 | |
| Accounts receivable | | 36,812 | | | 47,663 | | | (22.8) | |
| Other assets | | 266,478 | | | 248,828 | | | 7.1 | |
| Total accrued interest receivable and other assets | | $ | 3,205,825 | | | $ | 1,745,233 | | | 83.7 | |
NM—Not meaningful(1)See “Derivatives” section below.
| |
(1)
| See “Derivatives” section below. |
Foreign Exchange Spot Contract Assets
The increase of $156 million$1.3 billion in foreign exchange spot contract assets was primarily due to a higher numberan overall increase in the amount of unsettled clientspot trades reflective of several large trades at year-end December 31, 20172020 as compared to December 31, 2016.2019.
Net Deferred TaxAccrued interest receivable
The increase of $27.8 million in accrued interest receivable was primarily due to an overall increase in the interest receivable for mortgage backed securities at year-end December 31, 2020 as compared to December 31, 2019.
Other Assets
Other assets includes various asset amounts for other operational transactions. The decreaseincrease of $8.0$17.7 million in net deferred tax assets was primarily driven by the revaluationdue to a $57.9 million increase in Leerink trade receivables reflective of our deferred tax assets incorporating the new federal tax rate related to the TCJ Act, increases in the fair value of AFS equity securities and decreases in accrued expenses and the tax basis in fund investments relative to our book value. These increases wereincreased investment banking activity, partially offset by decreases$27.3 million decrease in the fair valuedeferred compensation and $10.7 million decrease in merchant card receivables.
Derivatives
Derivative instruments are recorded as a component of other assets and other liabilities on the balance sheet. The following table provides a summary of derivative assets and liabilities net at December 31, 20172020 and 2016: 2019:
|
| | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change |
| Assets: | | | | | | |
| Equity warrant assets | | $ | 123,763 |
| | $ | 131,123 |
| | (5.6 | )% |
| Foreign exchange forward and option contracts | | 96,636 |
| | 68,027 |
| | 42.1 |
|
| Client interest rate derivatives | | 11,753 |
| | 10,110 |
| | 16.3 |
|
| Interest rate swaps (1) | | — |
| | 810 |
| | (100.0 | ) |
| Total derivatives assets | | $ | 232,152 |
| | $ | 210,070 |
| | 10.5 |
|
| Liabilities: | | | | | | |
| Foreign exchange forward and option contracts | | $ | (96,641 | ) | | $ | (54,668 | ) | | 76.8 |
|
| Client interest rate derivatives | | (11,940 | ) | | (9,770 | ) | | 22.2 |
|
| Total derivatives liabilities | | $ | (108,581 | ) | | $ | (64,438 | ) | | 68.5 |
|
| |
(1) | On June 1, 2017, our interest rate swap was terminated upon repayment of the 6.05% Subordinated Notes. |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change |
| Assets: | | | | | | |
| Equity warrant assets | | $ | 203,438 | | | $ | 165,473 | | | 22.9 | % |
| Foreign exchange forward and option contracts | | 216,977 | | | 115,854 | | | 87.3 | |
| Client interest rate derivatives | | 67,854 | | | 28,811 | | | 135.5 | |
| Interest rate swaps | | — | | | 22,676 | | | — | |
| Total derivatives assets | | $ | 488,269 | | | $ | 332,814 | | | 46.7 | |
| Liabilities: | | | | | | |
| Foreign exchange forward and option contracts | | $ | 210,833 | | | $ | 98,207 | | | 114.7 | |
| Client interest rate derivatives | | 26,646 | | | 14,154 | | | 88.3 | |
| Interest rate swaps | | — | | | 25,623 | | | — | |
| Total derivatives liabilities | | $ | 237,479 | | | $ | 137,984 | | | 72.1 | |
Equity Warrant Assets
In connection with negotiating credit facilities and certain other services, we often obtain rights to acquire stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science/healthcare
industries. At December 31, 2017,2020, we held warrants in 1,8682,602 companies, compared to 1,7392,268 companies at December 31, 2016.2019. Warrants in 1425 companies each had values greater than $1.0 million and collectively represented $29.1$75.9 million, or 2437.3 percent, of the fair value of the total warrant portfolio. The change in fair value of equity warrant assets is recorded in gains on equity warrant assets, net, in noninterest income, a component of consolidated net income. The following table provides a summary of transactions and valuation changes for the years ended December 31, 20172020 and 2016:2019:
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | (Dollars in thousands) | | 2020 | | 2019 |
| Balance, beginning of period | | $ | 131,123 |
| | $ | 137,105 |
| Balance, beginning of period | | $ | 165,473 | | | $ | 149,238 | |
| New equity warrant assets | | 15,201 |
| | 13,420 |
| New equity warrant assets | | 19,719 | | | 16,103 | |
| Non-cash increases in fair value | | 10,702 |
| | 9,710 |
| Non-cash increases in fair value | | 59,728 | | | 34,412 | |
| Exercised equity warrant assets | | (28,841 | ) | | (26,097 | ) | Exercised equity warrant assets | | (39,534) | | | (30,778) | |
| Terminated equity warrant assets | | (4,422 | ) | | (3,015 | ) | Terminated equity warrant assets | | (1,948) | | | (3,502) | |
| Balance, end of period | | $ | 123,763 |
| | $ | 131,123 |
| Balance, end of period | | $ | 203,438 | | | $ | 165,473 | |
Foreign Exchange Forward and Foreign Currency Option Contracts
We enter into foreign exchange forward contracts and foreign currency option contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients' need. For each forward or option contract entered into with our clients, we enter into an opposite way forward or option contract with a correspondent bank, which mitigates the risk of fluctuations in currency rates. We also enter into forward contracts with correspondent banks to economically reduce our foreign exchange exposure related to certain foreign currency denominated instruments. Net gains and losses on the revaluation of foreign currency denominated instruments are recorded in the line item "Other" as part of noninterest income, a component of consolidated net income. We have not experienced nonperformance by any of our counterparties and therefore have not incurred any related losses. Further, we anticipate performance by all counterparties. Our net exposure for foreign exchange forward and foreign currency option contracts, net of cash collateral, was zero at December 31, 2017 and $0.8$31.0 million at December 31, 2016.2020 and $22.2 million at December 31, 2019. For additional information on our foreign exchange forward contracts and foreign currency option contracts, see Note 13—15—“Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Client Interest Rate Derivatives
We sell interest rate contracts to clients who wish to mitigate their interest rate exposure. We economically reduce the interest rate risk from this business by entering into opposite way contracts with correspondent banks. Our net exposure for
client interest rate derivative contracts, net of cash collateral, was zero at December 31, 2017 and $0.3$67.3 million at December 31, 2016.2020 and $28.6 million at December 31, 2019. For information on our client interest rate derivatives, refer to Note 13—15—“Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
To manage interest rate risk on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815 and record them in other assets and other liabilities. Our net exposure for interest rate swaps, net of cash collateral, was zero at December 31, 2020. As of March 31, 2020, all derivatives previously classified as hedges with notional balances totaling $5.0 billion and a net asset fair value of $227.5 million were terminated. Refer to Note 15—“Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional information regarding the termination of our interest rate swap cash flow hedges during the first quarter of 2020.
Deposits
The following table presents the composition of our deposits as of December 31, 2017, 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Noninterest-bearing demand | | $ | 66,519,240 | | | $ | 40,841,570 | | | $ | 39,103,422 | |
| Interest-bearing checking and savings accounts | | 4,800,831 | | | 568,256 | | | 648,468 | |
| Money market | | 28,406,195 | | | 17,749,736 | | | 7,498,205 | |
| Money market deposits in foreign offices | | 616,570 | | | 352,437 | | | 152,781 | |
| Sweep deposits in foreign offices | | 950,510 | | | 2,057,715 | | | 1,875,298 | |
| Time | | 688,461 | | | 188,093 | | | 50,726 | |
| Total deposits | | $ | 101,981,807 | | | $ | 61,757,807 | | | $ | 49,328,900 | |
|
| | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Noninterest-bearing demand | | $ | 36,655,497 |
| | $ | 31,975,457 |
| | $ | 30,867,497 |
|
| Interest bearing checking and savings accounts | | 556,121 |
| | 375,710 |
| | 330,525 |
|
| Money market | | 5,975,220 |
| | 5,331,054 |
| | 6,128,442 |
|
| Money market deposits in foreign offices | | 111,201 |
| | 107,657 |
| | 88,656 |
|
| Sweep deposits in foreign offices | | 908,890 |
| | 1,133,872 |
| | 1,657,177 |
|
| Time | | 47,146 |
| | 56,118 |
| | 70,479 |
|
| Total deposits | | $ | 44,254,075 |
| | $ | 38,979,868 |
| | $ | 39,142,776 |
|
The increase in deposits of $5.3$40.2 billion in 20172020 was driven primarily by increases instrong public and private fundraising and exit activity as well as significant new client acquisition. We saw growth across all portfolios with the primary contributors coming from our noninterest-bearing demandtechnology and money market deposits with growth in our private equity/venture capital and China market segmentlife science/healthcare portfolios. No material portion of our deposits has been obtained from a single depositor and the loss of any one depositor would not materially affect
our business.Approximately 14 percent, 12 percent and 13 percent of our total deposits at December 31, 2017, 20162020 and 2015,2019, respectively, were from our clients in Asia.
The decreaseincrease in deposits of $0.2$12.4 billion in 20162019 was driven primarily by decreasesa healthy equity funding environment across a majority of our market segments with robust activities in our money marketthe IPO and sweep deposits in foreign offices, partially offset by increases in our noninterest-bearing demand accounts from growth in our private-equity/venture capital and life science/health care portfolios.secondary public offering markets as well as strong new client acquisition.
At December 31, 2017, 172020, 35 percent of our total deposits were interest-bearing deposits, compared to 1834 percent at December 31, 2016 and 21 percent at December 31, 2015.2019.
At December 31, 2017,2020, the aggregate balance of time deposit accounts individually equal to or greater than $100,000 totaled $41$686 million, compared to $61$185 million at December 31, 2016 and $116 million at 2019. At December 31, 2015. At December 31, 2017, all2020, $686 million in time deposit accounts individually equal to or greater than $100,000 were scheduled to mature within one year. The maturity profile of our time deposits as of December 31, 20172020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| (Dollars in thousands) | | Three months
or less | | More than
three months
to six months | | More than six
months to
twelve months | | More than
twelve months | | Total |
| Time deposits, $100,000 and over | | $ | 590,870 | | | $ | 325 | | | $ | 94,408 | | | $ | 100 | | | $ | 685,703 | |
| Other time deposits | | 1,705 | | | 798 | | | 255 | | | — | | | 2,758 | |
| Total time deposits | | $ | 592,575 | | | $ | 1,123 | | | $ | 94,663 | | | $ | 100 | | | $ | 688,461 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| (Dollars in thousands) | | Three months or less | | More than three months to six months | | More than six months to twelve months | | More than twelve months | | Total |
| Time deposits, $100,000 and over | | $ | 25,489 |
| | $ | 4,738 |
| | $ | 10,816 |
| | $ | — |
| | $ | 41,043 |
|
| Other time deposits | | 3,592 |
| | 960 |
| | 1,551 |
| | — |
| | 6,103 |
|
| Total time deposits | | $ | 29,081 |
| | $ | 5,698 |
| | $ | 12,367 |
| | $ | — |
| | $ | 47,146 |
|
Short-Term Borrowings
The following table summarizes our short-term borrowings that mature in one month or less:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 | | 2018 |
| (Dollars in thousands) | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| Short-term FHLB advances | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 300,000 | | | 2.54 | % |
| | | | | | | | | | | | |
| Securities sold under agreement to repurchase | | — | | | — | | | — | | | — | | | 319,414 | | | 2.70 | |
| Other short-term borrowings | | 20,553 | | | 0.08 | | | 17,430 | | | 1.55 | | | 11,998 | | | 2.39 | |
| Total short-term borrowings | | $ | 20,553 | | | 0.08 | | | $ | 17,430 | | | 1.55 | | | $ | 631,412 | | | 2.62 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 | | 2015 |
| (Dollars in thousands) | | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| Short-term FHLB advances | | $ | 700,000 |
| | 1.37 | % | | $ | 500,000 |
| | 0.59 | % | | $ | 638,000 |
| | 0.25 | % |
| Federal funds purchased | | 330,000 |
| | 1.45 |
| | — |
| | — |
| | 135,000 |
| | 0.64 |
|
| Other short-term borrowings | | 3,730 |
| | 1.33 |
| | 12,668 |
| | 0.57 |
| | 1,900 |
| | 0.20 |
|
| Total short-term borrowings | | $ | 1,033,730 |
| | 1.39 |
| | $ | 512,668 |
| | 0.59 |
| | $ | 774,900 |
| | 0.32 |
|
On December 29, 2017, we borrowed a total of $1.0 billion from our overnight credit facilities to support the short-term liquidity needs of the Bank. These borrowings were repaid, subsequent to year-end, on January 2, 2018.
Average daily balances and maximum month-end balances for ourWe had $20.6 million in short-term borrowings in 2017, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Average daily balances: | | | | | | |
| Short-term FHLB advances | | $ | 36,712 |
| | $ | 147,716 |
| | $ | 6,542 |
|
| Federal Funds purchased (1) | | 7,529 |
| | 5,844 |
| | 8,477 |
|
| Securities sold under agreements to repurchase | | — |
| | 63,464 |
| | 1,222 |
|
| Other short-term borrowings (2) | | 4,264 |
| | 3,227 |
| | 6,985 |
|
| Total average short-term borrowings | | $ | 48,505 |
| | $ | 220,251 |
| | $ | 23,226 |
|
| Weighted average interest rate during the year: | | | | | | |
| Short-term FHLB advances | | 1.02 | % | | 0.42 | % | | 0.20 | % |
| Federal Funds purchased | | 1.36 |
| | 0.44 |
| | 0.26 |
|
| Securities sold under agreements to repurchase | | — |
| | 0.49 |
| | 0.24 |
|
| Other short-term borrowings | | 1.55 |
| | 0.28 |
| | 0.13 |
|
| Maximum month-end balances: | | | | | | |
| Short-term FHLB advances | | $ | 700,000 |
| | $ | 750,000 |
| | $ | 638,000 |
|
| Federal Funds purchased | | 330,000 |
| | 150,000 |
| | 135,000 |
|
| Securities sold under agreements to repurchase | | — |
| | 304,000 |
| | — |
|
| Other short-term borrowings | | 8,470 |
| | 15,082 |
| | 21,561 |
|
| |
(1)
| As part of our liquidity risk management practices, we periodically test availability and access to overnight borrowings in the Federal Funds market. These balances represent short-term borrowings. |
| |
(2)
| Represents cash collateral received from certain counterparties in relation to market value exposures of derivative contracts in our favor. |
Long-Term Debt
The following table represents outstanding long-term debt at December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | | |
| | | Principal value at December 31, 2017 | | December 31, |
| (Dollars in thousands) | | | 2017 | | 2016 | | 2015 |
| 3.50% Senior Notes | | $ | 350,000 |
| | $ | 347,303 |
| | $ | 346,979 |
| | $ | 346,667 |
|
| 5.375% Senior Notes | | 350,000 |
| | 348,189 |
| | 347,586 |
| | 347,016 |
|
| 6.05% Subordinated Notes | | — |
| | — |
| | 46,646 |
| | 48,350 |
|
| 7.0% Junior Subordinated Debentures | | — |
| | — |
| | 54,493 |
| | 54,669 |
|
| Total long-term debt | | $ | 700,000 |
| | $ | 695,492 |
| | $ | 795,704 |
| | $ | 796,702 |
|
Our long-term debt was $695.52020, compared to $17.4 million at December 31, 2017 and $795.7 million at December 31, 2016.
As2019. There were no overnight short-term borrowings as of December 31, 2017, long-term debt included our 3.50% Senior Notes and 5.375% Senior Notes.2020 or 2019. For more information on our long-termshort-term debt, outstanding at December 31, 2017, refer tosee Note 12—14—“Short-Term Borrowings and Long-Term Debt” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Our 6.05% SubordinatedAverage daily balances and maximum month-end balances for our short-term borrowings in 2020, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Average daily balances: | | | | | | |
| Short-term FHLB advances | | $ | 295,902 | | | $ | 63,836 | | | $ | 424,384 | |
| Federal Funds purchased (1) | | 13,123 | | | 25,959 | | | 44,164 | |
| Securities sold under agreements to repurchase | | 64,606 | | | 36,716 | | | 164,938 | |
| Other short-term borrowings (2) | | 27,528 | | | 19,034 | | | 10,400 | |
| Total average short-term borrowings | | $ | 401,159 | | | $ | 145,545 | | | $ | 643,886 | |
| Weighted average interest rate during the year: | | | | | | |
| Short-term FHLB advances | | 0.62 | % | | 2.57 | % | | 2.24 | % |
| Federal Funds purchased | | 0.73 | | | 2.45 | | | 2.1 | |
| Securities sold under agreements to repurchase | | 1.74 | | | 2.65 | | | 2.37 | |
| Other short-term borrowings | | 0.28 | | | 1.92 | | | 2.28 | |
| Maximum month-end balances: | | | | | | |
| Short-term FHLB advances | | $ | 2,700,000 | | | $ | 400,000 | | | $ | 2,250,000 | |
| Federal Funds purchased | | 375,000 | | | 265,000 | | | 490,000 | |
| Securities sold under agreements to repurchase | | 1,030,622 | | | 196,000 | | | 394,592 | |
| Other short-term borrowings | | 63,162 | | | 30,246 | | | 19,770 | |
(1)As part of our liquidity risk management practices, we periodically test availability and access to overnight borrowings in the Federal Funds market. These balances represent short-term borrowings.
(2)Represents cash collateral received from certain counterparties in relation to market value exposures of derivative contracts in our favor.
Long-Term Debt
The following table represents outstanding long-term debt at December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal value at December 31, 2020 | | December 31, |
| (Dollars in thousands) | | | 2020 | | 2019 | | 2018 |
| 3.50% Senior Notes | | $ | 350,000 | | | $ | 348,348 | | | $ | 347,987 | | | $ | 347,639 | |
| 3.125% Senior Notes | | 500,000 | | | 495,280 | | | — | | | — | |
| 5.375% Senior Notes | | — | | | — | | | — | | | 348,826 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total long-term debt | | $ | 850,000 | | | $ | 843,628 | | | $ | 347,987 | | | $ | 696,465 | |
As of December 31, 2020, long-term debt was comprised of our 3.50% Senior Notes issued byand 3.125% Senior Notes. The increase in our long-term debt at December 31, 2020 as compared to December 31, 2019 was due to the Bank, were repaidissuance of 3.125% Senior Notes during the second quarter of 2020. For more information on June 1, 2017. The interest rate swap agreement relatingour long-term debt outstanding at December 31, 2020, refer to this issuance was terminated upon repaymentNote 14—“Short-Term Borrowings and Long-Term Debt” of the notes.“Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
On December 21, 2017, we redeemed in fullFebruary 2, 2021, the outstanding aggregate principal amount of $51.5Company issued $500 million of our 7.0% Junior Subordinated Debentures due October 15, 2033, relatingSenior Notes. Refer to our 7.0% Cumulative Trust Preferred Securities issued by SVB Capital II.Note 28—“Subsequent Events” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional information.
Other Liabilities
A summary of other liabilities at December 31, 20172020 and 20162019 is as follows:
|
| | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | % Change |
| Foreign exchange spot contract liabilities, gross | | $ | 202,807 |
| | $ | 68,018 |
| | 198.2 | % |
| Accrued compensation | | 167,531 |
| | 135,842 |
| | 23.3 |
|
| Derivative liabilities, gross (1) | | 108,581 |
| | 64,438 |
| | 68.5 |
|
| Allowance for unfunded credit commitments | | 51,770 |
| | 45,265 |
| | 14.4 |
|
| Other | | 381,066 |
| | 304,820 |
| | 25.0 |
|
| Total other liabilities | | $ | 911,755 |
| | $ | 618,383 |
| | 47.4 |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | % Change |
| Foreign exchange spot contract liabilities, gross | | $ | 2,164,805 | | | $ | 888,360 | | | 143.7 | % |
| Accrued compensation | | 545,376 | | | 354,393 | | | 53.9 | |
| Derivative liabilities (1) | | 237,478 | | | 137,984 | | | 72.1 | |
| Allowance for unfunded credit commitments | | 120,796 | | | 67,656 | | | 78.5 | |
| Net deferred tax liabilities | | 173,030 | | | — | | | — | |
| Other liabilities | | 730,489 | | | 593,359 | | | 23.1 | |
| Total other liabilities | | $ | 3,971,974 | | | $ | 2,041,752 | | | 94.5 | |
| |
(1)(1)See “Derivatives” section above. | See “Derivatives” section above. |
Foreign Exchange Spot Contract Liabilities
The increase of $134.8 million$1.3 billion in foreign exchange spot contract liabilities was due primarily to a higher numberan increase in the amount of unsettled clientspot trades at December 31, 20172020 as compared to December 31, 2016.2019.
Accrued Compensation
Accrued compensation includes amounts for our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, ESOP, SVB Leerink Incentive Compensation Plan, SVB Leerink Retention Award and other compensation arrangements. The increase of $31.7$191.0 million was due primarily theto an increase in our SVB Leerink incentive accruals as a result of larger incentive compensation accruals at December 31, 2017 based on our strong 2020 full-year financial performance, for 2017.and as well as the increase in the number of average FTEs in 2020. For a description of our variable compensation plans, refer to Note 17—19—“Employee Compensation and Benefit Plans” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Allowance for Unfunded Credit Commitments
Our allowanceAllowance for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit. The increase of $53.1 million was due primarily to the day one impact of the adoption of CECL of $22.8 million as well as an $30.2 million increase for the year ended December 31, 2020, driven primarily by growth in unfunded credit commitments of $7.5 billion.
Net Deferred Tax Liabilities
Net deferred tax liabilities increased to $51.8$173.0 million due to an increase in unrealized gains recorded to accumulated other comprehensive income from our available-for-sale securities and the termination of our interest rate swap cash flow
hedge contracts, as discussed in the "Derivatives" section above, as well as gains from conversion of convertible debt options, partially offset by an increase in allowance for credit losses for loans.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $137.1 million was reflective primarily of a $68.2 million increase in investment securities payable due to unsettled purchases of fixed income investment securities and a $41.3 million increase in income tax payable.
Noncontrolling Interests
Noncontrolling interests totaled $213.8 million and $150.8 million at December 31, 2017, compared to $45.3 million at December 31, 2016. The increase in the reserves was driven by the increase in unfunded credit commitments.
Other
Other liabilities increased $76.3 million to $381.1 million at December 31, 2017, compared to $304.8 million at December 31, 2016, primarily related to increases in various accrued liabilities including unsettled purchases of investment securities2020 and an increase in deferred compensation.
Noncontrolling Interests
Noncontrolling interests totaled $139.6 million and $134.5 million at December 31, 2017 and 2016,2019, respectively. The increase was due to net income attributable to noncontrolling interests of $28.7$85.9 million, partially offset by net capital distributions of $23.5$22.9 million primarily to investors in our managed funds of funds for the year ended December 31, 2017.2020. For more information, refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Capital Resources
We maintain an adequate capital base to support anticipated asset growth, operating needs, and credit and other business risks, and to provide for SVB Financial and the Bank to be in compliance with applicable regulatory capital guidelines, including the joint agency rules implementing the "Basel III" capital rules.rules (the "Capital Rules"). Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of our capital stock or other securities. In consultation withUnder the oversight of the Finance Committee of our Board of Directors, management engages in regular capital planning processes in an effort to optimize the use of the capital available to us and to appropriately plan for our future capital needs. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. In addition, we conduct capital stress tests as part of our annual capital planning process. The capital stress tests allow us to assess the impact of adverse changes in the economy and interest rates on our capital adequacy position.
Common Stock
On November 13, 2018, the Company announced a program to purchase up to $500 million of our outstanding common stock (the "Stock Repurchase Program"). The program completed on July 1, 2019, after we repurchased and retired 2.2 million shares of our outstanding common stock totaling $499.6 million.
On October 24, 2019, the Company’s Board of Directors authorized a new stock repurchase program that enabled the Company to repurchase up to $350 million of its outstanding common stock. Under the program, we purchased and retired 244,223 shares of our outstanding common stock totaling $60.0 million. This program expired on October 29, 2020.
Preferred Stock
On December 9, 2019, the Company issued depositary shares each representing a 1/40th ownership interest in 350,000 shares of Series A Preferred Stock with $0.001 par value and liquidation preference of $1,000 per share, or $25 per depositary share. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or other obligation of SVB Financial Group. Dividends are approved by the Board of Directors and, if declared, are payable quarterly, in arrears, at a rate per annum equal to 5.25 percent.
As of December 31, 2020, there were 350,000 shares issued and outstanding of Series A Preferred Stock, which had a carrying value of $340.1 million and liquidation preference of $350 million. For the year ended December 31, 2020, the Company's Board of Directors declared and SVB Financial distributed quarterly cash dividends totaling $17.2 million to Series A Preferred Stock holders.
On February 2, 2021, the Company issued Series B Preferred Stock. Refer to Note 28—“Subsequent Events” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional information.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $4.2$8.2 billion at December 31, 2017,2020, an increase of $537 million,$1.7 billion, or 14.727.0 percent compared to $3.6$6.5 billion at December 31, 2016.2019. This increase was primarily the result of net income of $491 million$1.2 billion in 2017 and2020, an increase in additional paid-in capitalaccumulated other comprehensive income reflective primarily of $72a $544.9 million reflective($393.3 million net of amortization of share-based compensation and the issuance of common stock under our equity incentive plans. These increases were partially offset by a $47 million decreasetax) increase in the fair value of our AFS securities portfolio driven by decreases in period-end market interest rates, and $182.0 million ($28131.4 million net of tax). The net decrease in the balance of our accumulated other comprehensive income was driven by an $87 million decrease in the fair value of our fixed income securities resulting from an increase in the period-end market interest rates partially offset by a $40 million increase in the fair value of our equity securities as a result of the exercise of the Roku warrants and is reflective of the increase in Roku’s common stock from the date of exercise through December 31, 2017.remaining unrealized gains on cash flow hedge.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Capital Ratios
Regulatory capital ratios for SVB Financial and the Bank exceeded minimum federal regulatory guidelines under the current Capital Rules as well as for a well-capitalized bank holding company and insured depository institution, respectively, as of December 31, 2017, 20162020, 2019 and 2015.2018. See Note 21—23—“Regulatory Matters” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further information. Capital ratios for SVB Financial and the Bank, compared to the minimum regulatorycapital ratios to be considered “well capitalized” and “adequately capitalized”, are set forth below:
|
| | | | | | | | | | | | | | | |
| | | December 31, | | Minimum Ratios under Applicable Regulatory Capital Adequacy Requirements |
| | | 2017 | | 2016 | | 2015 | | “Well Capitalized” | | “Adequately Capitalized” |
| SVB Financial: | | | | | | | | | | |
| CET 1 risk-based capital ratio | | 12.78 | % | | 12.80 | % | | 12.28 | % | | 6.5 | % | | 4.5 | % |
| Tier 1 risk-based capital ratio | | 12.97 |
| | 13.26 |
| | 12.83 |
| | 8.0 |
| | 6.0 |
|
| Total risk-based capital ratio | | 13.96 |
| | 14.21 |
| | 13.84 |
| | 10.0 |
| | 8.0 |
|
| Tier 1 leverage ratio | | 8.34 |
| | 8.34 |
| | 7.63 |
| | N/A |
| | 4.0 |
|
| Tangible common equity to tangible assets ratio (1)(2) | | 8.16 |
| | 8.15 |
| | 7.16 |
| | N/A |
| | N/A |
|
| Tangible common equity to risk-weighted assets ratio (1)(2) | | 12.77 |
| | 12.89 |
| | 12.34 |
| | N/A |
| | N/A |
|
| Bank: | | | | | | | | | | |
| CET 1 risk-based capital ratio | | 12.06 | % | | 12.65 | % | | 12.52 | % | | 6.5 | % | | 4.5 | % |
| Tier 1 risk-based capital ratio | | 12.06 |
| | 12.65 |
| | 12.52 |
| | 8.0 |
| | 6.0 |
|
| Total risk-based capital ratio | | 13.04 |
| | 13.66 |
| | 13.60 |
| | 10.0 |
| | 8.0 |
|
| Tier 1 leverage ratio | | 7.56 |
| | 7.67 |
| | 7.09 |
| | 5.0 |
| | 4.0 |
|
| Tangible common equity to tangible assets ratio (1)(2) | | 7.47 |
| | 7.77 |
| | 6.95 |
| | N/A |
| | N/A |
|
| Tangible common equity to risk-weighted assets ratio (1)(2) | | 11.98 |
| | 12.75 |
| | 12.59 |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Required Minimum (1) | | Well Capitalized Minimum |
| | 2020 | | 2019 | | 2018 | | |
| SVB Financial: | | | | | | | | | | |
| CET 1 risk-based capital ratio (2) (3) | | 11.04 | % | | 12.58 | % | | 13.41 | % | | 7.0 | % | | N/A |
| Tier 1 risk-based capital ratio (3) | | 11.89 | | | 13.43 | | | 13.58 | | | 8.5 | | | 6.0 | |
| Total risk-based capital ratio (3) | | 12.64 | | | 14.23 | | | 14.45 | | | 10.5 | | | 10.0 | |
| Tier 1 leverage ratio (2) (3) | | 7.45 | | | 9.06 | | | 9.06 | | | 4.0 | | N/A |
| Tangible common equity to tangible assets ratio (4)(5) | | 6.66 | | | 8.39 | | | 8.99 | | | N/A | | N/A |
| Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.87 | | | 12.76 | | | 13.28 | | | N/A | | N/A |
| Bank: | | | | | | | | | | |
| CET 1 risk-based capital ratio (3) | | 10.70 | % | | 11.12 | % | | 12.41 | % | | 7.0 | % | | 6.5 | % |
| Tier 1 risk-based capital ratio (3) | | 10.70 | | | 11.12 | | | 12.41 | | | 8.5 | | | 8.0 | |
| Total risk-based capital ratio (3) | | 11.49 | | | 11.96 | | | 13.32 | | | 10.5 | | | 10.0 | |
| Tier 1 leverage ratio (3) | | 6.43 | | | 7.30 | | | 8.10 | | | 4.0 | | | 5.0 | |
| Tangible common equity to tangible assets ratio (4)(5) | | 6.24 | | | 7.24 | | | 8.13 | | | N/A | | N/A |
| Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.58 | | | 11.31 | | | 12.28 | | | N/A | | N/A |
| |
(1) | (1)Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital conservation buffer under the Capital Rules. (2)"Well-Capitalized Minimum" CET 1 risk-based capital and Tier 1 leverage ratios are not formally defined under applicable banking regulations for bank holding companies. (3)Capital ratios include regulatory capital phase-in of the allowance for credit losses under the 2020 CECL Transition Rule for periods beginning December 31, 2020. (4)See below for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets. |
| |
(2) | The FRB has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio. However, we believe these ratios provide meaningful supplemental information regarding our capital levels and are therefore provided above. |
2017 compared to 2016tangible assets and tangible common equity to risk-weighted assets.
(5)The FRB has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio, however, we believe these ratios provide meaningful supplemental information regarding our capital levels and are therefore provided above.
Risk-based capital ratios (CET 1, tier 1, total risk-based capital, and tier 1 capital ratiosleverage) for both SVB Financial and the Bank decreased as of December 31, 2017, as2020, compared to the same ratios as of December 31, 2016.2019, primarily as a result of a proportionally higher increase in our risk-weighted assets relative to the increase in capital during 2020. The increase in risk-weighted assets was driven primarily by the increases in our loan and fixed income portfolios during 2020. The increase in average assets was driven by increases in fixed income investments and loan portfolios, as well as cash and cash equivalents reflective of strong deposit growth. The increase in capital was reflective primarily of net income of $1.2 billion.
Risk-based capital ratios (CET 1, tier 1, total risk-based capital, and tier 1 leverage) for Silicon Valley Bank (the "Bank") decreased as of December 31, 2020, compared to the same ratios as of December 31, 2019. The decreases were a result of the proportionally higher increase in our risk-weighted assets compared to the increases in capital during the year ended December 31, 2017. The growth in period-end risk-weighted assets was primarily from period-end loan growth and an increase in fixed income securities. Increased capital was reflective primarily of year-to-date earnings and issuance of common stock related to equity-based employee stock plans resulting from an increase in SVB Financial's stock price during 2017. SVB Financial's tier 1 leverage ratio held flat at 8.34 percent, while the Bank's tier 1 leverage ratio decreased 11 basis points as of December 31, 2017, compared to December 31, 2016. The decrease in tier 1 leverage ratio was reflective of an increase in average assets from period-end loan and investment growth relative to the increase in tiercapital during 2020. The increase in risk-weighted assets and average assets were driven by increases in our loan and fixed income
portfolios, as well as cash and cash equivalents 2020 reflective of strong deposit growth. The increases in capital includes for Silicon valley bank was driven by net income as well as a $700 million downstream capital infusion from our bank holding company.
Regulatory Capital Phase-In under the 2020 CECL Transition Rule
In March 2020, the federal banking agencies issued the 2020 CECL Transition Rule, which provides transitional relief to banking organizations with respect to the impact of CECL on regulatory capital. Under the rule, banking organizations that adopt CECL during the 2020 calendar year, such as SVB Financial and the Bank, may delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year period to phase out the aggregate capital benefit provided during the initial two-year delay. The rule prescribes a methodology for estimating the impact of differences in credit loss allowances reflected under CECL versus under the incurred loss methodology during the five-year transition period. We have elected to use the five-year transition option under the 2020 CECL Transition Rule.
Capital Simplification Rules
In July 2019, the federal banking agencies adopted final rules intended to simplify compliance with capital rules for non-advanced approaches banking organizations (the “Capital Simplification Rules”), such as SVB Financial and the Bank. The Capital Simplification Rules took effect for SVB Financial as of January 1, 2020 and simplify the capital primarily from retained earnings. treatment of mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions and minority interests for banking organizations.
All of our reported capital ratios wereremain above the levels considered to be “well capitalized” as of December 31, 2017"well capitalized" under applicable banking regulations.
2016 compared to 2015
The total risk-based capital and tier 1 capital ratios for both SVB Financial and the Bank increased as of December 31, 2016, as compared to December 31, 2015. The increases were a result of the proportionally higher increase in our capital compared to the increases in risk-weighted assets during the year ended December 31, 2016. Increased capital was reflective primarily of year-to-date earnings and issuance of common stock related to equity-based employee stock plans resulting from an increase in SVB Financial's stock price during the latter half of 2016. The growth in period-end risk-weighted assets was primarily from period-end loan growth, partially offset by a decrease in risk-weighted assets from fixed income securities. SVB Financial's and the Bank's tier 1 leverage ratios increased 71 basis points and 58 basis points, respectively, as of December 31, 2016, compared to December 31, 2015. The increase in tier 1 leverage ratios were reflective of an increase in tier 1 capital, primarily from retained earnings, relative to the increase in average assets. All of our reported capital ratios were above the levels considered to be “well capitalized” as of December 31, 2016 under applicable banking regulations.
Non-GAAP Tangible Common Equity to Tangible Assets and Non-GAAP Tangible Common Equity to Risk-weighted Assets
The tangible common equity, or tangible book value, to tangible assets ratio and the tangible common equity to risk-weighted assets ratios are not required by GAAP or applicable bank regulatory requirements. However, we believe these ratios provide meaningful supplemental information regarding our capital levels. Our management uses, and believes that investors benefit from referring to, these ratios in evaluating the adequacy of the Company’s capital levels; however, this financial measure should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. These ratios are calculated by dividing total SVBFG stockholder’s equity, by total period-end assets and risk-weighted assets, after reducing both amounts by acquired intangibles, if any. The manner in which this ratio is calculated varies among companies. Accordingly, our ratio is not necessarily comparable to similar measures of other companies. The following table provides a reconciliation of non-GAAP financial measures with financial measures defined by GAAP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP tangible common equity and tangible assets
(Dollars in thousands, except ratios) | | SVB Financial |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| GAAP SVBFG stockholders’ equity | | $ | 8,219,700 | | | $ | 6,470,307 | | | $ | 5,116,209 | | | $ | 4,179,795 | | | $ | 3,642,554 | |
| Less: preferred stock | | 340,138 | | | 340,138 | | | — | | | — | | | — | |
| Less: intangible assets | | 204,120 | | | 187,240 | | | — | | | — | | | — | |
| Tangible common equity | | $ | 7,675,442 | | | $ | 5,942,929 | | | $ | 5,116,209 | | | $ | 4,179,795 | | | $ | 3,642,554 | |
| GAAP total assets | | $ | 115,511,007 | | | $ | 71,004,903 | | | $ | 56,927,979 | | | $ | 51,214,467 | | | $ | 44,683,660 | |
| Less: intangible assets | | 204,120 | | | 187,240 | | | — | | | — | | | — | |
| Tangible assets | | $ | 115,306,887 | | | $ | 70,817,663 | | | $ | 56,927,979 | | | $ | 51,214,467 | | | $ | 44,683,660 | |
| Risk-weighted assets | | $ | 64,680,666 | | | $ | 46,577,485 | | | $ | 38,527,853 | | | $ | 32,736,959 | | | $ | 28,248,750 | |
| Non-GAAP tangible common equity to tangible assets | | 6.66 | % | | 8.39 | % | | 8.99 | % | | 8.16 | % | | 8.15 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.87 | | | 12.76 | | | 13.28 | | | 12.77 | | | 12.89 | |
| | Non-GAAP tangible common equity and tangible assets (Dollars in thousands, except ratios) | | SVB Financial | Non-GAAP tangible common equity and tangible assets
(Dollars in thousands, except ratios) | | Bank |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | December 31,
2014 | | December 31,
2013 | | December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| GAAP SVBFG stockholders’ equity | | $ | 4,179,795 |
| | $ | 3,642,554 |
| | $ | 3,198,134 |
| | $ | 2,813,072 |
| | $ | 1,961,635 |
| |
| Tangible common equity | | $ | 4,179,795 |
| | $ | 3,642,554 |
| | $ | 3,198,134 |
| | $ | 2,813,072 |
| | $ | 1,961,635 |
| Tangible common equity | | $ | 7,068,964 | | | $ | 5,034,095 | | | $ | 4,554,814 | | | $ | 3,762,542 | | | $ | 3,423,427 | |
| GAAP total assets | | $ | 51,214,467 |
| | $ | 44,683,660 |
| | $ | 44,686,703 |
| | $ | 39,337,869 |
| | $ | 26,410,144 |
| |
| Tangible assets | | $ | 51,214,467 |
| | $ | 44,683,660 |
| | $ | 44,686,703 |
| | $ | 39,337,869 |
| | $ | 26,410,144 |
| Tangible assets | | $ | 113,303,370 | | | $ | 69,563,817 | | | $ | 56,047,134 | | | $ | 50,383,774 | | | $ | 44,059,340 | |
| Risk-weighted assets | | $ | 32,736,959 |
| | $ | 28,248,750 |
| | $ | 25,919,594 |
| | $ | 21,755,091 |
| | $ | 16,901,501 |
| Risk-weighted assets | | $ | 61,023,462 | | | $ | 44,502,150 | | | $ | 37,104,080 | | | $ | 31,403,489 | | | $ | 26,856,850 | |
| Non-GAAP tangible common equity to tangible assets | | 8.16 | % | | 8.15 | % |
| 7.16 | % |
| 7.15 | % |
| 7.43 | % | Non-GAAP tangible common equity to tangible assets | | 6.24 | % | | 7.24 | % | | 8.13 | % | | 7.47 | % | | 7.77 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 12.77 |
| | 12.89 |
|
| 12.34 |
|
| 12.93 |
|
| 11.61 |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.58 | | | 11.31 | | | 12.28 | | | 11.98 | | | 12.75 | |
|
| | | | | | | | | | | | | | | | | | | | |
Non-GAAP tangible common equity and tangible assets (Dollars in thousands, except ratios) | | Bank |
| | December 31,
2017 | | December 31,
2016 | | December 31,
2015 | | December 31,
2014 | | December 31,
2013 |
| Tangible common equity | | $ | 3,762,542 |
| | $ | 3,423,427 |
| | $ | 3,059,045 |
| | $ | 2,399,411 |
| | $ | 1,634,389 |
|
| Tangible assets | | $ | 50,383,774 |
| | $ | 44,059,340 |
| | $ | 44,045,967 |
| | $ | 37,607,973 |
| | $ | 24,849,484 |
|
| Risk-weighted assets | | $ | 31,403,489 |
| | $ | 26,856,850 |
| | $ | 24,301,043 |
| | $ | 21,450,480 |
| | $ | 16,612,870 |
|
| Non-GAAP tangible common equity to tangible assets | | 7.47 | % | | 7.77 | % |
| 6.95 | % |
| 6.38 | % |
| 6.58 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.98 |
| | 12.75 |
|
| 12.59 |
|
| 11.19 |
|
| 9.84 |
|
2017 compared to 2016
SVB Financial's tangible common equity to tangible assets ratio increased due to the proportionally higher increase in tangible common equity as compared to changes to tangible assets. Increased capital was reflective primarily of net income. The Bank's tangible common equity to tangible assets ratio decreased, primarily as a result of $90.0 million in cash dividends paid by the Bank to our bank holding company, SVB Financial, during 2017. SVB Financial's and the Bank's tangible common equity to tangible assets and SVB Financial's risk-weighted assets ratios decreased due to the proportionally higher increaseincreases in tangible and risk-weighted assets relative to the increase in tangible common equity. The growthincrease in period-endrisk-tangible and risk-weighted assets was primarily due to period-end loanwere driven by robust asset growth and higher investment and cash balancesduring 2020 driven by increases in deposits. See "SVBFG Stockholders’ Equity" above for further details on changes tofixed income and loan portfolios. Increased capital was reflective primarily of net income.
The increase in the individual components of our equity balance.
2016 compared to 2015
For both SVB Financial and the Bank, theBank's tangible common equity to tangible assets ratios andratio was driven by the tangible common equity to risk-weighted assets ratios increasedincrease in capital due to the proportionally higher increase in tangible common equity as compared to changes to tangiblelarge unrealized gains from the available for sale and risk-weighted assets.securities and unrealized gains on the cash flow hedges during 2020. See "SVBFG Stockholders’ Equity" above for further details on changes to the individual components of our equity balance.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, and commercial and standby letters of credit.credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. The actual liquidity
needs and the credit risk that we have experienced have historically been lower than the contractual amount of these commitments because a significant portion of these commitments expire without being drawn upon. Refer to the discussion of our off-balance sheet arrangements in Note 19—21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
The following table summarizes our unfunded commercial commitments as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitments Expiring per Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Commercial commitments: | | | | | | | | | | |
| Loan commitments available for funding | | $ | 28,975,133 | | | $ | 21,879,793 | | | $ | 5,258,406 | | | $ | 1,555,776 | | | $ | 281,158 | |
| Standby letters of credit | | 3,002,752 | | | 2,916,623 | | | 65,079 | | | 9,742 | | | 11,308 | |
| Commercial letters of credit | | 4,366 | | | 4,366 | | | — | | | — | | | — | |
| Total unfunded credit commitments | | $ | 31,982,251 | | | $ | 24,800,782 | | | $ | 5,323,485 | | | $ | 1,565,518 | | | $ | 292,466 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Amount of commitment expiring per period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Commercial commitments: | | | | | | | | | | |
| Total loan commitments available for funding | | $ | 15,512,326 |
| | $ | 11,583,641 |
| | $ | 2,882,181 |
| | $ | 782,180 |
| | $ | 264,324 |
|
| Standby letters of credit | | 1,932,300 |
| | 1,860,376 |
| | 55,174 |
| | 16,309 |
| | 441 |
|
| Commercial letters of credit | | 17,911 |
| | 17,911 |
| | — |
| | — |
| | — |
|
The following table summarizes our contractual obligations to make future payments as of December 31, 2017:2020:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due By Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| SVBFG contractual obligations: | | | | | | | | | | |
| Deposits (1) (2) | | $ | 44,254,075 |
| | $ | 44,254,075 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Borrowings (2) | | 1,729,222 |
| | 1,033,730 |
| | 348,189 |
| | — |
| | 347,303 |
|
| Non-cancelable operating leases, net of income from subleases | | 226,475 |
| | 35,627 |
| | 67,662 |
| | 58,952 |
| | 64,234 |
|
| Commitments to qualified affordable housing projects | | 100,891 |
| | 37,656 |
| | 46,747 |
| | 6,996 |
| | 9,492 |
|
| Other obligations | | 24,652 |
| | 7,707 |
| | 15,075 |
| | 1,870 |
| | — |
|
| Total obligations attributable to SVBFG | | $ | 46,335,315 |
| | $ | 45,368,795 |
| | $ | 477,673 |
| | $ | 67,818 |
| | $ | 421,029 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| SVBFG contractual obligations: | | | | | | | | | | |
| Deposits (1) (2) | | $ | 101,981,807 | | | $ | 101,981,807 | | | $ | — | | | $ | — | | | $ | — | |
| Borrowings (2) | | 864,181 | | | 20,553 | | | — | | | 348,348 | | | 495,280 | |
| Non-cancelable operating leases | | 276,924 | | | 51,547 | | | 97,037 | | | 74,498 | | | 53,842 | |
| Commitments to qualified affordable housing projects | | 370,208 | | | 167,026 | | | 170,552 | | | 13,977 | | | 18,653 | |
| Other obligations | | 2,258 | | | 1,962 | | | 296 | | | — | | | — | |
| Total obligations attributable to SVBFG | | $ | 103,495,378 | | | $ | 102,222,895 | | | $ | 267,885 | | | $ | 436,823 | | | $ | 567,775 | |
| |
(1) | Includes time deposits and deposits with no defined maturity, such as noninterest-bearing demand, interest-bearing checking, savings, money market and sweep accounts. |
| |
(2) | Amounts exclude contractual interest. |
(1)Includes time deposits and deposits with no defined maturity, such as noninterest-bearing demand, interest-bearing checking, savings, money market and sweep accounts.
(2)Amounts exclude contractual interest.
Excluded from the tables above are unfunded commitment obligations of $16.1$22.1 million to our managed funds of funds and other fund investments for which neither the payment, timing, nor eventual obligation is certain. Subject to applicable regulatory requirements, including the Volcker Rule (see "Business - Supervision and Regulation" under Part I, Item 1 of this report), we make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately-held companies. Commitments to invest in these funds are generally made for a 10-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years; however in certain cases, the funds may not call 100% of committed capital over the life of the fund. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. Additionally, our consolidated managed funds of funds have $5.8$4.3 million of remaining unfunded commitments to venture capital and private equity funds. See Note 8—“Investment Securities" of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further disclosure related to non-marketable and other equity securities. Additional discussion of our off-balance sheet arrangements for these fund investments is included in Note 19—21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Liquidity
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations, including, as necessary, paying creditors, meeting depositors’ needs, accommodating loan demand and growth, funding investments, repurchasing securities and other operating or capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding
needs, and existing and planned business activities. Our Asset/Liability Committee (“ALCO”), which is a management committee, provides oversight to the liquidity management process and recommends policy guidelines for the approval of the Finance Committee of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Additionally, we routinely conduct liquidity stress testing as part of our liquidity management practices.
Our deposit base is, and historically has been, our primary source of liquidity. Our deposit levels and cost of deposits may fluctuate from time to time due to a variety of factors, including market conditions, prevailing interest rates, changes in client deposit behaviors, availability of insurance protection, and our offering of deposit products. At December 31, 2017,2020, our period-end total deposit balances increased to $44.3$102.0 billion,, compared to $39.0$61.8 billion at December 31, 2016.2019.
Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, short-term investment securities maturing within one year, AFS securities eligible and available for financing or pledging purposes with a maturity in excess of one year and anticipated near-term cash flows from investments.
We have certain facilities in place to enable us to access short-term borrowings on a secured (using loans and AFS securities as collateral) and an unsecured basis. TheseOur secured facilities include repurchase agreements and uncommitted federal funds lines with various financial institutions. We also pledge securitiescollateral pledged to the FHLB of San Francisco and the discount window at the FRB. The fair valueFRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of December 31, 2020, collateral pledged to the FHLB of San Francisco (comprisedwas comprised primarily of fixed income investment securities and loans and U.S. Treasury securities) at December 31, 2017 totaled $3.4had a carrying value of $6.8 billion, of which $2.7$5.8 billion was unused and available to support additional borrowings. The fair valueAs of December 31, 2020, collateral pledged atto the discount window ofat the FRB (comprised primarilywas comprised of U.S. Treasuryfixed income investment securities and U.S. agency debentures) at December 31, 2017 totaled $1.0had a carrying value of $0.9 billion, all of which was unused and available to support additional borrowings. Our total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.9 billion at December 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $4.0 billion at December 31, 2020.
In connection with our participation in the PPP under the CARES Act as discussed, we considered participating in the Federal Reserve’s Paycheck Protection Program Lending Facility ("PPPLF"). The PPPLF was established to allow participating institutions to facilitate lending under the PPP and extends credit to eligible PPP loan originators on a non-recourse basis, taking PPP loans as collateral at face value. Ultimately, we were able to extend credit to PPP borrowers without relying on the PPPLF. Additionally, interim final capital rules issued by federal bank regulatory agencies have neutralized the regulatory capital effects of participating in the PPP, in that loans outstanding are assessed a zero percent risk weight for regulatory capital purposes.
On a stand-alone basis, SVB Financial’s primary liquidity channels include dividends from the Bank, its portfolio of liquid assets, and its ability to raise debt and capital.The ability of the Bank to pay dividends is subject to certain regulations described in “Business—Supervision and Regulation—Restrictions on Dividends” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for 2017, 20162020, 2019 and 2015,2018, respectively: (For further details, see our Consolidated Statements of Cash Flows under "Consolidated Financial Statements and Supplementary Data" under Part II, Item 8 of this report.)
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Average cash and cash equivalents | | $ | 13,273,237 | | | $ | 6,524,342 | | | $ | 3,301,783 | |
| Percentage of total average assets | | 15.5 | % | | 10.3 | % | | 6.0 | % |
| Net cash provided by operating activities | | $ | 1,445,487 | | | $ | 1,164,129 | | | $ | 933,562 | |
| Net cash used for investing activities | | (31,205,721) | | | (9,371,882) | | | (4,800,375) | |
| Net cash provided by financing activities | | 40,653,214 | | | 11,417,997 | | | 4,515,277 | |
| Net increase in cash and cash equivalents | | $ | 10,892,980 | | | $ | 3,210,244 | | | $ | 648,464 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Average cash and cash equivalents | | $ | 3,484,651 |
| | $ | 2,863,777 |
| | $ | 2,569,482 |
|
| Percentage of total average assets | | 7.2 | % | | 6.5 | % | | 6.3 | % |
| Net cash provided by operating activities | | $ | 580,099 |
| | $ | 437,977 |
| | $ | 339,197 |
|
| Net cash (used for) provided by investing activities | | (5,903,730 | ) | | 1,015,344 |
| | (6,495,736 | ) |
| Net cash provided by (used for) financing activities | | 5,700,956 |
| | (410,828 | ) | | 5,848,782 |
|
| Net increase (decrease) in cash and cash equivalents | | $ | 377,325 |
| | $ | 1,042,493 |
| | $ | (307,757 | ) |
Average cash and cash equivalents increased to $3.5$13.3 billion in 2017,2020, compared to $2.9$6.5 billion for 2016. In 2017, our average2019. Average deposits increased $4.0 billion and our fixed income securities portfolio increased $0.9$20.0 billion which enabled us to grow our average loan portfolio by $2.9$7.3 billion in 2017.2020.
20172020
Cash provided by operating activities of $580 million$1.4 billion in 20172020 included net income before noncontrolling interests of $519 million.$1.3 billion and $200 million from changes in other assets and liabilities, offset by $49 million from changes from adjustments to reconcile to net income to net cash.
Cash used for investing activities of $31.2 billion in 2020 included $19.1 billion of net outflows from our fixed income securities portfolio due to $30.0 billion of purchases, offset by fixed income inflows of $10.9 billion in portfolio cash flows from sales, maturities and paydowns, and $11.9 billion of net outflows from funded loans.
Cash provided by financing activities of $40.7 billion in 2020 was driven primarily by the net increase in deposits of $40.2 billion and $0.5 billion from the issuance of our 3.125% Senior Notes.
Cash and cash equivalents at December 31, 2020 were $17.7 billion, compared to $6.8 billion at December 31, 2019.
2019
Cash provided by operating activities of $1.2 billion in 2019 included net income before noncontrolling interests of $1.2 billion. These net inflows also benefited from $16were offset by $62 million of adjustments to reconcile net income to net cash and $45$82 million from changes in other assets and liabilities.
Cash used for investing activities of $5.9$9.4 billion in 20172019 included $3.2$4.8 billion of net outflows from the net increase in loans funded and $2.8$4.4 billion of net outflows from our fixed income securities portfolio which had $8.4due to $10.4 billion of purchases, offset by $5.6fixed income inflows of $6.0 billion of portfolio cash flows from sales, maturities and paydowns during 2017.paydowns.
Cash provided by financing activities of $5.7$11.4 billion in 20172019 was driven primarily fromby the net increase in deposits of $5.3$12.4 billion and $0.3 billion in proceeds from issuance of preferred stock, partially offset by a $521 million increase$1.0 billion decrease in short-term borrowings outstanding as of December 31, 2017.
Cash and cash equivalents at December 31, 2017 were $2.9 billion, compared to $2.5 billion at December 31, 2016.
2016
Cash provided by operating activities of $438 million in 2016 included net income before noncontrolling interests of $390 million. These net inflows also benefited from $23 million of adjustments to reconcile net income to net cash.
Cash provided by investing activities of $1.02019 as well as $0.4 billion in 2016 included $4.2 billion of net inflows from our fixed income securities, partially offset by $3.2 billioncash outflows from the net increase in loans funded.
Cash used for financing activities of $411 million in 2016 included a $262 million decrease in short-term borrowings.
Cash and cash equivalents at December 31, 2016 were $2.5 billion, compared to $1.5 billion at December 31, 2015.
2015
Cash provided by operating activities of $339 million in 2015 included net income before noncontrolling interests of $375 million. These net inflows were partially offset by $56.5 million of adjustments to reconcile net income to net cash.
Cash used for investing activities of $6.5 billion in 2015 included $7.5 billion for purchases of fixed income securities and $2.3 billion from the net increase in loans funded. These cash outflows were partially offset by $3.2 billion from sales, maturities and paydownsrepurchase of our fixed income securities portfolio.common stock under the Stock Repurchase Program.
Cash providedSubsequent Events
Potential Fraudulent Client Activity
The Company recently became aware of potentially fraudulent activity conducted by financing activitiesJES Global Capital III, L.P. (“JES”), a client of $5.8 billionthe Bank, in 2015 includedconnection with a $4.7 billion increaseloan transaction funded in deposits,early February 2021.
We are currently investigating this incident to determine our potential credit exposure, which is currently estimated to be up to $70 million, net of tax, relating to a $767 million increaseGlobal Fund Banking capital call line of credit. We have been advised that a principal of JES was recently arrested, and the matter is pending in short-term borrowingsthe U.S. District Court for the Southern District of New
York. We are continuing to work with the appropriate law enforcement authorities in connection with this matter and $346 million fromintend to pursue all available sources of recovery and other measures to mitigate the issuancepotential loss.
Based on our review of the potentially fraudulent activity, as well as our 3.50% Senior Notesrisk assessment review of the Global Fund Banking loan portfolio conducted in January 2015.light of the incident, the Company currently believes this incident is an isolated occurrence involving a single business relationship.
Cash and cash equivalents at December 31, 2015 were $1.5 billion, comparedThis matter (and other updates about the first quarter of 2021) was initially disclosed by the Company in a Current Report on Form 8-K on February 26, 2021. We may be limited in any additional information we can disclose due to $1.8 billion at December 31, 2014.the ongoing investigation.
94
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
Market risk is defined as the risk of adverse fluctuations in the market value of financial instruments due to changes in market interest rates. Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of the benchmark LIBOR/SWAP yield curve.interest rates. Additionally, changes in interest rates can influence the rate of principal prepayments on mortgage securities, which affects the rate of amortization of purchase premiums and discounts. Other market risks include foreign currency exchange risk and equity price risk including(including the effect of competition on product pricing. While all of thesepricing). These risks and related impacts are important market considerations allbut are inherently difficult to predict, and it is equally difficult to assess the impact of each on the overallthrough simulation results. Consequently, simulations used to analyze the sensitivity of net interest income to changes in interest rate riskrates will differ from actual results due to differences in the timing and frequency andof rate resets, the magnitude of changes in market rates, the impact of competition, fluctuating business conditions and the impact of strategies taken by management to mitigate these risks.
Interest rate risk is managed by our ALCO. ALCO reviews the sensitivity of the market valuation on earning assets and funding liabilities and modeled 12-month forward lookingprojections of net interest income from changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and current market conditions. Adherence with relevantRelevant metrics included in our Interest Rate Risk Policy,and guidelines, which isare approved by the Finance Committee of our Board of Directors isand are included in our Interest Rate Risk Policy, are monitored on an ongoing basis.
Management of interestInterest rate risk is carried outmanaged primarily through strategies involving our fixed income securities portfolio, available funding channels and capital market activities. In addition, our policies permit the use of off-balance sheet derivatives, such as interest rate swaps, to assist inwith managing interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the economic value of our equity and our net interest income under a variety of interest rate scenarios, balance sheet forecasts and business strategies. The simulation model provides a dynamic assessment of interest rate sensitivity which is embedded within our balance sheet whichsheet. Rate sensitivity measures the potential variability in economic value and net interest income relating solely to changes in market interest rates over time. We review our interest rate risk position and sensitivity to market interest rates on a quarterly basis at a minimum.regularly.
Model Simulation and Sensitivity Analysis
A specific application of our simulation model involves measurement of the impact of changes in market interest rates on ourthe economic value of equity (“EVE”). EVE is defined as the market value of assets, less the market value of liabilities, adjusted for any off-balance sheet items, if any.liabilities. Another application of the simulation model measures the impact of changes in market interest rates on our net interest income (“NII”) assuming a static balance sheet, in both size and composition as of the period-end reporting date. Meaning,In the NII simulation, the level of market interest rates and the size and composition of earning assets and funding liabilitiesthe balance sheet are held constant over the simulation horizon. Simulated cash flows during the scenario horizon are assumed to be replaced as they occur, which restoresmaintains the balance sheet toat its originalcurrent size and composition. More specifically, with respect to earning assets, loan maturities, principal maturities, paydowns and calls on investments are added back as replacement balances as they occur during the simulation horizon. Yield and spread assumptions on cash and investment balances reflect current market rates.rates and the shape of the yield curve. Yield and spread assumptions on loans reflect recent market impacts on product pricing. Similarly, we make certain deposit balance decay rate assumptions on demand deposits and interest bearinginterest-bearing deposits, which are replenished to hold the level and mix of funding liabilities constant. Changes in market interest rates that affect usnet interest income are principally short-term interest rates and include the following benchmark indexes: (i) the National and SVB Prime rates,Rate, (ii) 1-month and 3-month LIBOR, and (iii) the Federal Funds target rate. Changes in these short-term rates impact interest earned on our variable rate loans variable rate investment securities and balances held as cash and cash equivalents. Additionally, simulated changes in deposit pricing relative to changes in market rates, commonly referred to as deposit beta, generally follow overall changes in short-term interest rates, although actual changes may lag in terms of timing and magnitude. Overall,
Both EVE and NII measures rely upon the assumed weighted deposituse of models to simulate cash flow behavior for loans and deposits. These models were developed internally and are based on historical balance and rate observations. Investment portfolio cash flow is based on a combination of third-party prepayment models and internally managed prepayment vectors depending on security type. As part of our ongoing governance structure, each of these models and assumptions are periodically reviewed and recalibrated as needed to ensure that they are representative of our understanding of existing behaviors.
During the fourth quarter of 2020, a modeling assumption change was made to align investment portfolio cash flows with an established benchmark model. This included recalibration of third-party prepayment models associated with certain mortgage-backed security classes. As a result of these changes, the measure of interest rate sensitivity of total investments was reduced resulting in an overall lower EVE sensitivity. This modeling change did not significantly impact NII sensitivity measures.
Simulation results presented include an "asymmetric" beta on interest bearing depositsassumption that is approximately 35.0 percent, which meansapplied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations that deposit repricing is assumed tobehavior in a falling rate environment would be different than repricing behavior in a rising rate environment. This model assumes the overall beta for interest-bearing deposits in a falling rate environment would be approximately 35.060 percent. That is, overall changes in interest-bearing deposit rates would be approximately 60 percent of a giventhe change in short-term interestmarket rates. ThisThe deposit beta assumption for an increasing rate environment is 50 percent. These repricing isassumptions are reflected as a changechanges in interest expense on interest bearinginterest-bearing deposit balances.
For the year ended December 31, 2017, our results include two key modeling assumption changes relating to our non-maturity deposits and prepayments on outstanding commercial loans. The impact was seen primarily in our EVE sensitivity profile and, to a lesser degree, on our NII sensitivity.
For non-maturity deposits, the assumed deposit decay rate is greater in current modeled results compared to assumptions used in prior periods. The impact of the change in assumptions in all rate simulations resulted in greater market value sensitivity of deposits and greater EVE sensitivity overall. Prepayment rate assumptions on commercial loans are also greater in current modeled results compared to assumptions used in prior periods. The impact of the change in assumptions resulted in lower
market value sensitivity on commercial loans but the impact on overall EVE sensitivity was minimal in comparison to the overall changes in EVE sensitivity.
The following table presents our EVE and NII sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points ("bps") at December 31, 20172020 and at December 31, 2016 (as2019. Net Interest Income sensitivity and the modeled Economic Value of Equity for December 31, 2019 has been revised based onto reflect the assumption changes noted above):updated model assumptions.
| | Change in interest rates (basis points) (Dollars in thousands) | | Estimated | | Estimated Increase/(Decrease) In EVE | | Estimated | | Estimated Increase/ (Decrease) In NII | |
| | EVE | | Amount | | Percent | | NII | | Amount | | Percent | |
| December 31, 2017: | | | | | | | | | | | | | |
Change in interest rates (bps)
(Dollars in thousands) | | Change in interest rates (bps)
(Dollars in thousands) | | Estimated | | Estimated Increase/(Decrease) In EVE | | Estimated | | Estimated Increase/
(Decrease) In NII |
| | EVE | | Amount | | Percent | | NII | | Amount | | Percent |
| December 31, 2020: | | December 31, 2020: | | | | | | | | | | | | |
| +200 | | $ | 8,091,107 |
| | $ | 805,624 |
| | 11.1 | % | | $ | 1,885,885 |
| | $ | 400,127 |
| | 26.9 | % | +200 | | $ | 9,499,738 | | | $ | (1,724,648) | | | (15.4) | % | | $ | 3,063,350 | | | $ | 691,748 | | | 29.2 | % |
| +100 | | 7,716,066 |
| | 430,583 |
| | 5.9 |
| | 1,683,742 |
| | 197,984 |
| | 13.3 |
| +100 | | 10,558,232 | | | (666,154) | | | (5.9) | | | 2,728,691 | | | 357,089 | | | 15.1 | |
| — | | 7,285,483 |
| | — |
| | — |
| | 1,485,758 |
| | — |
| | — |
| — | | 11,224,386 | | | — | | | — | | | 2,371,602 | | | — | | | — | |
| -100 | | 6,637,588 |
| | (647,895 | ) | | (8.9 | ) | | 1,252,063 |
| | (233,695 | ) | | (15.7 | ) | -100 | | 11,581,718 | | | 357,332 | | | 3.2 | | | 2,309,596 | | | (62,006) | | | (2.6) | |
| -200 | | 5,718,401 |
| | (1,567,082 | ) | | (21.5 | ) | | 1,108,712 |
| | (377,046 | ) | | (25.4 | ) | -200 | | 11,534,332 | | | 309,946 | | | 2.8 | | | 2,306,280 | | | (65,322) | | | (2.8) | |
| | | | | | | | | | | | | | |
| December 31, 2016: (As revised) | | | | | | | | | | | | | |
| December 31, 2019 (as revised): | | December 31, 2019 (as revised): | |
| +200 | | $ | 7,601,404 |
| | $ | 1,129,823 |
| | 17.5 | % | | $ | 1,543,247 |
| | $ | 365,734 |
| | 31.1 | % | +200 | | $ | 7,503,986 | | | $ | (619,463) | | | (7.6) | % | | $ | 2,588,319 | | | $ | 523,423 | | | 25.3 | % |
| +100 | | 7,073,407 |
| | 601,826 |
| | 9.3 |
| | 1,360,356 |
| | 182,843 |
| | 15.5 |
| +100 | | 7,792,507 | | | (330,942) | | | (4.1) | | | 2,326,428 | | | 261,532 | | | 12.7 | |
| — | | 6,471,581 |
| | — |
| | — |
| | 1,177,513 |
| | — |
| | — |
| — | | 8,123,449 | | | — | | | — | | | 2,064,896 | | | — | | | — | |
| -100 | | 5,765,799 |
| | (705,782 | ) | | (10.9 | ) | | 1,075,353 |
| | (102,160 | ) | | (8.7 | ) | -100 | | 8,495,627 | | | 372,178 | | | 4.6 | | | 1,789,625 | | | (275,271) | | | (13.3) | |
| -200 | | 4,860,540 |
| | (1,611,041 | ) | | (24.9 | ) | | 1,039,903 |
| | (137,610 | ) | | (11.7 | ) | -200 | | 8,567,118 | | | 443,669 | | | 5.5 | | | 1,514,354 | | | (550,542) | | | (26.7) | |
Economic Value of Equity
The estimated EVE in the preceding table is based on a combination of valuation methodologies including a discounted cash flow analysis and a multi-path lattice basedlattice-based valuation. Both methodologies use publicly available market interest rates to determine discounting factors on preparedprojected cash flows. The model simulations and calculations are highly assumption-dependent and will change regularly as the composition of earning assets and funding liabilities change (including the impact of changes in the value of interest rate derivatives, if any), as interest rate environments evolve, and as we change our assumptions in response to relevant market conditions, competition or business circumstances. These calculations do not reflect theforecast changes in our balance sheet or changes we may make to reduce our EVE exposure as a part of our overall interest rate risk management strategy.
As with any method of measuring interest rate risk, certain limitations are inherent in the method of analysis presented in the preceding table. We are exposed to yield curve risk, prepayment risk, basis risk and yield spread compression, which cannot be fully modeled and expressed using the above methodology. Accordingly, the results in the preceding table should not be relied upon as a precise indicator of actual results in the event of changing market interest rates. Additionally, the resulting EVE and NII estimates are not intended to represent and should not be construed to represent our estimate of the underlying value of equityEVE or forecast of NII.
Our base case EVE as of December 31, 20172020 increased $3.1 billion from December 31, 20162019, driven by $0.8 billion, driven primarily by the change in ouroverall balance sheet composition. Rising interestgrowth and the significant decrease in market rates also impacted this measure, to a lesser extent. Atsince the first quarter of 2020. For the period ended December 31, 2017,2020, as compared to December 31, 2016, total2019, cash balances and fixed income investments in our AFS and HTM portfolios increased by $10.9 billion and $19.6 billion, respectively, while loan balances increased by $3.2$12.0 billion. Funding for these assets came primarily from growth of $40.2 billion primarily in variable-rate loans. Total fixed income securities also increased by $2.7 billion due to purchases of longer maturity instruments such as pass-through mortgage-backed securities and municipal debt securities combined with run-off of shorter maturity U.S. Treasury securities. Additionally, total deposits, increased by $5.3 billion.
Marginally higher LIBOR/swap rateswhich consists of $25.7 billion and $14.5 billion increase in the 3-noninterest bearing and interest-bearing accounts, respectively. The mix of noninterest bearing and interest-bearing deposits to 24-month tenors continue to drive atotal deposits remained relatively flat yield curveunchanged at December 31, 2020, compared to December 31, 2016. These higher rates, along with changes in balance sheet composition2019.
Rapid deposit growth has exceeded the pace of our loan growth, and as a result, a significant amount of excess deposits not used to fund loan growth have contributed to the growth of our cash and investments balances. Much of the investment portfolio is held in fixed rate MBS and CMOs which generally have a $171 million decreasehigher market value sensitivity than variable rate loans or
cash. Thus, under an upward rate shock scenario, the market value of investments changes more than the market value of deposits resulting in a negative EVE sensitivity in those scenarios.
Due to the +100 bps rate shock scenario.sudden decrease in market rates that occurred in March 2020, EVE sensitivity measures in the -100 and -200 bps rate shock scenarios increased $58 milliondo not represent the full magnitude of those rate shocks because we assume that U.S. Federal Fund rates are floored at zero. As a result, the December 31, 2020 EVE sensitivity of the -100 and $44 million, respectively.-200 bps rate shock scenarios are similar.
The modeling assumption change described above combined with continued balance sheet growth and a lower overall rate environment are the primary contributing factors to the overall change in EVE sensitivity.
12-Month Net Interest Income Simulation
NII sensitivity is measured as the percentage change in projected 12-month net interest income earned in +/-100 and +/-200 basis point interest rate shock scenarios compared to a base scenario where balances and interest rates are held constant over the forecast horizon. At December 31, 2020, NII sensitivity was 15.1 percent in the +100 bps interest rate scenario, compared to 12.7 percent at December 31, 2019. Our estimatedNII sensitivity in the +200 bps interest rate shock scenario was 29.2 percent compared to 25.3 percent at December 31, 2019. NII sensitivity in the -100 bps scenario of negative 2.6 percent was lower at December 31, 2020, compared to a negative 13.3 percent at December 31, 2019. The -200 bps scenario currently indicates a lower percentage change in NII of negative 2.8 percent at December 31, 2020, compared to negative 26.7 percent at December 31, 2019. However, as noted above, the -100 and -200 bps scenarios are not complete rate shocks in this rate environment, since rates are assumed to be floored at zero. The December 31, 2020 NII sensitivity percentages are inclusive of the realized income or expense associated with interest rate swaps that were unwound reflective of the macro hedging process initiated in 2019 to reduce the impact of decreasing rates on NII. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition previously described, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at December 31, 20172020 increased fromcompared to December 31, 20162019 by $308$306.7 million,, primarily driven by growth in the balance sheet that has taken place year-to-date combined with an overall relatively lower rate environment, reflective of the decrease in the Federal Funds Rate in March 2020, compared to last year. Specifically, a large portion of the loan portfolio is indexed to the Prime rate, which decreased 150 bps in March of 2020 due to actions undertaken by the changeFederal Reserve to mitigate a possible economic downturn. The adverse impact of changes in interest rates on NII was partially tempered to a certain degree by continued growth in the loan portfolio, as well as continued balance sheet compositiongrowth as previously noted indescribed.
A majority of our loans are indexed to Prime and LIBOR. In the EVE section above. A larger portion of higher-yielding,positive parallel simulated rate shock scenarios, interest income on assets that are tied to variable rate loans relative to lower-yield fixed income securities resulted in an increase in estimated 12-month NII. As rates rise, the proportionately greater amounts ofindexes, primarily our variable rate loans, are expected to benefit our base 12-month NII projections. In addition,The opposite is true for negative rate shock scenarios.
theThe 12-month NII simulations include repricing assumptions on our interest bearinginterest-bearing deposit products which are appliedwe set at our discretion based on client needs and our overall funding mix. Repricing of interest bearinginterest-bearing deposits impacts estimated interest expense. As noted previously, repricing deposit rates are generally assumed to be less than one-half of
For the amount of simulated changes in short-term market interest rates.
NII sensitivity at December 31, 2017 in the +100 and +200 bps interest rate shock scenarios, increased $15 million and $34 million, respectively, as compared to December 31, 2016. These changes are due primarily to the changing composition of the balance sheet as noted above. Specifically, a relative increase in variable rate loans, coupled with a higher proportion of non-interest bearing deposit balances is expected to result in an increased NII in a rising rate environment.
The simulation model used in the above analysisincorporates embedded rate floors on loans, in our interest rate scenarios,where present, which preventprevents model benchmark rates from moving below zero percent in the down rate scenarios. The embedded rate floors are also a factor in the upincreasing rate scenarios to the extent a simulated increase in rates is needed before floored rates are cleared. In addition, we assume different deposit balance decay rates for each interest rate scenario based on a historical deposit study of our clients. These assumptions may change in future periods based on changes in client behavior and at management's discretion. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our actual sensitivity overall.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders
SVB Financial Group:
Opinions on the Consolidated Financial Statements and Internal Control overOver Financial Reporting
We have audited the accompanying consolidated balance sheets of SVB Financial Group and subsidiaries (the “Company”)Company) as of December 31, 20172020 and 2016, and2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2020, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control-Control – Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020 based on criteria established in Internal Control -– Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Notes 2 and 9 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control overOver Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses for loans and unfunded loan commitments evaluated on a collective basis
As discussed in Notes 2 and 9 of the consolidated financial statements, the Company’s allowance for credit losses (ACL) for loans and unfunded credit commitments were $447.8 million and $120.8 million as of December 31, 2020, respectively. The allowance principally relates to the Company’s loans and unfunded loan commitments evaluated on a collective basis (the collective ALL and the collective AULC, respectively). The collective ALL and the collective AULC include the measure of expected credit losses on a collective (pooled) basis for those loans and unfunded loan commitments that share similar risk characteristics. The Company estimated the collective ALL using a current expected credit losses methodology based on relevant information about historical experience, the current macroeconomic environment, and reasonable and supportable economic forecasts that affect the collectability of the loan balances. The quantitative expected credit losses are the product of multiplying the Company’s estimates of probability of default (PD), loss given default (LGD), and individual loan level exposure at default (EAD) on an undiscounted basis. The Company derives the PD, LGD, and EAD from internal historical default and loss experience adjusted for multiple probability-weighted economic forecast scenarios of macroeconomic assumptions over a reasonable and supportable forecast period of three years. After the reasonable and supportable forecast period, the Company reverts to historical averages using an autoregressive method of mean reversion that trends towards the mean historical loss over the remaining contractual lives, adjusted for prepayments. The Company also applies certain qualitative adjustments to the results of its quantitative model for asset-specific risk characteristics, and current conditions and reasonable and supportable forecasts based on its expectation of the risks that may lead to future loan loss experience different from its historical loan loss experience. These adjustments are based on qualitative factors not reflected in the quantitative model but are expected to impact the estimate of credit losses. In order to capture the unique risks of the loan portfolio within the PD, LGD, EAD model, the Company segments the portfolio into pools and by credit risk rating. The Company estimated the collective AULC using a similar methodology as the collective ALL adjusted by the probability of an unfunded loan commitment being funded. Certain qualitative adjustments to historical loss information are also applied to the collective AULC.
We identified the assessment of the December 31, 2020 collective ALL and collective AULC as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the methods and model used to estimate (1) the PD, LGD, and EAD and their significant assumptions and inputs, and (2) certain qualitative adjustments. Significant assumptions and inputs include the economic forecast scenarios of macroeconomic assumptions and their weightings, the historical observation period, portfolio segmentation, and credit risk ratings. The assessment also included an evaluation of the conceptual soundness and performance of the PD, LGD, and EAD model. Auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the December 31, 2020 collective ALL and collective AULC estimates, including controls over the:
•periodic review and monitoring of the collective ALL and the collective AULC methodology
•identification and determination of significant assumptions used in the PD, LGD, and EAD model
•evaluation of the qualitative adjustments, including significant assumptions used in the measurement of the qualitative adjustments
•determination of credit risk ratings
•analysis of the collective ALL and collective AULC results, trends, and ratios.
We evaluated the Company’s process to develop the December 31, 2020 collective ALL and collective AULC estimates by testing certain sources of data, qualitative factors and assumptions that the Company used, and considered the relevance and reliability of such data, qualitative factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge who assisted in:
•evaluating that the Company’s collective ALL and collective AULC methodology and key assumptions for compliance with U.S. generally accepted accounting principles
•assessing the conceptual soundness and performance of the PD, LGD, and EAD model by inspecting the model documentation to determine whether the model is suitable for the intended use
•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ALL and the collective AULC compared with relevant credit risk factors and consistency with credit trends associated with the Company’s portfolio
•evaluating the historical observation period, focusing on the relevance of the full economic cycle relative to the Company’s current portfolio
•evaluating the approach to incorporate macroeconomic forecast assumptions in the PD, LGD, EAD model with respect to the Company’s business environment and the loan products used across the industry
•evaluating model validation findings and assessing their possible impact, if any
•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business and environment and relevant industry practices
•testing individual credit risk ratings for a selection of loan and unfunded loan commitment borrower relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral, as applicable.
We also assessed the sufficiency of the audit evidence obtained related to the December 31, 2020 collective ALL and collective AULC estimates by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Company's auditor since 1994.
San Francisco, California
February 28, 2018March 1, 2021
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands, except par value and share data) | | 2020 | | 2019 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 17,674,763 | | | $ | 6,781,783 | |
| Available-for-sale securities, at fair value (cost of $30,244,896 and $13,894,348, respectively) | | 30,912,438 | | | 14,014,919 | |
| Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $392 and $0 (fair value of $17,216,871 and $14,115,272, respectively) (1) | | 16,592,153 | | | 13,842,946 | |
| Non-marketable and other equity securities | | 1,802,235 | | | 1,213,829 | |
| Total investment securities | | 49,306,826 | | | 29,071,694 | |
| Loans, amortized cost | | 45,181,488 | | | 33,164,636 | |
| Allowance for credit losses: loans | | (447,765) | | | (304,924) | |
| Net loans | | 44,733,723 | | | 32,859,712 | |
| Premises and equipment, net of accumulated depreciation and amortization | | 175,818 | | | 161,876 | |
| Goodwill | | 142,685 | | | 137,823 | |
| Other intangible assets, net | | 61,435 | | | 49,417 | |
| Lease right-of-use assets | | 209,932 | | | 197,365 | |
| Accrued interest receivable and other assets | | 3,205,825 | | | 1,745,233 | |
| Total assets | | $ | 115,511,007 | | | $ | 71,004,903 | |
| Liabilities and total equity | | | | |
| Liabilities: | | | | |
| Noninterest-bearing demand deposits | | $ | 66,519,240 | | | $ | 40,841,570 | |
| Interest-bearing deposits | | 35,462,567 | | | 20,916,237 | |
| Total deposits | | 101,981,807 | | | 61,757,807 | |
| Short-term borrowings | | 20,553 | | | 17,430 | |
| Lease liabilities | | 259,554 | | | 218,847 | |
| Other liabilities | | 3,971,974 | | | 2,041,752 | |
| Long-term debt | | 843,628 | | | 347,987 | |
| Total liabilities | | 107,077,516 | | | 64,383,823 | |
| Commitments and contingencies (Note 21 and Note 27) | | 0 | | 0 |
| SVBFG stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; 350,000 and 350,000 shares issued and outstanding, respectively | | 340,138 | | | 340,138 | |
| Common stock, $0.001 par value, 150,000,000 shares authorized; 51,888,463 and 51,655,607 shares issued and outstanding, respectively | | 52 | | | 52 | |
| Additional paid-in capital | | 1,585,244 | | | 1,470,071 | |
| Retained earnings | | 5,671,749 | | | 4,575,601 | |
| Accumulated other comprehensive income | | 622,517 | | | 84,445 | |
| Total SVBFG stockholders’ equity | | 8,219,700 | | | 6,470,307 | |
| Noncontrolling interests | | 213,791 | | | 150,773 | |
| Total equity | | 8,433,491 | | | 6,621,080 | |
| Total liabilities and total equity | | $ | 115,511,007 | | | $ | 71,004,903 | |
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands, except par value and share data) | | 2017 | | 2016 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 2,923,075 |
| | $ | 2,545,750 |
|
| Available-for-sale securities, at fair value (cost of $11,131,008 and $12,588,783, respectively) | | 11,120,664 |
| | 12,620,411 |
|
| Held-to-maturity securities, at cost (fair value of $12,548,280 and $8,376,138, respectively) | | 12,663,455 |
| | 8,426,998 |
|
| Non-marketable and other securities | | 651,053 |
| | 622,552 |
|
| Total investment securities | | 24,435,172 |
| | 21,669,961 |
|
| Loans, net of unearned income | | 23,106,316 |
| | 19,899,944 |
|
| Allowance for loan losses | | (255,024 | ) | | (225,366 | ) |
| Net loans | | 22,851,292 |
| | 19,674,578 |
|
| Premises and equipment, net of accumulated depreciation and amortization | | 128,682 |
| | 120,683 |
|
| Accrued interest receivable and other assets | | 876,246 |
| | 672,688 |
|
| Total assets | | $ | 51,214,467 |
| | $ | 44,683,660 |
|
| Liabilities and total equity | | | | |
| Liabilities: | | | | |
| Noninterest-bearing demand deposits | | $ | 36,655,497 |
| | $ | 31,975,457 |
|
| Interest-bearing deposits | | 7,598,578 |
| | 7,004,411 |
|
| Total deposits | | 44,254,075 |
| | 38,979,868 |
|
| Short-term borrowings | | 1,033,730 |
| | 512,668 |
|
| Other liabilities | | 911,755 |
| | 618,383 |
|
| Long-term debt | | 695,492 |
| | 795,704 |
|
| Total liabilities | | 46,895,052 |
| | 40,906,623 |
|
| Commitments and contingencies (Note 19 and Note 25) | |
| |
|
|
| 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; 52,835,188 shares and 52,254,074 shares outstanding, respectively | | 53 |
| | 52 |
|
| Additional paid-in capital | | 1,314,377 |
| | 1,242,741 |
|
| Retained earnings | | 2,866,837 |
| | 2,376,331 |
|
| Accumulated other comprehensive (loss) income | | (1,472 | ) | | 23,430 |
|
| Total SVBFG stockholders’ equity | | 4,179,795 |
| | 3,642,554 |
|
| Noncontrolling interests | | 139,620 |
| | 134,483 |
|
| Total equity | | 4,319,415 |
| | 3,777,037 |
|
| Total liabilities and total equity | | $ | 51,214,467 |
|
| $ | 44,683,660 |
|
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands, except per share amounts) | | 2017 | | 2016 | | 2015 | (Dollars in thousands, except per share amounts) | | 2020 | | 2019 | | 2018 |
| Interest income: | | | | | | | Interest income: | | | | | | |
| Loans | | $ | 1,025,788 |
| | $ | 834,155 |
| | $ | 693,147 |
| Loans | | $ | 1,520,021 | | | $ | 1,599,165 | | | $ | 1,358,480 | |
| Investment securities: | | | | | | | Investment securities: | |
| Taxable | | 412,133 |
| | 346,937 |
| | 344,646 |
| Taxable | | 634,992 | | | 568,851 | | | 541,605 | |
| Non-taxable | | 5,714 |
| | 2,234 |
| | 2,905 |
| Non-taxable | | 61,055 | | | 44,952 | | | 34,616 | |
| Federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | 21,505 |
| | 10,070 |
| | 6,067 |
| Federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | 25,542 | | | 96,440 | | | 35,208 | |
| Total interest income | | 1,465,140 |
| | 1,193,396 |
| | 1,046,765 |
| Total interest income | | 2,241,610 | | | 2,309,408 | | | 1,969,909 | |
| Interest expense: | | | | | | | Interest expense: | | | | | | |
| Deposits | | 8,676 |
| | 5,611 |
| | 5,447 |
| Deposits | | 60,219 | | | 177,672 | | | 29,306 | |
| Borrowings | | 36,095 |
| | 37,262 |
| | 34,893 |
| Borrowings | | 25,107 | | | 35,135 | | | 46,615 | |
| Total interest expense | | 44,771 |
| | 42,873 |
| | 40,340 |
| Total interest expense | | 85,326 | | | 212,807 | | | 75,921 | |
| Net interest income | | 1,420,369 |
| | 1,150,523 |
| | 1,006,425 |
| Net interest income | | 2,156,284 | | | 2,096,601 | | | 1,893,988 | |
| Provision for credit losses (1) | | 92,304 |
| | 106,679 |
| | 95,683 |
| |
| Net interest income after provision for loan losses | | 1,328,065 |
| | 1,043,844 |
| | 910,742 |
| |
| Provision for credit losses | | Provision for credit losses | | 219,510 | | | 106,416 | | | 87,870 | |
| Net interest income after provision for credit losses | | Net interest income after provision for credit losses | | 1,936,774 | | | 1,990,185 | | | 1,806,118 | |
| Noninterest income: | | | | | | | Noninterest income: | | | | | | |
| Gains on investment securities, net | | 64,603 |
| | 51,740 |
| | 89,445 |
| Gains on investment securities, net | | 420,752 | | | 134,670 | | | 88,094 | |
| Gains on equity warrant assets, net (2) | | 54,555 |
| | 37,892 |
| | 70,963 |
| |
| Gains on equity warrant assets, net | | Gains on equity warrant assets, net | | 237,428 | | | 138,078 | | | 89,142 | |
| Client investment fees | | Client investment fees | | 132,200 | | | 182,068 | | | 130,360 | |
| Foreign exchange fees | | 115,760 |
| | 104,183 |
| | 87,007 |
| Foreign exchange fees | | 178,733 | | | 159,262 | | | 138,812 | |
| Credit card fees | | 76,543 |
|
| 68,205 |
|
| 56,657 |
| Credit card fees | | 97,737 | | | 118,719 | | | 94,072 | |
| Deposit service charges | | 58,715 |
| | 52,524 |
| | 46,683 |
| Deposit service charges | | 90,336 | | | 89,200 | | | 76,097 | |
| Client investment fees | | 56,136 |
| | 32,219 |
| | 21,610 |
| |
| Lending related fees | | 43,265 |
| | 33,395 |
| | 32,536 |
| Lending related fees | | 57,533 | | | 49,920 | | | 41,949 | |
| Letters of credit and standby letters of credit fees | | 28,544 |
| | 25,644 |
| | 20,889 |
| Letters of credit and standby letters of credit fees | | 46,659 | | | 42,669 | | | 34,600 | |
| Other (2) | | 59,110 |
| | 50,750 |
| | 47,004 |
| |
| Investment banking revenue | | Investment banking revenue | | 413,985 | | | 195,177 | | | 0 | |
| Commissions | | Commissions | | 66,640 | | | 56,346 | | | 0 | |
| Other | | Other | | 98,145 | | | 55,370 | | | 51,858 | |
| Total noninterest income | | 557,231 |
| | 456,552 |
| | 472,794 |
| Total noninterest income | | 1,840,148 | | | 1,221,479 | | | 744,984 | |
| Noninterest expense: | | | | | | | Noninterest expense: | | | | | | |
| Compensation and benefits | | 606,402 |
| | 514,270 |
| | 473,841 |
| Compensation and benefits | | 1,318,457 | | | 989,734 | | | 726,980 | |
| Professional services | | 121,935 |
| | 94,982 |
| | 82,839 |
| Professional services | | 247,084 | | | 205,479 | | | 158,835 | |
| Premises and equipment | | 71,753 |
| | 65,502 |
| | 51,927 |
| Premises and equipment | | 127,125 | | | 96,770 | | | 77,918 | |
| Net occupancy | | 48,397 |
| | 39,928 |
| | 34,674 |
| Net occupancy | | 100,889 | | | 69,279 | | | 54,753 | |
| Business development and travel | | 41,978 |
| | 40,130 |
| | 39,524 |
| Business development and travel | | 23,724 | | | 68,912 | | | 48,180 | |
| FDIC and state assessments | | 35,069 |
| | 30,285 |
| | 25,455 |
| FDIC and state assessments | | 27,587 | | | 18,509 | | | 34,276 | |
| Correspondent bank fees | | 12,976 |
| | 12,457 |
| | 13,415 |
| |
| Other | | 72,145 |
| | 62,243 |
| | 58,287 |
| Other | | 190,175 | | | 152,579 | | | 87,251 | |
Total noninterest expense (1) | | 1,010,655 |
| | 859,797 |
| | 779,962 |
| | 2,035,041 | | | 1,601,262 | | | 1,188,193 | |
| Income before income tax expense | | 874,641 |
| | 640,599 |
| | 603,574 |
| Income before income tax expense | | 1,741,881 | | | 1,610,402 | | | 1,362,909 | |
Income tax expense (3) | | 355,463 |
| | 250,333 |
| | 228,754 |
| | 447,587 | | | 425,685 | | | 351,561 | |
| Net income before noncontrolling interests | | 519,178 |
| | 390,266 |
| | 374,820 |
| Net income before noncontrolling interests | | 1,294,294 | | | 1,184,717 | | | 1,011,348 | |
| Net income attributable to noncontrolling interests | | (28,672 | ) | | (7,581 | ) | | (30,916 | ) | Net income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | |
| Net income available to common stockholders (3) | | $ | 490,506 |
| | $ | 382,685 |
| | $ | 343,904 |
| |
| Earnings per common share—basic (3) | | $ | 9.33 |
| | $ | 7.37 |
| | $ | 6.70 |
| |
| Earnings per common share—diluted (3) | | 9.20 |
| | 7.31 |
| | 6.62 |
| |
| Preferred stock dividends | | Preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Net income available to common stockholders | | Net income available to common stockholders | | $ | 1,191,217 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Earnings per common share—basic | | Earnings per common share—basic | | $ | 23.05 | | | $ | 21.90 | | | $ | 18.35 | |
| Earnings per common share—diluted | | Earnings per common share—diluted | | 22.87 | | | 21.73 | | | 18.11 | |
| |
(1) | Our consolidated statements of income for the years ended December 31, 2016 and 2015 were modified from prior periods’ 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 separately as a component of noninterest expense. |
| |
(2) | Our consolidated statements of income for the years ended December 31, 2016 and 2015 were modified from prior periods’ 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 net gains on derivative instruments. We removed the line item "gains on derivative instruments, net" and reclassified all other gains on derivative instruments, net to other noninterest income. |
| |
(3) | Included in income tax expense, net income available to common stockholders, earnings per common share-basic and earnings for common share-diluted, for the year ended December 31, 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 the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Net income before noncontrolling interests | | $ | 1,294,294 | | | $ | 1,184,717 | | | $ | 1,011,348 | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Change in foreign currency cumulative translation gains and losses: | | | | | | |
| Foreign currency translation gains (losses) | | 16,467 | | | 3,208 | | | (5,999) | |
| Related tax (expense) benefit | | (4,621) | | | (889) | | | 1,669 | |
| Change in unrealized gains and losses on available-for-sale securities: | | | | | | |
| Unrealized holding gains (losses) | | 606,038 | | | 189,813 | | | (22,348) | |
| Related tax (expense) benefit | | (168,521) | | | (52,697) | | | 6,315 | |
Reclassification adjustment for (gains) losses included in net
income | | (61,165) | | | 3,905 | | | 740 | |
| Related tax expense (benefit) | | 16,953 | | | (1,087) | | | (205) | |
| Reclassification of unrealized gains on equity securities to retained earnings for ASU 2016-01 | | 0 | | | 0 | | | (40,316) | |
| Related tax expense | | 0 | | | 0 | | | 11,145 | |
| Amortization of unrealized holding losses (gains) on securities transferred from available-for-sale to held-to-maturity | | 2,104 | | | (2,158) | | | (4,607) | |
| Related tax (expense) benefit | | (586) | | | 600 | | | 1,277 | |
| Reclassification of stranded tax effect to retained earnings for ASU 2018-02 | | 0 | | | 0 | | | (319) | |
| Change in unrealized gains and losses on cash flow hedges: | | | | | | |
| Unrealized gains (losses) | | 231,920 | | | (8,305) | | | 0 | |
| Related tax (expenses) benefit | | (64,281) | | | 2,306 | | | 0 | |
| Reclassification adjustment for (gains) losses included in net income | | (49,928) | | | 5,358 | | | 0 | |
| Related tax expense (benefit) | | 13,692 | | | (1,489) | | | 0 | |
| Other comprehensive income (loss), net of tax | | 538,072 | | | 138,565 | | | (52,648) | |
| Comprehensive income | | 1,832,366 | | | 1,323,282 | | | 958,700 | |
| Comprehensive income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | |
| Comprehensive income attributable to SVBFG | | $ | 1,746,440 | | | $ | 1,275,421 | | | $ | 921,192 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Net income before noncontrolling interests | | $ | 519,178 |
| | $ | 390,266 |
| | $ | 374,820 |
|
| Other comprehensive (loss) income, net of tax: | | | | | | |
| Change in cumulative translation gains (losses): | | | | | | |
| Foreign currency translation gains (losses) | | 6,355 |
| | (5,245 | ) | | 2,570 |
|
| Related tax (expense) benefit | | (2,587 | ) | | 2,050 |
| | (957 | ) |
| Change in unrealized (losses) gains on available-for-sale securities: | | | | | | |
| Unrealized holding (losses) gains | | (47,161 | ) | | 39,016 |
| | (36,702 | ) |
| Related tax benefit (expense) | | 19,282 |
| | (15,911 | ) | | 14,730 |
|
Reclassification adjustment for losses (gains) included in net income | | 5,189 |
| | (12,195 | ) | | (1,201 | ) |
| Related tax (benefit) expense | | (2,098 | ) | | 4,963 |
| | 481 |
|
Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity | | (6,475 | ) | | (7,786 | ) | | (10,412 | ) |
| Related tax benefit | | 2,593 |
| | 3,134 |
| | 4,191 |
|
| Other comprehensive (loss) income, net of tax | | (24,902 | ) | | 8,026 |
| | (27,300 | ) |
| Comprehensive income | | 494,276 |
| | 398,292 |
| | 347,520 |
|
| Comprehensive income attributable to noncontrolling interests | | (28,672 | ) | | (7,581 | ) | | (30,916 | ) |
| Comprehensive income attributable to SVBFG | | $ | 465,604 |
| | $ | 390,711 |
| | $ | 316,604 |
|
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total SVBFG Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| (Dollars in thousands, except share data) | | Shares | | Amount | | | | | | |
| Balance at December 31, 2014 | | 50,924,925 |
| | $ | 51 |
| | $ | 1,120,350 |
| | $ | 1,649,967 |
| | $ | 42,704 |
| | $ | 2,813,072 |
| | $ | 1,238,662 |
| | $ | 4,051,734 |
|
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | 657,876 |
| | 1 |
| | 18,897 |
| | — |
| | — |
| | 18,898 |
| | — |
| | 18,898 |
|
| Common stock issued under ESOP | | 27,425 |
| | — |
| | 3,512 |
| | — |
| | — |
| | 3,512 |
| | — |
| | 3,512 |
|
| Income tax effect from stock options exercised, vesting of restricted stock and other (1) | | — |
| | — |
| | 16,602 |
| | — |
| | — |
| | 16,602 |
| | — |
| | 16,602 |
|
| Deconsolidation of noncontrolling interest upon adoption of ASU 2015-02 (2) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,069,437 | ) | | (1,069,437 | ) |
| Net income | | — |
| | — |
| | — |
| | 343,904 |
| | — |
| | 343,904 |
| | 30,916 |
| | 374,820 |
|
| Capital calls and distributions, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (65,044 | ) | | (65,044 | ) |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — |
| | — |
| | — |
| | — |
| | (22,692 | ) | | (22,692 | ) | | — |
| | (22,692 | ) |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — |
| | — |
| | — |
| | — |
| | (6,221 | ) | | (6,221 | ) | | — |
| | (6,221 | ) |
| Foreign currency translation adjustments, net of tax | | — |
| | — |
| | — |
| | — |
| | 1,613 |
| | 1,613 |
| | — |
| | 1,613 |
|
| Share-based compensation, net | | — |
| | — |
| | 29,671 |
| | — |
| | — |
| | 29,671 |
| | — |
| | 29,671 |
|
| Other, net | | — |
| | — |
| | — |
| | (225 | ) | | — |
| | (225 | ) | | — |
| | (225 | ) |
| 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 | | 600,683 |
| | — |
| | 21,819 |
| | — |
| | — |
| | 21,819 |
| | — |
| | 21,819 |
|
| 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) | | — |
| | — |
| | (3,640 | ) | | — |
| | — |
| | (3,640 | ) | | — |
| | (3,640 | ) |
| Net income | | — |
| | — |
| | — |
| | 382,685 |
| | — |
| | 382,685 |
| | 7,581 |
| | 390,266 |
|
| Capital calls and distributions, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,195 | ) | | (8,195 | ) |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — |
| | — |
| | — |
| | — |
| | 15,873 |
| | 15,873 |
| | — |
| | 15,873 |
|
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — |
| | — |
| | — |
| | — |
| | (4,652 | ) | | (4,652 | ) | | — |
| | (4,652 | ) |
| Foreign currency translation adjustments, net of tax | | — |
| | — |
| | — |
| | — |
| | (3,195 | ) | | (3,195 | ) | | — |
| | (3,195 | ) |
| Share-based compensation, net | | — |
| | — |
| | 31,202 |
| | — |
| | — |
| | 31,202 |
| | — |
| | 31,202 |
|
| 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 | | 570,276 |
| | 1 |
| | 24,908 |
| | — |
| | — |
| | 24,909 |
| | — |
| | 24,909 |
|
| 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 | | — |
| | — |
| | — |
| | 490,506 |
| | — |
| | 490,506 |
| | 28,672 |
| | 519,178 |
|
| Capital calls and distributions, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (23,535 | ) | | (23,535 | ) |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — |
| | — |
| | — |
| | — |
| | (24,788 | ) | | (24,788 | ) | | — |
| | (24,788 | ) |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — |
| | — |
| | — |
| | — |
| | (3,882 | ) | | (3,882 | ) | | — |
| | (3,882 | ) |
| Foreign currency translation adjustments, net of tax | | — |
| | — |
| | — |
| | — |
| | 3,768 |
| | 3,768 |
| | — |
| | 3,768 |
|
| Share-based compensation, net | | — |
| | — |
| | 44,634 |
| | — |
| | — |
| | 44,634 |
| | — |
| | 44,634 |
|
| 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | Common Stock | | Additional
Paid-in Capital | | Retained Earnings | | Accumulated Other
Comprehensive Income (Loss) | | Total SVBFG
Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| (Dollars in thousands, except share data) | | | Shares | | Amount | | | | | | |
| Balance at December 31, 2017 | | $ | 0 | | | 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 | | — | | | — | | | — | | | — | | | (5,802) | | | — | | | (5,802) | | | — | | | (5,802) | |
| Cumulative adjustment for ASU 2016-01, net of tax | | — | | | — | | | — | | | — | | | 103,766 | | | (29,171) | | | 74,595 | | | — | | | 74,595 | |
| Reclassification of stranded tax effect for ASU 2018-02 | | — | | | — | | | — | | | — | | | 319 | | | (319) | | | 0 | | | — | | | 0 | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 456,845 | | | 1 | | | 15,809 | | | — | | | — | | | 15,810 | | | — | | | 15,810 | |
| Common stock issued under ESOP | | — | | | 9,672 | | | — | | | 2,577 | | | — | | | — | | | 2,577 | | | — | | | 2,577 | |
| Net income | | — | | | — | | | — | | | — | | | 973,840 | | | — | | | 973,840 | | | 37,508 | | | 1,011,348 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (28,494) | | | (28,494) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | (15,498) | | | (15,498) | | | — | | | (15,498) | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | (3,330) | | | (3,330) | | | — | | | (3,330) | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | (4,330) | | | (4,330) | | | — | | | (4,330) | |
| Share-based compensation, net | | — | | | — | | | — | | | 45,675 | | | — | | | — | | | 45,675 | | | — | | | 45,675 | |
| Common stock repurchases | | — | | | (715,207) | | | (1) | | | — | | | (147,122) | | | — | | | (147,123) | | | — | | | (147,123) | |
| Balance at December 31, 2018 | | $ | 0 | | | 52,586,498 | | | $ | 53 | | | $ | 1,378,438 | | | $ | 3,791,838 | | | $ | (54,120) | | | $ | 5,116,209 | | | $ | 148,634 | | | $ | 5,264,843 | |
| Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities (ASU 2017-08) (1) | | — | | | — | | | — | | | — | | | (583) | | | — | | | (583) | | | — | | | (583) | |
| Acquisition of SVB Leerink | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,256 | | | 5,256 | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 586,877 | | | 0 | | | 21,312 | | | — | | | — | | | 21,312 | | | — | | | 21,312 | |
| Common stock issued under ESOP | | — | | | 14,442 | | | — | | | 3,506 | | | — | | | — | | | 3,506 | | | — | | | 3,506 | |
| Issuance of Series A Preferred Stock | | 340,138 | | | — | | | — | | | — | | | — | | | — | | | 340,138 | | | — | | | 340,138 | |
| Net income | | — | | | — | | | — | | | — | | | 1,136,856 | | | — | | | 1,136,856 | | | 47,861 | | | 1,184,717 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (50,978) | | | (50,978) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | 139,934 | | | 139,934 | | | — | | | 139,934 | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | (1,558) | | | (1,558) | | | — | | | (1,558) | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | 2,319 | | | 2,319 | | | — | | | 2,319 | |
| Net change in unrealized gains and losses on cash flow hedges, net of tax | | — | | | — | | | — | | | — | | | — | | | (2,130) | | | (2,130) | | | — | | | (2,130) | |
| Share-based compensation, net | | — | | | — | | | — | | | 66,815 | | | — | | | — | | | 66,815 | | | — | | | 66,815 | |
| Common stock repurchases | | — | | | (1,532,210) | | | (1) | | | — | | | (352,510) | | | — | | | (352,511) | | | — | | | (352,511) | |
| Balance at December 31, 2019 | | $ | 340,138 | | | 51,655,607 | | | $ | 52 | | | $ | 1,470,071 | | | $ | 4,575,601 | | | $ | 84,445 | | | $ | 6,470,307 | | | $ | 150,773 | | | $ | 6,621,080 | |
| Cumulative adjustment for the day one adoption of ASC 326, net of tax (1) | | — | | | — | | | — | | | — | | | (35,049) | | | — | | | (35,049) | | | — | | | (35,049) | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 464,985 | | | 0 | | | 28,699 | | | — | | | — | | | 28,699 | | | — | | | 28,699 | |
| Common stock issued under ESOP | | — | | | 12,094 | | | — | | | 2,447 | | | — | | | — | | | 2,447 | | | — | | | 2,447 | |
| Net income | | — | | | — | | | — | | | — | | | 1,208,368 | | | — | | | 1,208,368 | | | 85,926 | | | 1,294,294 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (22,908) | | | (22,908) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | 393,305 | | | 393,305 | | | — | | | 393,305 | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | 1,518 | | | 1,518 | | | — | | | 1,518 | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | 11,846 | | | 11,846 | | | — | | | 11,846 | |
| Net change in unrealized gains and losses on cash flow hedges, net of tax | | — | | | — | | | — | | | — | | | — | | | 131,403 | | | 131,403 | | | — | | | 131,403 | |
| Share-based compensation, net | | — | | | — | | | — | | | 83,986 | | | — | | | — | | | 83,986 | | | — | | | 83,986 | |
| Common stock repurchases | | — | | | (244,223) | | | 0 | | | — | | | (60,020) | | | — | | | (60,020) | | | — | | | (60,020) | |
| Dividends on preferred stock | | — | | | — | | | — | | | — | | | (17,151) | | | — | | | (17,151) | | | — | | | (17,151) | |
| Other, net | | — | | | — | | | — | | | 41 | | | — | | | — | | | 41 | | | — | | | 41 | |
| Balance at December 31, 2020 | | $ | 340,138 | | | 51,888,463 | | | $ | 52 | | | $ | 1,585,244 | | | $ | 5,671,749 | | | $ | 622,517 | | | $ | 8,219,700 | | | $ | 213,791 | | | $ | 8,433,491 | |
| |
(1) | During the first quarter of 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. See Note 2— "Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details. |
| |
(2) | During the second quarter of 2015 we adopted new accounting guidance related to our consolidated variable interest entities (ASU 2015-02). Amounts prior to January 1, 2015 have not been revised for the adoption of this guidance. See Note 2— "Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details. |
(1)See Note 2- "Summary of Significant Accounting Policies" for additional details.
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | |
| Net income before noncontrolling interests | | $ | 519,178 |
| | $ | 390,266 |
| | $ | 374,820 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Provision for credit losses | | 92,304 |
| | 106,679 |
| | 95,683 |
|
| Change in fair value of equity warrant assets, net of proceeds from exercises | | (11,862 | ) | | (9,251 | ) | | (54,678 | ) |
| Changes in fair values of derivatives, net | | 14,261 |
| | (9,036 | ) | | 1,208 |
|
| Gains on investment securities, net | | (64,603 | ) | | (51,740 | ) | | (89,445 | ) |
| Depreciation and amortization | | 56,123 |
| | 46,819 |
| | 40,008 |
|
| Amortization of premiums and discounts on investment securities, net | | 2,530 |
| | 6,582 |
| | 18,271 |
|
| Amortization of share-based compensation | | 36,900 |
| | 35,494 |
| | 32,239 |
|
| Amortization of deferred loan fees | | (111,738 | ) | | (98,150 | ) | | (89,384 | ) |
| Deferred income tax expense (benefit) | | 25,187 |
| | (4,235 | ) | | (9,133 | ) |
| Excess tax benefit from exercise of stock options and vesting of restricted shares (1) | | (18,014 | ) | | — |
| | — |
|
| Other gains | | (5,124 | ) | | — |
| | (1,287 | ) |
| Changes in other assets and liabilities: | | | | | | |
| Accrued interest receivable and payable, net | | (31,372 | ) | | (3,663 | ) | | (8,397 | ) |
| Accounts receivable and payable, net | | 3,481 |
| | (4,945 | ) | | (24,029 | ) |
| Income tax receivable and payable, net | | 46,168 |
| | 3,672 |
| | (9,857 | ) |
| Accrued compensation | | 31,689 |
| | (15,292 | ) | | 30,293 |
|
| Foreign exchange spot contracts, net | | (20,891 | ) | | 3,093 |
| | (31,159 | ) |
| Other, net | | 15,882 |
| | 41,684 |
| | 64,044 |
|
| Net cash provided by operating activities | | 580,099 |
| | 437,977 |
| | 339,197 |
|
| Cash flows from investing activities: | | | | | | |
| Purchases of available-for-sale securities | | (2,420,741 | ) | | (429,268 | ) | | (4,586,680 | ) |
| Proceeds from sales of available-for-sale securities | | 580,871 |
| | 2,892,460 |
| | 8,054 |
|
| Proceeds from maturities and paydowns of available-for-sale securities | | 3,339,574 |
| | 1,364,398 |
| | 1,704,918 |
|
| Purchases of held-to-maturity securities | | (5,967,223 | ) | | (1,306,010 | ) | | (2,888,805 | ) |
| Proceeds from maturities and paydowns of held-to-maturity securities | | 1,708,001 |
| | 1,656,580 |
| | 1,495,362 |
|
| Purchases of non-marketable and other securities | | (43,994 | ) | | (48,932 | ) | | (39,455 | ) |
| Proceeds from sales and distributions of non-marketable and other securities | | 117,765 |
| | 96,708 |
| | 138,453 |
|
| Net increase in loans | | (3,170,099 | ) | | (3,157,281 | ) | | (2,328,944 | ) |
| Purchases of premises and equipment | | (50,884 | ) | | (53,311 | ) | | (53,918 | ) |
| Proceeds from sale of equity valuation services business | | 3,000 |
| | — |
| | — |
|
| Net proceeds from SVBIF transaction (2) | | — |
| | — |
| | 39,284 |
|
| Effect of deconsolidation due to adoption of ASU 2015-02 | | — |
| | — |
| | 15,995 |
|
| Net cash (used for) provided by investing activities | | (5,903,730 | ) | | 1,015,344 |
| | (6,495,736 | ) |
| Cash flows from financing activities: | | | | | | |
| Net increase (decrease) in deposits | | 5,274,207 |
| | (162,908 | ) | | 4,719,738 |
|
| Net increase (decrease) in short-term borrowings | | 521,062 |
| | (262,232 | ) | | 767,119 |
|
| Principal payments of long-term debt | | (97,781 | ) | | — |
| | — |
|
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | | (23,535 | ) | | (8,195 | ) | | (23,518 | ) |
| Proceeds from issuance of common stock, ESPP and ESOP | | 27,003 |
| | 26,147 |
| | 22,410 |
|
| Tax effect from stock exercises (1) | | — |
| | (3,640 | ) | | 16,602 |
|
Proceeds from issuance of 3.50% Senior Notes
| | — |
| | — |
| | 346,431 |
|
| Net cash provided by (used for) by financing activities | | 5,700,956 |
| | (410,828 | ) | | 5,848,782 |
|
| Net increase (decrease) in cash and cash equivalents | | 377,325 |
| | 1,042,493 |
| | (307,757 | ) |
| Cash and cash equivalents at beginning of period (2) | | 2,545,750 |
| | 1,503,257 |
| | 1,811,014 |
|
| Cash and cash equivalents at end of period | | $ | 2,923,075 |
|
| $ | 2,545,750 |
| | $ | 1,503,257 |
|
| Supplemental disclosures: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | | $ | 45,592 |
| | $ | 42,918 |
| | $ | 35,280 |
|
| Income taxes | | 277,823 |
| | 240,752 |
| | 220,484 |
|
| Noncash items during the period: | | | | | | |
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | | $ | (24,788 | ) | | $ | 15,873 |
| | $ | (22,692 | ) |
| Distributions of stock from investments (3) | | 6,807 |
| | 1,315 |
| | 64,503 |
|
| |
(1) | In 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting on a prospective basis with no change to prior period amounts. See Note 2- "Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" under Part II, Item 8 of this report for additional details. |
| |
(2) | Cash and cash equivalents at December 31, 2014 included $15.0 million recognized in assets held-for-sale in conjunction with the SVBIF sale transaction. On April 13, 2015 we received net proceeds of $39.3 million consisting of the sales price of $48.6 million less $9.3 million of cash and cash equivalents held by SVBIF that were sold.
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(3) | For the year ended December 31, 2015, includes distributions to our noncontrolling interests of $41.5 million.
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| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income before noncontrolling interests | | $ | 1,294,294 | | | $ | 1,184,717 | | | $ | 1,011,348 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Provision for credit losses | | 219,510 | | | 106,416 | | | 87,870 | |
| Changes in fair value of equity warrant assets, net of proceeds from exercises | | (2,347) | | | 2,240 | | | (24,417) | |
| Changes in fair values of derivatives, net | | (48,013) | | | (18,506) | | | (11,043) | |
| Gains on investment securities, net | | (420,752) | | | (134,670) | | | (88,094) | |
| Distributions of earnings from non-marketable and other equity securities | | 85,587 | | | 95,131 | | | 72,015 | |
| Depreciation and amortization | | 100,840 | | | 82,717 | | | 57,906 | |
| Amortization of premiums and discounts on investment securities, net | | 75,178 | | | 15,513 | | | (28) | |
| Amortization of share-based compensation | | 83,986 | | | 66,815 | | | 45,675 | |
| Amortization of deferred loan fees | | (173,975) | | | (155,429) | | | (128,077) | |
| Deferred income tax expense (benefit) | | 6,911 | | | (3,072) | | | (21,061) | |
| Excess tax benefit from exercise of stock options and vesting of restricted shares | | (5,857) | | | (9,588) | | | (17,989) | |
| Losses from the write-off of premises and equipment and right-of-use assets | | 30,170 | | | 5,219 | | | 7,278 | |
| Other losses | | 0 | | | 8,959 | | | 0 | |
| Changes in other assets and liabilities: | | | | | | |
| Accrued interest receivable and payable, net | | (26,205) | | | (24,189) | | | (55,834) | |
| Accounts receivable and payable, net | | 18,765 | | | (17,019) | | | (23,020) | |
| Income tax receivable and payable, net | | 97,607 | | | (11,630) | | | (5,820) | |
| Accrued compensation | | 190,983 | | | (15,253) | | | 56,874 | |
| Foreign exchange spot contracts, net | | (20,790) | | | 59,998 | | | 24,018 | |
| Proceeds from termination of interest rate swaps | | 227,500 | | | 0 | | | 0 | |
| Other, net | | (287,905) | | | (74,240) | | | (54,039) | |
| Net cash provided by operating activities | | 1,445,487 | | | 1,164,129 | | | 933,562 | |
| Cash flows from investing activities: | | | | | | |
| Purchases of available-for-sale securities | | (23,207,791) | | | (9,872,095) | | | (668,264) | |
| Proceeds from sales of available-for-sale securities | | 2,654,212 | | | 2,189,087 | | | 474,482 | |
| Proceeds from maturities and paydowns of available-for-sale securities | | 4,183,888 | | | 1,643,357 | | | 3,436,064 | |
| Purchases of held-to-maturity securities | | (6,778,370) | | | (492,502) | | | (4,726,595) | |
| Proceeds from maturities and paydowns of held-to-maturity securities | | 4,035,952 | | | 2,124,513 | | | 1,891,761 | |
| Purchases of non-marketable and other equity securities | | (201,293) | | | (136,186) | | | (81,574) | |
| Proceeds from sales and distributions of capital of non-marketable and other equity securities | | 148,224 | | | 113,526 | | | 95,025 | |
| Net increase in loans | | (11,926,436) | | | (4,773,775) | | | (5,175,409) | |
| Purchases of premises and equipment | | (87,407) | | | (65,479) | | | (45,865) | |
| Business acquisitions | | (26,700) | | | (102,328) | | | 0 | |
| Net cash used for investing activities | | (31,205,721) | | | (9,371,882) | | | (4,800,375) | |
| Cash flows from financing activities: | | | | | | |
| Net increase in deposits | | 40,224,000 | | | 12,428,907 | | | 5,074,825 | |
| Net increase (decrease) in short-term borrowings | | 3,123 | | | (613,982) | | | (402,318) | |
| Principal payments of long-term debt | | 0 | | | (358,395) | | | 0 | |
| Proceeds from issuance of 3.125% Senior Notes | | 495,024 | | | 0 | | | 0 | |
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | | (22,908) | | | (50,978) | | | (28,494) | |
| Net proceeds from the issuance of preferred stock | | 0 | | | 340,138 | | | 0 | |
| Payment of preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Common stock repurchase | | (60,020) | | | (352,511) | | | (147,123) | |
| Proceeds from issuance of common stock, ESPP and ESOP | | 31,146 | | | 24,818 | | | 18,387 | |
| Net cash provided by financing activities | | 40,653,214 | | | 11,417,997 | | | 4,515,277 | |
| Net increase in cash and cash equivalents | | 10,892,980 | | | 3,210,244 | | | 648,464 | |
| Cash and cash equivalents at beginning of period | | 6,781,783 | | | 3,571,539 | | | 2,923,075 | |
| Cash and cash equivalents at end of period | | $ | 17,674,763 | | | $ | 6,781,783 | | | $ | 3,571,539 | |
| Supplemental disclosures: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | | $ | 83,746 | | | $ | 217,961 | | | $ | 75,601 | |
| Income taxes | | 299,175 | | | 422,346 | | | 376,425 | |
| Noncash items during the period: | | | | | | |
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | | $ | 393,305 | | | $ | 139,934 | | | $ | (15,498) | |
| Distributions of stock from investments | | 11,913 | | | 8,917 | | | 5,277 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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1. | Nature of Business1.Nature of Business |
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 diverse set 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 entity, SVB Financial Group (not including subsidiaries).
We offer commercial banking products and services through our principal subsidiary, the Bank, which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers asset management, private wealth management and other investment services. We alsoIn addition, through SVB Financial's other subsidiaries and divisions, we offer investment banking and non-banking products and services, such as funds management private equity/venture capital investment through our other subsidiaries and divisions.M&A advisory services. We primarily focus on serving corporate clients in the following niches:industries: technology, life science/healthcare, private equity/venture capital and premium wine. Our corporate clients range widely in terms of size and stage of maturity. Additionally, we focus on cultivating strong relationships with firms within the venture capital and private equity community worldwide, many of which are also our clients and may invest in our corporate clients.
Headquartered in Santa Clara, California, we operate in centers of innovation in the United States and around the world.
For reporting purposes, SVB Financial Group has three4 operating segments for which we report financial information in this report: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Capital. Financial information, resultsLeerink.
2. Summary of operations and a description of the services provided by our operating segments are set forth in Note 22—“Segment Reporting” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.Significant Accounting Policies
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2. | Summary of Significant Accounting Policies
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Use of Estimates and Assumptions
The preparation of 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 itemsItems that are subject to such estimates includeinclude: 1) measurements of fair value, which include the valuation of non-marketable and other equity securities and the valuation of equity warrant assets, 2) income taxes, and 3) the adequacy of the allowance for loancredit losses for loans and the allowance for credit losses for unfunded credit commitments and the recognition and measurement of income tax assets and liabilities.commitments. The following discussion provides additional background on ourof significant accounting policies.policies includes further details regarding these estimates.
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.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 and, 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) the power to direct the activities that most significantly
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
impact the VIEs economic performance, and (b) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash balances due from banks, interest-earning deposits, Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities. For the consolidated statements of cash flows, we consider cash equivalents to be investments that are readily convertible to known amounts of cash, so near to their maturity that they present an insignificant risk of change in fair value due to changes in market interest rates, and purchased in conjunction with our cash management activities.
Investment Securities
Available-for-Sale Securities and the Allowance for Credit Losses on Available-for-Sale Securities
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification and meeting our asset/liability management objectives. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of SVBFG's stockholders' equity, until realized.
We analyze available-for-sale securities for other-than-temporary impairment related to credit losses each quarter. Market valuations represent the current fair value of a security at a specified point in time and incorporates the risk of timing of interest due and the return of principal over the contractual life of each security. Gains and losses on securities are realized when there is a sale of the security prior to maturity. A credit downgrade representsimpairment is recognized through a valuation allowance against the security with an increased leveloffset through earnings; the allowance is limited to the amount that fair value, calculated as the present value of expected future cash flow discounted at the security’s effective interest rate, is less than the amortized cost basis. We separate the amount of the impairment related to credit losses, if any, and the amount due to all other factors. The credit loss component is recognized in earnings and recorded as an allowance for credit losses for AFS securities.
We consider numerous factors in determining whether a credit loss exists and the period over which the debt security is expected to recover. The following list is not meant to be all inclusive. All of the following factors are considered:
•The length of time and the extent to which the fair value has been less than the amortized cost basis (severity and duration);
•Adverse conditions specifically related to the security, an industry or geographic area; for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. Examples of those changes include any of the following:
◦Changes in technology;
◦The discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security; and
◦Changes in the quality of the credit enhancement.
•The historical and implied volatility of the fair value of the security;
•The payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
•Failure of the issuer of the security to make scheduled interest or principal payments;
•Any changes to the rating of the security by a rating agency; and
•Recoveries or additional declines in fair value after the balance sheet date.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, we use estimates of future principal prepayments, provided by third-party market-data vendors, in addition to actual principal prepayment experience to calculate the constant effective yield necessary to apply the effective interest method in the amortization of purchase discounts or premiums on mortgage-backed securities and fixed rate collateralized mortgage obligations. The accretion and amortization of discounts and premiums, respectively, are included in interest income over the contractual terms of the underlying securities replicating the effective interest method.
Held-to-Maturity Securities and the Allowance for Credit Losses on Held-to-Maturity Securities
Debt securities purchased with the positive intent and ability to hold to its maturity are classified as held-to-maturity securities and are recorded at amortized cost, net of any allowance for credit losses.
Effective January 1, 2020, we measure expected credit losses ("ECL") on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the exception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of other-than-temporary impairment,credit loss to be zero and, therefore, we do not record an ECL. Our municipal bond portfolio primarily consists of highly rated bonds and currently carry ratings no lower than Aa2. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for current conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year. We do not estimate ECL on accrued interest receivable ("AIR") from held-to-maturity securities as AIR is reversed or written off when the full collection of the AIR related to a partsecurity becomes doubtful. AIR from held-to-maturity securities totaled $55.0 million at December 31, 2020 and $45.2 million at December 31, 2019 and is excluded from the amortized cost disclosures within our HTM security disclosures in Note 8—“Investment Securities” as it is included and reported separately within "Accrued interest receivable and other assets" in our consolidated balance sheets.
Expected credit loss on municipal bonds that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of our considerationthe expected future cash flows and the recorded amortized cost basis of recording an other-than-temporary impairmentthe security.
Prior to the adoption of CECL, we will assess the issuer's ability to service the debt and to repay the principal at contractual maturity.
We applyapplied the other-than-temporary impairment standards of ASC 320, Investments-DebtInvestment-Debt and Equity Securities,. for our held-to-maturity securities. For our debt securities,periods prior to January 1, 2020, we have the intent and ability to hold these securities until we recover our cost less any credit-related loss. We separateseparated the amount of the other-than-temporary impairment, if any, into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security's amortized cost basis and the present value of expected future cash flows discounted at the security's effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
We consider numerous factors in determining whether a credit loss exists and the period over which the debt security is expected to recover. The following list is not meant to be all inclusive. All of the following factors are considered:
The length of time and the extent to which the fair value has been less than the amortized cost basis (severity and duration);
Adverse conditions specifically related to the security, an industry, or geographic area; for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. Examples of those changes include any of the following:
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◦ | The discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security; and |
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◦ | Changes in the quality of the credit enhancement. |
The historical and implied volatility of the fair value of the security;
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
Failure of the issuer of the security to make scheduled interest or principal payments;
Any changes to the rating of the security by a rating agency; and
Recoveries or additional declines in fair value after the balance sheet date.
In accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, we use estimates of future principal prepayments, provided by third-party market-data vendors, in addition to actual principal prepayment experience to calculate the constant effective yield necessary to apply the effective interest method in the amortization of purchase discounts or premiums on mortgage-backed securities and fixed rate collateralized mortgage obligations (“CMO”). The accretion and amortization of discounts and premiums, respectively, are included in interest income over the contractual terms of the underlying securities replicating the effective interest method.
Held-to-Maturity Securities
Debt securities purchased in which we have the positive intent and ability to hold to its maturity are classified as held-to-maturity securities and are recorded at amortized cost.
Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The net unrealized gains, net of tax, are retained in other comprehensive income, and the carrying value of the held-to-maturity securities are amortized over the life of the securities in a manner consistent with the amortization of a premium or discount. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity.
Non-Marketable and Other Equity Securities
Non-marketable and other equity securities include investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China ("SPD-SVB")),SPD-SVB, debt funds, private and public portfolio companies, including public equity securities held as a result of equity warrant assets exercised, and investments in qualified affordable housing projects. A majority of these investments are managed through our SVB Capital funds business in funds of funds and direct venture funds. Our accounting for investments in non-marketable and other equity securities depends on several factors, including the level of ownership, power to control and the legal structure of the subsidiary making the investment. As further described below, we base our accounting for such securities on: (i) fair value accounting, (ii) equity method accounting,measurement alternative for other investments without a readily determinable fair value, (iii) costequity method accounting and (iv) the proportional amortization method which is used only for qualified affordable housing projects.
Fair Value Accounting
Our managed funds are investment companies under the AICPA Audit and Accounting Guide for Investment Companies (codified in ASC 946) and accordingly, these funds report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as investment gains or losses in our consolidated statements of income. Our non-marketable and other equity securities recorded pursuant to fair value accounting consist of our investments through the following funds:
Fundsour managed funds of funds, which make investments in venture capital and private equity funds,funds. A summary of our
Direct venture funds, which make equity investments in privately held companies.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of our ownership interests in the investments held under fair value accounting as of December 31, 20172020 is presented in the following table:
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| Limited partnership | | Company Direct and Indirect Ownership in Limited Partnership |
| Managed funds of funds | | |
| Strategic Investors Fund, LP | | 12.6 | % |
| Capital Preferred Return Fund, LP | | 20.0 |
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| Growth Partners, LP | | 33.0 |
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Managed direct venture funds | | |
CP I, LP | | 10.7 |
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The general partner interests of these funds are controlled, and in some cases, owned by SVB Financial. The limited partners of these funds do not have substantive participating or kick-out rights. Therefore, these funds are consolidated and any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in our consolidated net income.
Under fair value accounting, investments are carried at their estimated fair value based on financial information obtained as the general partner of the fund or obtained from the funds' respective general partner. For direct private company investments, valuations are based upon consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. ForFor direct equity investments in public companies, valuations are based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Sales restriction discounts generally range from ten percent10 to twenty percent20 depending on the duration of the sale restrictions which typically range from three to six months. The valuation of non-marketable securities in shares of private company capital stock and the valuation of other securities in shares of public company stock with certain sales restrictions is subject to significant judgment. The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material.
For our fund investments, we utilize the net asset value as obtained from the general partners of the fund investments as the funds do not have a readily determinable fair value. The general partners of our fund investments prepare their financial statements using guidance consistent with fair value accounting. We account for differences between our measurement date and the date of the fund investment's net asset value by using the most recent available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements. We adjust the value of our investments for any contributions paid, distributions received from the investment and known significant fund transactions or market events about which we are aware through information provided by the fund managers or from publicly available transaction data during the reporting period.
Gains or losses resulting from changes in the estimated fair value of the investments and from distributions received are recorded as gains on investment securities, net, a component of noninterest income. The portion of any investment gains or losses attributable to the limited partners is reflected as net income attributable to noncontrolling interests and adjusts our net income to reflect its percentage ownership.
Other Investments without a Readily Determinable Fair Value
Our direct investments in private companies do not have a readily determinable fair value. We measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. Such changes are recognized through earnings. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Allowance for Unfunded Credit Commitments
Allowance for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit. The increase of $53.1 million was due primarily to the day one impact of the adoption of CECL of $22.8 million as well as an $30.2 million increase for the year ended December 31, 2020, driven primarily by growth in unfunded credit commitments of $7.5 billion.
Net Deferred Tax Liabilities
Net deferred tax liabilities increased to$173.0 million due to an increase in unrealized gains recorded to accumulated other comprehensive income from our available-for-sale securities and the termination of our interest rate swap cash flow
hedge contracts, as discussed in the "Derivatives" section above, as well as gains from conversion of convertible debt options, partially offset by an increase in allowance for credit losses for loans.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $137.1 million was reflective primarily of a $68.2 million increase in investment securities payable due to unsettled purchases of fixed income investment securities and a $41.3 million increase in income tax payable.
Noncontrolling Interests
Noncontrolling interests totaled $213.8 million and $150.8 million at December 31, 2020 and 2019, respectively. The increase was due to net income attributable to noncontrolling interests of $85.9 million, partially offset by net capital distributions of $22.9 million primarily to investors in our managed funds of funds for the year ended December 31, 2020. For more information, refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Capital Resources
We maintain an adequate capital base to support anticipated asset growth, operating needs, and credit and other business risks, and to provide for SVB Financial and the Bank to be in compliance with applicable regulatory capital guidelines, including the joint agency rules implementing the "Basel III" capital rules (the "Capital Rules"). Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of our capital stock or other securities. Under the oversight of the Finance Committee of our Board of Directors, management engages in regular capital planning processes in an effort to optimize the use of the capital available to us and to appropriately plan for our future capital needs. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. In addition, we conduct capital stress tests as part of our annual capital planning process. The capital stress tests allow us to assess the impact of adverse changes in the economy and interest rates on our capital adequacy position.
Common Stock
On November 13, 2018, the Company announced a program to purchase up to $500 million of our outstanding common stock (the "Stock Repurchase Program"). The program completed on July 1, 2019, after we repurchased and retired 2.2 million shares of our outstanding common stock totaling $499.6 million.
On October 24, 2019, the Company’s Board of Directors authorized a new stock repurchase program that enabled the Company to repurchase up to $350 million of its outstanding common stock. Under the program, we purchased and retired 244,223 shares of our outstanding common stock totaling $60.0 million. This program expired on October 29, 2020.
Preferred Stock
On December 9, 2019, the Company issued depositary shares each representing a 1/40th ownership interest in 350,000 shares of Series A Preferred Stock with $0.001 par value and liquidation preference of $1,000 per share, or $25 per depositary share. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or other obligation of SVB Financial Group. Dividends are approved by the Board of Directors and, if declared, are payable quarterly, in arrears, at a rate per annum equal to 5.25 percent.
As of December 31, 2020, there were 350,000 shares issued and outstanding of Series A Preferred Stock, which had a carrying value of $340.1 million and liquidation preference of $350 million. For the year ended December 31, 2020, the Company's Board of Directors declared and SVB Financial distributed quarterly cash dividends totaling $17.2 million to Series A Preferred Stock holders.
On February 2, 2021, the Company issued Series B Preferred Stock. Refer to Note 28—“Subsequent Events” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional information.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $8.2 billion at December 31, 2020, an increase of $1.7 billion, or 27.0 percent compared to $6.5 billion at December 31, 2019. This increase was primarily the result of net income of $1.2 billion in 2020, an increase in accumulated other comprehensive income reflective primarily of a $544.9 million ($393.3 million net of tax) increase in the fair value of our AFS securities portfolio driven by decreases in period-end market interest rates, and $182.0 million ($131.4 million net of tax) of remaining unrealized gains on cash flow hedge.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Capital Ratios
Regulatory capital ratios for SVB Financial and the Bank exceeded minimum federal regulatory guidelines under the current Capital Rules as well as for a well-capitalized bank holding company and insured depository institution, respectively, as of December 31, 2020, 2019 and 2018. See Note 23—“Regulatory Matters” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further information. Capital ratios for SVB Financial and the Bank, compared to the minimum capital ratios are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Required Minimum (1) | | Well Capitalized Minimum |
| | 2020 | | 2019 | | 2018 | | |
| SVB Financial: | | | | | | | | | | |
| CET 1 risk-based capital ratio (2) (3) | | 11.04 | % | | 12.58 | % | | 13.41 | % | | 7.0 | % | | N/A |
| Tier 1 risk-based capital ratio (3) | | 11.89 | | | 13.43 | | | 13.58 | | | 8.5 | | | 6.0 | |
| Total risk-based capital ratio (3) | | 12.64 | | | 14.23 | | | 14.45 | | | 10.5 | | | 10.0 | |
| Tier 1 leverage ratio (2) (3) | | 7.45 | | | 9.06 | | | 9.06 | | | 4.0 | | N/A |
| Tangible common equity to tangible assets ratio (4)(5) | | 6.66 | | | 8.39 | | | 8.99 | | | N/A | | N/A |
| Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.87 | | | 12.76 | | | 13.28 | | | N/A | | N/A |
| Bank: | | | | | | | | | | |
| CET 1 risk-based capital ratio (3) | | 10.70 | % | | 11.12 | % | | 12.41 | % | | 7.0 | % | | 6.5 | % |
| Tier 1 risk-based capital ratio (3) | | 10.70 | | | 11.12 | | | 12.41 | | | 8.5 | | | 8.0 | |
| Total risk-based capital ratio (3) | | 11.49 | | | 11.96 | | | 13.32 | | | 10.5 | | | 10.0 | |
| Tier 1 leverage ratio (3) | | 6.43 | | | 7.30 | | | 8.10 | | | 4.0 | | | 5.0 | |
| Tangible common equity to tangible assets ratio (4)(5) | | 6.24 | | | 7.24 | | | 8.13 | | | N/A | | N/A |
| Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.58 | | | 11.31 | | | 12.28 | | | N/A | | N/A |
(1)Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital conservation buffer under the Capital Rules.
(2)"Well-Capitalized Minimum" CET 1 risk-based capital and Tier 1 leverage ratios are not formally defined under applicable banking regulations for bank holding companies.
(3)Capital ratios include regulatory capital phase-in of the allowance for credit losses under the 2020 CECL Transition Rule for periods beginning December 31, 2020.
(4)See below for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.
(5)The FRB has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio, however, we believe these ratios provide meaningful supplemental information regarding our capital levels and are therefore provided above.
Risk-based capital ratios (CET 1, tier 1, total risk-based capital, and tier 1 leverage) for SVB Financial decreased as of December 31, 2020, compared to the same ratios as of December 31, 2019, primarily as a result of a proportionally higher increase in our risk-weighted assets relative to the increase in capital during 2020. The increase in risk-weighted assets was driven primarily by the increases in our loan and fixed income portfolios during 2020. The increase in average assets was driven by increases in fixed income investments and loan portfolios, as well as cash and cash equivalents reflective of strong deposit growth. The increase in capital was reflective primarily of net income of $1.2 billion.
Risk-based capital ratios (CET 1, tier 1, total risk-based capital, and tier 1 leverage) for Silicon Valley Bank (the "Bank") decreased as of December 31, 2020, compared to the same ratios as of December 31, 2019. The decreases were a result of the proportionally higher increase in our risk-weighted assets and average assets relative to the increase in capital during 2020. The increase in risk-weighted assets and average assets were driven by increases in our loan and fixed income
portfolios, as well as cash and cash equivalents 2020 reflective of strong deposit growth. The increases in capital includes for Silicon valley bank was driven by net income as well as a $700 million downstream capital infusion from our bank holding company.
Regulatory Capital Phase-In under the 2020 CECL Transition Rule
In March 2020, the federal banking agencies issued the 2020 CECL Transition Rule, which provides transitional relief to banking organizations with respect to the impact of CECL on regulatory capital. Under the rule, banking organizations that adopt CECL during the 2020 calendar year, such as SVB Financial and the Bank, may delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year period to phase out the aggregate capital benefit provided during the initial two-year delay. The rule prescribes a methodology for estimating the impact of differences in credit loss allowances reflected under CECL versus under the incurred loss methodology during the five-year transition period. We have elected to use the five-year transition option under the 2020 CECL Transition Rule.
Capital Simplification Rules
In July 2019, the federal banking agencies adopted final rules intended to simplify compliance with capital rules for non-advanced approaches banking organizations (the “Capital Simplification Rules”), such as SVB Financial and the Bank. The Capital Simplification Rules took effect for SVB Financial as of January 1, 2020 and simplify the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions and minority interests for banking organizations.
All our reported capital ratios remain above the levels considered to be "well capitalized" under applicable banking regulations.
Non-GAAP Tangible Common Equity Methodto Tangible Assets and Non-GAAP Tangible Common Equity to Risk-weighted Assets
The tangible common equity, or tangible book value, to tangible assets ratio and the tangible common equity to risk-weighted assets ratios are not required by GAAP or applicable bank regulatory requirements. However, we believe these ratios provide meaningful supplemental information regarding our capital levels. Our management uses, and believes that investors benefit from referring to, these ratios in evaluating the adequacy of the Company’s capital levels; however, this financial measure should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. These ratios are calculated by dividing total SVBFG stockholder’s equity, method non-marketableby total period-end assets and risk-weighted assets, after reducing both amounts by acquired intangibles, if any. The manner in which this ratio is calculated varies among companies. Accordingly, our ratio is not necessarily comparable to similar measures of other companies. The following table provides a reconciliation of non-GAAP financial measures with financial measures defined by GAAP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP tangible common equity and tangible assets
(Dollars in thousands, except ratios) | | SVB Financial |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| GAAP SVBFG stockholders’ equity | | $ | 8,219,700 | | | $ | 6,470,307 | | | $ | 5,116,209 | | | $ | 4,179,795 | | | $ | 3,642,554 | |
| Less: preferred stock | | 340,138 | | | 340,138 | | | — | | | — | | | — | |
| Less: intangible assets | | 204,120 | | | 187,240 | | | — | | | — | | | — | |
| Tangible common equity | | $ | 7,675,442 | | | $ | 5,942,929 | | | $ | 5,116,209 | | | $ | 4,179,795 | | | $ | 3,642,554 | |
| GAAP total assets | | $ | 115,511,007 | | | $ | 71,004,903 | | | $ | 56,927,979 | | | $ | 51,214,467 | | | $ | 44,683,660 | |
| Less: intangible assets | | 204,120 | | | 187,240 | | | — | | | — | | | — | |
| Tangible assets | | $ | 115,306,887 | | | $ | 70,817,663 | | | $ | 56,927,979 | | | $ | 51,214,467 | | | $ | 44,683,660 | |
| Risk-weighted assets | | $ | 64,680,666 | | | $ | 46,577,485 | | | $ | 38,527,853 | | | $ | 32,736,959 | | | $ | 28,248,750 | |
| Non-GAAP tangible common equity to tangible assets | | 6.66 | % | | 8.39 | % | | 8.99 | % | | 8.16 | % | | 8.15 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.87 | | | 12.76 | | | 13.28 | | | 12.77 | | | 12.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP tangible common equity and tangible assets
(Dollars in thousands, except ratios) | | Bank |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| Tangible common equity | | $ | 7,068,964 | | | $ | 5,034,095 | | | $ | 4,554,814 | | | $ | 3,762,542 | | | $ | 3,423,427 | |
| Tangible assets | | $ | 113,303,370 | | | $ | 69,563,817 | | | $ | 56,047,134 | | | $ | 50,383,774 | | | $ | 44,059,340 | |
| Risk-weighted assets | | $ | 61,023,462 | | | $ | 44,502,150 | | | $ | 37,104,080 | | | $ | 31,403,489 | | | $ | 26,856,850 | |
| Non-GAAP tangible common equity to tangible assets | | 6.24 | % | | 7.24 | % | | 8.13 | % | | 7.47 | % | | 7.77 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.58 | | | 11.31 | | | 12.28 | | | 11.98 | | | 12.75 | |
SVB Financial's and the Bank's tangible common equity to tangible assets and SVB Financial's risk-weighted assets ratios decreased due to the proportionally higher increases in tangible and risk-weighted assets relative to tangible common equity. The increase in risk-tangible and risk-weighted assets were driven by robust asset growth during 2020 driven by increases in fixed income and loan portfolios. Increased capital was reflective primarily of net income.
The increase in the Bank's tangible common equity to tangible assets ratio was driven by the increase in capital due to the large unrealized gains from the available for sale and securities consistand unrealized gains on the cash flow hedges during 2020. See "SVBFG Stockholders’ Equity" above for further details on changes to the individual components of our equity balance.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. The actual liquidity needs and the credit risk that we have experienced have historically been lower than the contractual amount of these commitments because a significant portion of these commitments expire without being drawn upon. Refer to the discussion of our off-balance sheet arrangements in Note 21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
The following table summarizes our unfunded commercial commitments as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitments Expiring per Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Commercial commitments: | | | | | | | | | | |
| Loan commitments available for funding | | $ | 28,975,133 | | | $ | 21,879,793 | | | $ | 5,258,406 | | | $ | 1,555,776 | | | $ | 281,158 | |
| Standby letters of credit | | 3,002,752 | | | 2,916,623 | | | 65,079 | | | 9,742 | | | 11,308 | |
| Commercial letters of credit | | 4,366 | | | 4,366 | | | — | | | — | | | — | |
| Total unfunded credit commitments | | $ | 31,982,251 | | | $ | 24,800,782 | | | $ | 5,323,485 | | | $ | 1,565,518 | | | $ | 292,466 | |
The following table summarizes our contractual obligations to make future payments as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| SVBFG contractual obligations: | | | | | | | | | | |
| Deposits (1) (2) | | $ | 101,981,807 | | | $ | 101,981,807 | | | $ | — | | | $ | — | | | $ | — | |
| Borrowings (2) | | 864,181 | | | 20,553 | | | — | | | 348,348 | | | 495,280 | |
| Non-cancelable operating leases | | 276,924 | | | 51,547 | | | 97,037 | | | 74,498 | | | 53,842 | |
| Commitments to qualified affordable housing projects | | 370,208 | | | 167,026 | | | 170,552 | | | 13,977 | | | 18,653 | |
| Other obligations | | 2,258 | | | 1,962 | | | 296 | | | — | | | — | |
| Total obligations attributable to SVBFG | | $ | 103,495,378 | | | $ | 102,222,895 | | | $ | 267,885 | | | $ | 436,823 | | | $ | 567,775 | |
(1)Includes time deposits and deposits with no defined maturity, such as noninterest-bearing demand, interest-bearing checking, savings, money market and sweep accounts.
(2)Amounts exclude contractual interest.
Excluded from the tables above are unfunded commitment obligations of $22.1 million to our managed funds of funds and other fund investments for which neither the payment, timing, nor eventual obligation is certain. Subject to applicable regulatory requirements, including the Volcker Rule (see "Business - Supervision and Regulation" under Part I, Item 1 of this report), we make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately-held companies. Commitments to invest in these funds are generally made for a 10-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years; however in certain cases, the funds may not call 100% of committed capital over the life of the fund. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies debtoperate. Additionally, our consolidated managed funds of funds have $4.3 million of remaining unfunded commitments to venture capital and joint ventures. Ourprivate equity methodfunds. See Note 8—“Investment Securities" of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further disclosure related to non-marketable and other equity securities. Additional discussion of our off-balance sheet arrangements for these fund investments is included in Note 21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Liquidity
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations, including, as necessary, paying creditors, meeting depositors’ needs, accommodating loan demand and growth, funding investments, repurchasing securities and other operating or capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Our Asset/Liability Committee (“ALCO”), which is a management committee, provides oversight to the liquidity management process and recommends policy guidelines for the approval of the Finance Committee of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Additionally, we routinely conduct liquidity stress testing as part of our liquidity management practices.
Our deposit base is, and historically has been, our primary source of liquidity. Our deposit levels and cost of deposits may fluctuate from time to time due to a variety of factors, including market conditions, prevailing interest rates, changes in client deposit behaviors, availability of insurance protection, and our offering of deposit products. At December 31, 2020, our period-end total deposit balances increased to $102.0 billion, compared to $61.8 billion at December 31, 2019.
Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, short-term investment securities maturing within one year, AFS securities eligible and available for financing or pledging purposes with a maturity in excess of one year and anticipated near-term cash flows from investments.
We have certain facilities in place to enable us to access short-term borrowings on a secured and unsecured basis. Our secured facilities include collateral pledged to the FHLB of San Francisco and the discount window at the FRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of December 31, 2020, collateral pledged to the FHLB of San Francisco was comprised primarily of fixed income investment securities and loans and had a carrying value of $6.8 billion, of which $5.8 billion was available to support additional borrowings. As of December 31, 2020, collateral pledged to the discount window at the FRB was comprised of fixed income investment securities and had a carrying value of $0.9 billion, all of which was unused and available to support additional borrowings. Our total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.9 billion at December 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $4.0 billion at December 31, 2020.
In connection with our participation in the PPP under the CARES Act as discussed, we considered participating in the Federal Reserve’s Paycheck Protection Program Lending Facility ("PPPLF"). The PPPLF was established to allow participating institutions to facilitate lending under the PPP and extends credit to eligible PPP loan originators on a non-recourse basis, taking PPP loans as collateral at face value. Ultimately, we were able to extend credit to PPP borrowers without relying on the PPPLF. Additionally, interim final capital rules issued by federal bank regulatory agencies have neutralized the regulatory capital effects of participating in the PPP, in that loans outstanding are assessed a zero percent risk weight for regulatory capital purposes.
On a stand-alone basis, SVB Financial’s primary liquidity channels include dividends from the Bank, its portfolio of liquid assets, and its ability to raise debt and capital.The ability of the Bank to pay dividends is subject to certain regulations described in “Business—Supervision and Regulation—Restrictions on Dividends” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for 2020, 2019 and 2018, respectively: (For further details, see our Consolidated Statements of Cash Flows under "Consolidated Financial Statements and Supplementary Data" under Part II, Item 8 of this report.)
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Average cash and cash equivalents | | $ | 13,273,237 | | | $ | 6,524,342 | | | $ | 3,301,783 | |
| Percentage of total average assets | | 15.5 | % | | 10.3 | % | | 6.0 | % |
| Net cash provided by operating activities | | $ | 1,445,487 | | | $ | 1,164,129 | | | $ | 933,562 | |
| Net cash used for investing activities | | (31,205,721) | | | (9,371,882) | | | (4,800,375) | |
| Net cash provided by financing activities | | 40,653,214 | | | 11,417,997 | | | 4,515,277 | |
| Net increase in cash and cash equivalents | | $ | 10,892,980 | | | $ | 3,210,244 | | | $ | 648,464 | |
Average cash and cash equivalents increased to $13.3 billion in 2020, compared to $6.5 billion for 2019. Average deposits increased $20.0 billion which enabled us to grow our average loan portfolio by $7.3 billion in 2020.
2020
Cash provided by operating activities of $1.4 billion in 2020 included net income before noncontrolling interests of $1.3 billion and $200 million from changes in other assets and liabilities, offset by $49 million from changes from adjustments to reconcile to net income to net cash.
Cash used for investing activities of $31.2 billion in 2020 included $19.1 billion of net outflows from our fixed income securities portfolio due to $30.0 billion of purchases, offset by fixed income inflows of $10.9 billion in portfolio cash flows from sales, maturities and paydowns, and $11.9 billion of net outflows from funded loans.
Cash provided by financing activities of $40.7 billion in 2020 was driven primarily by the net increase in deposits of $40.2 billion and $0.5 billion from the issuance of our 3.125% Senior Notes.
Cash and cash equivalents at December 31, 2020 were $17.7 billion, compared to $6.8 billion at December 31, 2019.
2019
Cash provided by operating activities of $1.2 billion in 2019 included net income before noncontrolling interests of $1.2 billion. These net inflows were offset by $62 million of adjustments to reconcile net income to net cash and $82 million from changes in other assets and liabilities.
Cash used for investing activities of $9.4 billion in 2019 included $4.8 billion of net outflows from the net increase in loans funded and $4.4 billion of net outflows from our fixed income securities portfolio due to $10.4 billion of purchases, offset by fixed income inflows of $6.0 billion of portfolio cash flows from sales, maturities and paydowns.
Cash provided by financing activities of $11.4 billion in 2019 was driven primarily by the net increase in deposits of $12.4 billion and $0.3 billion in proceeds from issuance of preferred stock, partially offset by a $1.0 billion decrease in borrowings outstanding as of December 31, 2019 as well as $0.4 billion in cash outflows from the repurchase of our common stock under the Stock Repurchase Program.
Subsequent Events
Potential Fraudulent Client Activity
The Company recently became aware of potentially fraudulent activity conducted by JES Global Capital III, L.P. (“JES”), a client of the Bank, in connection with a loan transaction funded in early February 2021.
We are currently investigating this incident to determine our potential credit exposure, which is currently estimated to be up to $70 million, net of tax, relating to a Global Fund Banking capital call line of credit. We have been advised that a principal of JES was recently arrested, and the matter is pending in the U.S. District Court for the Southern District of New
York. We are continuing to work with the appropriate law enforcement authorities in connection with this matter and intend to pursue all available sources of recovery and other measures to mitigate the potential loss.
Based on our review of the potentially fraudulent activity, as well as our risk assessment review of the Global Fund Banking loan portfolio conducted in light of the incident, the Company currently believes this incident is an isolated occurrence involving a single business relationship.
This matter (and other updates about the first quarter of 2021) was initially disclosed by the Company in a Current Report on Form 8-K on February 26, 2021. We may be limited in any additional information we can disclose due to the ongoing investigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
Market risk is defined as the risk of adverse fluctuations in the market value of financial instruments due to changes in market interest rates. Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of the benchmark interest rates. Additionally, changes in interest rates can influence the rate of principal prepayments on mortgage securities, which affects the rate of amortization of purchase premiums and discounts. Other market risks include foreign currency exchange risk and equity price risk (including the effect of competition on product pricing). These risks and related impacts are important market considerations but are inherently difficult to assess through simulation results. Consequently, simulations used to analyze the sensitivity of net interest income to changes in interest rates will differ from actual results due to differences in the timing and frequency of rate resets, the magnitude of changes in market rates, the impact of competition, fluctuating business conditions and the impact of strategies taken by management to mitigate these risks.
Interest rate risk is managed by our ALCO. ALCO reviews the sensitivity of the market valuation on earning assets and funding liabilities and modeled 12-month projections of net interest income from changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and market conditions. Relevant metrics and guidelines, which are approved by the Finance Committee of our Board of Directors and are included in our Interest Rate Risk Policy, are monitored on an ongoing basis.
Interest rate risk is managed primarily through strategies involving our fixed income securities portfolio, available funding channels and capital market activities. In addition, our policies permit the use of off-balance sheet derivatives, such as interest rate swaps, to assist with managing interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the economic value of equity and net interest income under a variety of interest rate scenarios, balance sheet forecasts and business strategies. The simulation model provides a dynamic assessment of interest rate sensitivity which is embedded within our balance sheet. Rate sensitivity measures the potential variability in economic value and net interest income relating solely to changes in market interest rates over time. We review our interest rate risk position and sensitivity to market interest rates regularly.
Model Simulation and Sensitivity Analysis
A specific application of our simulation model involves measurement of the impact of changes in market interest rates on the economic value of equity (“EVE”). EVE is defined as the market value of assets, less the market value of liabilities. Another application of the simulation model measures the impact of changes in market interest rates on net interest income (“NII”) assuming a static balance sheet, in both size and composition as of the period-end reporting date. In the NII simulation, the level of market interest rates and the size and composition of the balance sheet are held constant over the simulation horizon. Simulated cash flows during the scenario horizon are assumed to be replaced as they occur, which maintains the balance sheet at its current size and composition. Yield and spread assumptions on cash and investment balances reflect current market rates and the shape of the yield curve. Yield and spread assumptions on loans reflect recent market impacts on product pricing. Similarly, we make certain deposit balance decay rate assumptions on demand deposits and interest-bearing deposits, which are replenished to hold the level and mix of funding liabilities constant. Changes in market interest rates that affect net interest income are principally short-term interest rates and include the following benchmark indexes: (i) the National Prime Rate, (ii) 1-month and 3-month LIBOR, and (iii) the Federal Funds target rate. Changes in these short-term rates impact interest earned on our variable rate loans and balances held as cash and cash equivalents. Additionally, simulated changes in deposit pricing relative to changes in market rates, commonly referred to as deposit beta, generally follow overall changes in short-term interest rates, although actual changes may lag in terms of timing and magnitude.
Both EVE and NII measures rely upon the use of models to simulate cash flow behavior for loans and deposits. These models were developed internally and are based on historical balance and rate observations. Investment portfolio cash flow is based on a combination of third-party prepayment models and internally managed prepayment vectors depending on security type. As part of our ongoing governance structure, each of these models and assumptions are periodically reviewed and recalibrated as needed to ensure that they are representative of our understanding of existing behaviors.
During the fourth quarter of 2020, a modeling assumption change was made to align investment portfolio cash flows with an established benchmark model. This included recalibration of third-party prepayment models associated with certain mortgage-backed security classes. As a result of these changes, the measure of interest rate sensitivity of total investments was reduced resulting in an overall lower EVE sensitivity. This modeling change did not significantly impact NII sensitivity measures.
Simulation results presented include an "asymmetric" beta assumption that is applied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations that deposit repricing behavior in a falling rate environment would be different than repricing behavior in a rising rate environment. This model assumes the overall beta for interest-bearing deposits in a falling rate environment would be approximately 60 percent. That is, overall changes in interest-bearing deposit rates would be approximately 60 percent of the change in short-term market rates. The deposit beta assumption for an increasing rate environment is 50 percent. These repricing assumptions are reflected as changes in interest expense on interest-bearing deposit balances.
The following table presents our EVE and NII sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points ("bps") at December 31, 2020 and December 31, 2019. Net Interest Income sensitivity and the modeled Economic Value of Equity for December 31, 2019 has been revised to reflect the updated model assumptions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in interest rates (bps)
(Dollars in thousands) | | Estimated | | Estimated Increase/(Decrease) In EVE | | Estimated | | Estimated Increase/
(Decrease) In NII |
| EVE | | Amount | | Percent | | NII | | Amount | | Percent |
| December 31, 2020: | | | | | | | | | | | | |
| +200 | | $ | 9,499,738 | | | $ | (1,724,648) | | | (15.4) | % | | $ | 3,063,350 | | | $ | 691,748 | | | 29.2 | % |
| +100 | | 10,558,232 | | | (666,154) | | | (5.9) | | | 2,728,691 | | | 357,089 | | | 15.1 | |
| — | | 11,224,386 | | | — | | | — | | | 2,371,602 | | | — | | | — | |
| -100 | | 11,581,718 | | | 357,332 | | | 3.2 | | | 2,309,596 | | | (62,006) | | | (2.6) | |
| -200 | | 11,534,332 | | | 309,946 | | | 2.8 | | | 2,306,280 | | | (65,322) | | | (2.8) | |
| | | | | | | | | | | | |
| December 31, 2019 (as revised): | | | | | | | | | | | | |
| +200 | | $ | 7,503,986 | | | $ | (619,463) | | | (7.6) | % | | $ | 2,588,319 | | | $ | 523,423 | | | 25.3 | % |
| +100 | | 7,792,507 | | | (330,942) | | | (4.1) | | | 2,326,428 | | | 261,532 | | | 12.7 | |
| — | | 8,123,449 | | | — | | | — | | | 2,064,896 | | | — | | | — | |
| -100 | | 8,495,627 | | | 372,178 | | | 4.6 | | | 1,789,625 | | | (275,271) | | | (13.3) | |
| -200 | | 8,567,118 | | | 443,669 | | | 5.5 | | | 1,514,354 | | | (550,542) | | | (26.7) | |
Economic Value of Equity
The estimated EVE in the preceding table is based on a combination of valuation methodologies including discounted cash flow analysis and a multi-path lattice-based valuation. Both methodologies use publicly available market interest rates to determine discounting factors on projected cash flows. The model simulations and calculations are highly assumption-dependent and will change regularly as the composition of earning assets and funding liabilities change (including the impact of changes in the value of interest rate derivatives, if any), as interest rate environments evolve, and as we change our assumptions in response to relevant market conditions, competition or business circumstances. These calculations do not reflect forecast changes in our balance sheet or changes we may make to reduce our EVE exposure as a part of our overall interest rate risk management strategy.
As with any method of measuring interest rate risk, certain limitations are inherent in the method of analysis presented in the preceding table. We are exposed to yield curve risk, prepayment risk, basis risk and yield spread compression, which cannot be fully modeled and expressed using the above methodology. Accordingly, the results in the preceding table should not be relied upon as a precise indicator of actual results in the event of changing market interest rates. Additionally, the resulting EVE and NII estimates are not intended to represent and should not be construed to represent our estimate of the underlying EVE or forecast of NII.
Our base EVE as of December 31, 2020 increased $3.1 billion from December 31, 2019, driven by overall balance sheet growth and the significant decrease in market rates since the first quarter of 2020. For the period ended December 31, 2020, as compared to December 31, 2019, cash balances and fixed income investments in our AFS and HTM portfolios increased by $10.9 billion and $19.6 billion, respectively, while loan balances increased by $12.0 billion. Funding for these assets came primarily from growth of $40.2 billion in total deposits, which consists of $25.7 billion and $14.5 billion increase in noninterest bearing and interest-bearing accounts, respectively. The mix of noninterest bearing and interest-bearing deposits to total deposits remained relatively unchanged at December 31, 2020, compared to December 31, 2019.
Rapid deposit growth has exceeded the pace of our loan growth, and as a result, a significant amount of excess deposits not used to fund loan growth have contributed to the growth of our cash and investments balances. Much of the investment portfolio is held in fixed rate MBS and CMOs which generally have a higher market value sensitivity than variable rate loans or
cash. Thus, under an upward rate shock scenario, the market value of investments changes more than the market value of deposits resulting in a negative EVE sensitivity in those scenarios.
Due to the sudden decrease in market rates that occurred in March 2020, EVE sensitivity measures in the -100 and -200 bps rate shock scenarios do not represent the full magnitude of those rate shocks because we assume that U.S. Federal Fund rates are floored at zero. As a result, the December 31, 2020 EVE sensitivity of the -100 and -200 bps rate shock scenarios are similar.
The modeling assumption change described above combined with continued balance sheet growth and a lower overall rate environment are the primary contributing factors to the overall change in EVE sensitivity.
12-Month Net Interest Income Simulation
NII sensitivity is measured as the percentage change in projected 12-month net interest income earned in +/-100 and +/-200 basis point interest rate shock scenarios compared to a base scenario where balances and interest rates are held constant over the forecast horizon. At December 31, 2020, NII sensitivity was 15.1 percent in the +100 bps interest rate scenario, compared to 12.7 percent at December 31, 2019. Our NII sensitivity in the +200 bps interest rate shock scenario was 29.2 percent compared to 25.3 percent at December 31, 2019. NII sensitivity in the -100 bps scenario of negative 2.6 percent was lower at December 31, 2020, compared to a negative 13.3 percent at December 31, 2019. The -200 bps scenario currently indicates a lower percentage change in NII of negative 2.8 percent at December 31, 2020, compared to negative 26.7 percent at December 31, 2019. However, as noted above, the -100 and -200 bps scenarios are not complete rate shocks in this rate environment, since rates are assumed to be floored at zero. The December 31, 2020 NII sensitivity percentages are inclusive of the realized income or expense associated with interest rate swaps that were unwound reflective of the macro hedging process initiated in 2019 to reduce the impact of decreasing rates on NII. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition previously described, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at December 31, 2020 increased compared to December 31, 2019 by $306.7 million, primarily driven by growth in the balance sheet that has taken place year-to-date combined with an overall relatively lower rate environment, reflective of the decrease in the Federal Funds Rate in March 2020, compared to last year. Specifically, a large portion of the loan portfolio is indexed to the Prime rate, which decreased 150 bps in March of 2020 due to actions undertaken by the Federal Reserve to mitigate a possible economic downturn. The adverse impact of changes in interest rates on NII was partially tempered to a certain degree by continued growth in the loan portfolio, as well as continued balance sheet growth as previously described.
A majority of our loans are indexed to Prime and LIBOR. In the positive parallel simulated rate shock scenarios, interest income on assets that are tied to variable rate indexes, primarily our variable rate loans, are expected to benefit our base 12-month NII projections. The opposite is true for negative rate shock scenarios.
The 12-month NII simulations include repricing assumptions on our interest-bearing deposit products which we set at our discretion based on client needs and our overall funding mix. Repricing of interest-bearing deposits impacts estimated interest expense.
For the interest rate scenarios, the simulation model incorporates embedded rate floors on loans, where present, which prevents model benchmark rates from moving below zero percent in the down rate scenarios. The embedded rate floors are also a factor in the increasing rate scenarios to the extent a simulated increase in rates is needed before floored rates are cleared. In addition, we assume deposit balance decay rates based on a historical deposit study of our clients. These assumptions may change in future periods based on changes in client behavior and at management's discretion. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our actual sensitivity overall.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
SVB Financial Group:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of SVB Financial Group and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Notes 2 and 9 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses for loans and unfunded loan commitments evaluated on a collective basis
As discussed in Notes 2 and 9 of the consolidated financial statements, the Company’s allowance for credit losses (ACL) for loans and unfunded credit commitments were $447.8 million and $120.8 million as of December 31, 2020, respectively. The allowance principally relates to the Company’s loans and unfunded loan commitments evaluated on a collective basis (the collective ALL and the collective AULC, respectively). The collective ALL and the collective AULC include the measure of expected credit losses on a collective (pooled) basis for those loans and unfunded loan commitments that share similar risk characteristics. The Company estimated the collective ALL using a current expected credit losses methodology based on relevant information about historical experience, the current macroeconomic environment, and reasonable and supportable economic forecasts that affect the collectability of the loan balances. The quantitative expected credit losses are the product of multiplying the Company’s estimates of probability of default (PD), loss given default (LGD), and individual loan level exposure at default (EAD) on an undiscounted basis. The Company derives the PD, LGD, and EAD from internal historical default and loss experience adjusted for multiple probability-weighted economic forecast scenarios of macroeconomic assumptions over a reasonable and supportable forecast period of three years. After the reasonable and supportable forecast period, the Company reverts to historical averages using an autoregressive method of mean reversion that trends towards the mean historical loss over the remaining contractual lives, adjusted for prepayments. The Company also applies certain qualitative adjustments to the results of its quantitative model for asset-specific risk characteristics, and current conditions and reasonable and supportable forecasts based on its expectation of the risks that may lead to future loan loss experience different from its historical loan loss experience. These adjustments are based on qualitative factors not reflected in the quantitative model but are expected to impact the estimate of credit losses. In order to capture the unique risks of the loan portfolio within the PD, LGD, EAD model, the Company segments the portfolio into pools and by credit risk rating. The Company estimated the collective AULC using a similar methodology as the collective ALL adjusted by the probability of an unfunded loan commitment being funded. Certain qualitative adjustments to historical loss information are also applied to the collective AULC.
We identified the assessment of the December 31, 2020 collective ALL and collective AULC as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the methods and model used to estimate (1) the PD, LGD, and EAD and their significant assumptions and inputs, and (2) certain qualitative adjustments. Significant assumptions and inputs include the economic forecast scenarios of macroeconomic assumptions and their weightings, the historical observation period, portfolio segmentation, and credit risk ratings. The assessment also included an evaluation of the conceptual soundness and performance of the PD, LGD, and EAD model. Auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the December 31, 2020 collective ALL and collective AULC estimates, including controls over the:
•periodic review and monitoring of the collective ALL and the collective AULC methodology
•identification and determination of significant assumptions used in the PD, LGD, and EAD model
•evaluation of the qualitative adjustments, including significant assumptions used in the measurement of the qualitative adjustments
•determination of credit risk ratings
•analysis of the collective ALL and collective AULC results, trends, and ratios.
We evaluated the Company’s process to develop the December 31, 2020 collective ALL and collective AULC estimates by testing certain sources of data, qualitative factors and assumptions that the Company used, and considered the relevance and reliability of such data, qualitative factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge who assisted in:
•evaluating that the Company’s collective ALL and collective AULC methodology and key assumptions for compliance with U.S. generally accepted accounting principles
•assessing the conceptual soundness and performance of the PD, LGD, and EAD model by inspecting the model documentation to determine whether the model is suitable for the intended use
•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ALL and the collective AULC compared with relevant credit risk factors and consistency with credit trends associated with the Company’s portfolio
•evaluating the historical observation period, focusing on the relevance of the full economic cycle relative to the Company’s current portfolio
•evaluating the approach to incorporate macroeconomic forecast assumptions in the PD, LGD, EAD model with respect to the Company’s business environment and the loan products used across the industry
•evaluating model validation findings and assessing their possible impact, if any
•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business and environment and relevant industry practices
•testing individual credit risk ratings for a selection of loan and unfunded loan commitment borrower relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral, as applicable.
We also assessed the sufficiency of the audit evidence obtained related to the December 31, 2020 collective ALL and collective AULC estimates by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Company's auditor since 1994.
San Francisco, California
March 1, 2021
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands, except par value and share data) | | 2020 | | 2019 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 17,674,763 | | | $ | 6,781,783 | |
| Available-for-sale securities, at fair value (cost of $30,244,896 and $13,894,348, respectively) | | 30,912,438 | | | 14,014,919 | |
| Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $392 and $0 (fair value of $17,216,871 and $14,115,272, respectively) (1) | | 16,592,153 | | | 13,842,946 | |
| Non-marketable and other equity securities | | 1,802,235 | | | 1,213,829 | |
| Total investment securities | | 49,306,826 | | | 29,071,694 | |
| Loans, amortized cost | | 45,181,488 | | | 33,164,636 | |
| Allowance for credit losses: loans | | (447,765) | | | (304,924) | |
| Net loans | | 44,733,723 | | | 32,859,712 | |
| Premises and equipment, net of accumulated depreciation and amortization | | 175,818 | | | 161,876 | |
| Goodwill | | 142,685 | | | 137,823 | |
| Other intangible assets, net | | 61,435 | | | 49,417 | |
| Lease right-of-use assets | | 209,932 | | | 197,365 | |
| Accrued interest receivable and other assets | | 3,205,825 | | | 1,745,233 | |
| Total assets | | $ | 115,511,007 | | | $ | 71,004,903 | |
| Liabilities and total equity | | | | |
| Liabilities: | | | | |
| Noninterest-bearing demand deposits | | $ | 66,519,240 | | | $ | 40,841,570 | |
| Interest-bearing deposits | | 35,462,567 | | | 20,916,237 | |
| Total deposits | | 101,981,807 | | | 61,757,807 | |
| Short-term borrowings | | 20,553 | | | 17,430 | |
| Lease liabilities | | 259,554 | | | 218,847 | |
| Other liabilities | | 3,971,974 | | | 2,041,752 | |
| Long-term debt | | 843,628 | | | 347,987 | |
| Total liabilities | | 107,077,516 | | | 64,383,823 | |
| Commitments and contingencies (Note 21 and Note 27) | | 0 | | 0 |
| SVBFG stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; 350,000 and 350,000 shares issued and outstanding, respectively | | 340,138 | | | 340,138 | |
| Common stock, $0.001 par value, 150,000,000 shares authorized; 51,888,463 and 51,655,607 shares issued and outstanding, respectively | | 52 | | | 52 | |
| Additional paid-in capital | | 1,585,244 | | | 1,470,071 | |
| Retained earnings | | 5,671,749 | | | 4,575,601 | |
| Accumulated other comprehensive income | | 622,517 | | | 84,445 | |
| Total SVBFG stockholders’ equity | | 8,219,700 | | | 6,470,307 | |
| Noncontrolling interests | | 213,791 | | | 150,773 | |
| Total equity | | 8,433,491 | | | 6,621,080 | |
| Total liabilities and total equity | | $ | 115,511,007 | | | $ | 71,004,903 | |
(1)Prior to our adoption of Accounting Standard Update (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) on January 1, 2020, the allowance for credit losses related to held-to-maturity (HTM) securities was not applicable and is therefore presented as 0 at December 31, 2019. See "Adoption of New Accounting Standards" in Note 2—“Summary of Significant Accounting Policies” for additional details.
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except per share amounts) | | 2020 | | 2019 | | 2018 |
| Interest income: | | | | | | |
| Loans | | $ | 1,520,021 | | | $ | 1,599,165 | | | $ | 1,358,480 | |
| Investment securities: | | | | | | |
| Taxable | | 634,992 | | | 568,851 | | | 541,605 | |
| Non-taxable | | 61,055 | | | 44,952 | | | 34,616 | |
| Federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | 25,542 | | | 96,440 | | | 35,208 | |
| Total interest income | | 2,241,610 | | | 2,309,408 | | | 1,969,909 | |
| Interest expense: | | | | | | |
| Deposits | | 60,219 | | | 177,672 | | | 29,306 | |
| Borrowings | | 25,107 | | | 35,135 | | | 46,615 | |
| Total interest expense | | 85,326 | | | 212,807 | | | 75,921 | |
| Net interest income | | 2,156,284 | | | 2,096,601 | | | 1,893,988 | |
| Provision for credit losses | | 219,510 | | | 106,416 | | | 87,870 | |
| Net interest income after provision for credit losses | | 1,936,774 | | | 1,990,185 | | | 1,806,118 | |
| Noninterest income: | | | | | | |
| Gains on investment securities, net | | 420,752 | | | 134,670 | | | 88,094 | |
| Gains on equity warrant assets, net | | 237,428 | | | 138,078 | | | 89,142 | |
| Client investment fees | | 132,200 | | | 182,068 | | | 130,360 | |
| Foreign exchange fees | | 178,733 | | | 159,262 | | | 138,812 | |
| Credit card fees | | 97,737 | | | 118,719 | | | 94,072 | |
| Deposit service charges | | 90,336 | | | 89,200 | | | 76,097 | |
| Lending related fees | | 57,533 | | | 49,920 | | | 41,949 | |
| Letters of credit and standby letters of credit fees | | 46,659 | | | 42,669 | | | 34,600 | |
| Investment banking revenue | | 413,985 | | | 195,177 | | | 0 | |
| Commissions | | 66,640 | | | 56,346 | | | 0 | |
| Other | | 98,145 | | | 55,370 | | | 51,858 | |
| Total noninterest income | | 1,840,148 | | | 1,221,479 | | | 744,984 | |
| Noninterest expense: | | | | | | |
| Compensation and benefits | | 1,318,457 | | | 989,734 | | | 726,980 | |
| Professional services | | 247,084 | | | 205,479 | | | 158,835 | |
| Premises and equipment | | 127,125 | | | 96,770 | | | 77,918 | |
| Net occupancy | | 100,889 | | | 69,279 | | | 54,753 | |
| Business development and travel | | 23,724 | | | 68,912 | | | 48,180 | |
| FDIC and state assessments | | 27,587 | | | 18,509 | | | 34,276 | |
| Other | | 190,175 | | | 152,579 | | | 87,251 | |
| Total noninterest expense | | 2,035,041 | | | 1,601,262 | | | 1,188,193 | |
| Income before income tax expense | | 1,741,881 | | | 1,610,402 | | | 1,362,909 | |
| Income tax expense | | 447,587 | | | 425,685 | | | 351,561 | |
| Net income before noncontrolling interests | | 1,294,294 | | | 1,184,717 | | | 1,011,348 | |
| Net income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | |
| Preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Net income available to common stockholders | | $ | 1,191,217 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Earnings per common share—basic | | $ | 23.05 | | | $ | 21.90 | | | $ | 18.35 | |
| Earnings per common share—diluted | | 22.87 | | | 21.73 | | | 18.11 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Net income before noncontrolling interests | | $ | 1,294,294 | | | $ | 1,184,717 | | | $ | 1,011,348 | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Change in foreign currency cumulative translation gains and losses: | | | | | | |
| Foreign currency translation gains (losses) | | 16,467 | | | 3,208 | | | (5,999) | |
| Related tax (expense) benefit | | (4,621) | | | (889) | | | 1,669 | |
| Change in unrealized gains and losses on available-for-sale securities: | | | | | | |
| Unrealized holding gains (losses) | | 606,038 | | | 189,813 | | | (22,348) | |
| Related tax (expense) benefit | | (168,521) | | | (52,697) | | | 6,315 | |
Reclassification adjustment for (gains) losses included in net
income | | (61,165) | | | 3,905 | | | 740 | |
| Related tax expense (benefit) | | 16,953 | | | (1,087) | | | (205) | |
| Reclassification of unrealized gains on equity securities to retained earnings for ASU 2016-01 | | 0 | | | 0 | | | (40,316) | |
| Related tax expense | | 0 | | | 0 | | | 11,145 | |
| Amortization of unrealized holding losses (gains) on securities transferred from available-for-sale to held-to-maturity | | 2,104 | | | (2,158) | | | (4,607) | |
| Related tax (expense) benefit | | (586) | | | 600 | | | 1,277 | |
| Reclassification of stranded tax effect to retained earnings for ASU 2018-02 | | 0 | | | 0 | | | (319) | |
| Change in unrealized gains and losses on cash flow hedges: | | | | | | |
| Unrealized gains (losses) | | 231,920 | | | (8,305) | | | 0 | |
| Related tax (expenses) benefit | | (64,281) | | | 2,306 | | | 0 | |
| Reclassification adjustment for (gains) losses included in net income | | (49,928) | | | 5,358 | | | 0 | |
| Related tax expense (benefit) | | 13,692 | | | (1,489) | | | 0 | |
| Other comprehensive income (loss), net of tax | | 538,072 | | | 138,565 | | | (52,648) | |
| Comprehensive income | | 1,832,366 | | | 1,323,282 | | | 958,700 | |
| Comprehensive income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | |
| Comprehensive income attributable to SVBFG | | $ | 1,746,440 | | | $ | 1,275,421 | | | $ | 921,192 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | Common Stock | | Additional
Paid-in Capital | | Retained Earnings | | Accumulated Other
Comprehensive Income (Loss) | | Total SVBFG
Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| (Dollars in thousands, except share data) | | | Shares | | Amount | | | | | | |
| Balance at December 31, 2017 | | $ | 0 | | | 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 | | — | | | — | | | — | | | — | | | (5,802) | | | — | | | (5,802) | | | — | | | (5,802) | |
| Cumulative adjustment for ASU 2016-01, net of tax | | — | | | — | | | — | | | — | | | 103,766 | | | (29,171) | | | 74,595 | | | — | | | 74,595 | |
| Reclassification of stranded tax effect for ASU 2018-02 | | — | | | — | | | — | | | — | | | 319 | | | (319) | | | 0 | | | — | | | 0 | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 456,845 | | | 1 | | | 15,809 | | | — | | | — | | | 15,810 | | | — | | | 15,810 | |
| Common stock issued under ESOP | | — | | | 9,672 | | | — | | | 2,577 | | | — | | | — | | | 2,577 | | | — | | | 2,577 | |
| Net income | | — | | | — | | | — | | | — | | | 973,840 | | | — | | | 973,840 | | | 37,508 | | | 1,011,348 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (28,494) | | | (28,494) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | (15,498) | | | (15,498) | | | — | | | (15,498) | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | (3,330) | | | (3,330) | | | — | | | (3,330) | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | (4,330) | | | (4,330) | | | — | | | (4,330) | |
| Share-based compensation, net | | — | | | — | | | — | | | 45,675 | | | — | | | — | | | 45,675 | | | — | | | 45,675 | |
| Common stock repurchases | | — | | | (715,207) | | | (1) | | | — | | | (147,122) | | | — | | | (147,123) | | | — | | | (147,123) | |
| Balance at December 31, 2018 | | $ | 0 | | | 52,586,498 | | | $ | 53 | | | $ | 1,378,438 | | | $ | 3,791,838 | | | $ | (54,120) | | | $ | 5,116,209 | | | $ | 148,634 | | | $ | 5,264,843 | |
| Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities (ASU 2017-08) (1) | | — | | | — | | | — | | | — | | | (583) | | | — | | | (583) | | | — | | | (583) | |
| Acquisition of SVB Leerink | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,256 | | | 5,256 | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 586,877 | | | 0 | | | 21,312 | | | — | | | — | | | 21,312 | | | — | | | 21,312 | |
| Common stock issued under ESOP | | — | | | 14,442 | | | — | | | 3,506 | | | — | | | — | | | 3,506 | | | — | | | 3,506 | |
| Issuance of Series A Preferred Stock | | 340,138 | | | — | | | — | | | — | | | — | | | — | | | 340,138 | | | — | | | 340,138 | |
| Net income | | — | | | — | | | — | | | — | | | 1,136,856 | | | — | | | 1,136,856 | | | 47,861 | | | 1,184,717 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (50,978) | | | (50,978) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | 139,934 | | | 139,934 | | | — | | | 139,934 | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | (1,558) | | | (1,558) | | | — | | | (1,558) | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | 2,319 | | | 2,319 | | | — | | | 2,319 | |
| Net change in unrealized gains and losses on cash flow hedges, net of tax | | — | | | — | | | — | | | — | | | — | | | (2,130) | | | (2,130) | | | — | | | (2,130) | |
| Share-based compensation, net | | — | | | — | | | — | | | 66,815 | | | — | | | — | | | 66,815 | | | — | | | 66,815 | |
| Common stock repurchases | | — | | | (1,532,210) | | | (1) | | | — | | | (352,510) | | | — | | | (352,511) | | | — | | | (352,511) | |
| Balance at December 31, 2019 | | $ | 340,138 | | | 51,655,607 | | | $ | 52 | | | $ | 1,470,071 | | | $ | 4,575,601 | | | $ | 84,445 | | | $ | 6,470,307 | | | $ | 150,773 | | | $ | 6,621,080 | |
| Cumulative adjustment for the day one adoption of ASC 326, net of tax (1) | | — | | | — | | | — | | | — | | | (35,049) | | | — | | | (35,049) | | | — | | | (35,049) | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 464,985 | | | 0 | | | 28,699 | | | — | | | — | | | 28,699 | | | — | | | 28,699 | |
| Common stock issued under ESOP | | — | | | 12,094 | | | — | | | 2,447 | | | — | | | — | | | 2,447 | | | — | | | 2,447 | |
| Net income | | — | | | — | | | — | | | — | | | 1,208,368 | | | — | | | 1,208,368 | | | 85,926 | | | 1,294,294 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (22,908) | | | (22,908) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | 393,305 | | | 393,305 | | | — | | | 393,305 | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | 1,518 | | | 1,518 | | | — | | | 1,518 | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | 11,846 | | | 11,846 | | | — | | | 11,846 | |
| Net change in unrealized gains and losses on cash flow hedges, net of tax | | — | | | — | | | — | | | — | | | — | | | 131,403 | | | 131,403 | | | — | | | 131,403 | |
| Share-based compensation, net | | — | | | — | | | — | | | 83,986 | | | — | | | — | | | 83,986 | | | — | | | 83,986 | |
| Common stock repurchases | | — | | | (244,223) | | | 0 | | | — | | | (60,020) | | | — | | | (60,020) | | | — | | | (60,020) | |
| Dividends on preferred stock | | — | | | — | | | — | | | — | | | (17,151) | | | — | | | (17,151) | | | — | | | (17,151) | |
| Other, net | | — | | | — | | | — | | | 41 | | | — | | | — | | | 41 | | | — | | | 41 | |
| Balance at December 31, 2020 | | $ | 340,138 | | | 51,888,463 | | | $ | 52 | | | $ | 1,585,244 | | | $ | 5,671,749 | | | $ | 622,517 | | | $ | 8,219,700 | | | $ | 213,791 | | | $ | 8,433,491 | |
(1)See Note 2- "Summary of Significant Accounting Policies" for additional details.
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income before noncontrolling interests | | $ | 1,294,294 | | | $ | 1,184,717 | | | $ | 1,011,348 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Provision for credit losses | | 219,510 | | | 106,416 | | | 87,870 | |
| Changes in fair value of equity warrant assets, net of proceeds from exercises | | (2,347) | | | 2,240 | | | (24,417) | |
| Changes in fair values of derivatives, net | | (48,013) | | | (18,506) | | | (11,043) | |
| Gains on investment securities, net | | (420,752) | | | (134,670) | | | (88,094) | |
| Distributions of earnings from non-marketable and other equity securities | | 85,587 | | | 95,131 | | | 72,015 | |
| Depreciation and amortization | | 100,840 | | | 82,717 | | | 57,906 | |
| Amortization of premiums and discounts on investment securities, net | | 75,178 | | | 15,513 | | | (28) | |
| Amortization of share-based compensation | | 83,986 | | | 66,815 | | | 45,675 | |
| Amortization of deferred loan fees | | (173,975) | | | (155,429) | | | (128,077) | |
| Deferred income tax expense (benefit) | | 6,911 | | | (3,072) | | | (21,061) | |
| Excess tax benefit from exercise of stock options and vesting of restricted shares | | (5,857) | | | (9,588) | | | (17,989) | |
| Losses from the write-off of premises and equipment and right-of-use assets | | 30,170 | | | 5,219 | | | 7,278 | |
| Other losses | | 0 | | | 8,959 | | | 0 | |
| Changes in other assets and liabilities: | | | | | | |
| Accrued interest receivable and payable, net | | (26,205) | | | (24,189) | | | (55,834) | |
| Accounts receivable and payable, net | | 18,765 | | | (17,019) | | | (23,020) | |
| Income tax receivable and payable, net | | 97,607 | | | (11,630) | | | (5,820) | |
| Accrued compensation | | 190,983 | | | (15,253) | | | 56,874 | |
| Foreign exchange spot contracts, net | | (20,790) | | | 59,998 | | | 24,018 | |
| Proceeds from termination of interest rate swaps | | 227,500 | | | 0 | | | 0 | |
| Other, net | | (287,905) | | | (74,240) | | | (54,039) | |
| Net cash provided by operating activities | | 1,445,487 | | | 1,164,129 | | | 933,562 | |
| Cash flows from investing activities: | | | | | | |
| Purchases of available-for-sale securities | | (23,207,791) | | | (9,872,095) | | | (668,264) | |
| Proceeds from sales of available-for-sale securities | | 2,654,212 | | | 2,189,087 | | | 474,482 | |
| Proceeds from maturities and paydowns of available-for-sale securities | | 4,183,888 | | | 1,643,357 | | | 3,436,064 | |
| Purchases of held-to-maturity securities | | (6,778,370) | | | (492,502) | | | (4,726,595) | |
| Proceeds from maturities and paydowns of held-to-maturity securities | | 4,035,952 | | | 2,124,513 | | | 1,891,761 | |
| Purchases of non-marketable and other equity securities | | (201,293) | | | (136,186) | | | (81,574) | |
| Proceeds from sales and distributions of capital of non-marketable and other equity securities | | 148,224 | | | 113,526 | | | 95,025 | |
| Net increase in loans | | (11,926,436) | | | (4,773,775) | | | (5,175,409) | |
| Purchases of premises and equipment | | (87,407) | | | (65,479) | | | (45,865) | |
| Business acquisitions | | (26,700) | | | (102,328) | | | 0 | |
| Net cash used for investing activities | | (31,205,721) | | | (9,371,882) | | | (4,800,375) | |
| Cash flows from financing activities: | | | | | | |
| Net increase in deposits | | 40,224,000 | | | 12,428,907 | | | 5,074,825 | |
| Net increase (decrease) in short-term borrowings | | 3,123 | | | (613,982) | | | (402,318) | |
| Principal payments of long-term debt | | 0 | | | (358,395) | | | 0 | |
| Proceeds from issuance of 3.125% Senior Notes | | 495,024 | | | 0 | | | 0 | |
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | | (22,908) | | | (50,978) | | | (28,494) | |
| Net proceeds from the issuance of preferred stock | | 0 | | | 340,138 | | | 0 | |
| Payment of preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Common stock repurchase | | (60,020) | | | (352,511) | | | (147,123) | |
| Proceeds from issuance of common stock, ESPP and ESOP | | 31,146 | | | 24,818 | | | 18,387 | |
| Net cash provided by financing activities | | 40,653,214 | | | 11,417,997 | | | 4,515,277 | |
| Net increase in cash and cash equivalents | | 10,892,980 | | | 3,210,244 | | | 648,464 | |
| Cash and cash equivalents at beginning of period | | 6,781,783 | | | 3,571,539 | | | 2,923,075 | |
| Cash and cash equivalents at end of period | | $ | 17,674,763 | | | $ | 6,781,783 | | | $ | 3,571,539 | |
| Supplemental disclosures: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | | $ | 83,746 | | | $ | 217,961 | | | $ | 75,601 | |
| Income taxes | | 299,175 | | | 422,346 | | | 376,425 | |
| Noncash items during the period: | | | | | | |
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | | $ | 393,305 | | | $ | 139,934 | | | $ | (15,498) | |
| Distributions of stock from investments | | 11,913 | | | 8,917 | | | 5,277 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.Nature of Business
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 diverse set 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 entity, SVB Financial Group (not including subsidiaries).
We offer commercial banking products and services through our principal subsidiary, the Bank, which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers asset management, private wealth management and other investment services. In addition, through SVB Financial's other subsidiaries and divisions, we offer investment banking and non-banking products and services, such as funds management and M&A advisory services. We primarily focus on serving corporate clients in the following industries: technology, life science/healthcare, private equity/venture capital and premium wine. Our corporate clients range widely in terms of size and stage of maturity. Additionally, we focus on cultivating strong relationships with firms within the venture capital and private equity community worldwide, many of which are also our clients and may invest in our corporate clients.
Headquartered in Santa Clara, California, we operate in centers of innovation in the United States and around the world.
For reporting purposes, SVB Financial Group has 4 operating segments for which we report financial information in this report: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Leerink.
2. Summary of Significant Accounting Policies
Use of Estimates and Assumptions
The preparation of 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. Items that are subject to such estimates include: 1) measurements of fair value, which include the valuation of non-marketable and other equity securities and the valuation of equity warrant assets, 2) income taxes, and 3) the adequacy of the allowance for credit losses for loans and the allowance for credit losses for unfunded credit commitments. The following discussion of significant accounting policies are described as follows:includes further details regarding these estimates.
Principles of Consolidation and Presentation
Equity securities, such as preferred or common stock in privately-held companies in which we hold aOur consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate voting interest of at least 20 percent, orentities 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 abilitypower to exercisedirect 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 influence overvariable interests if our commitments to a limited partnership investment represent a significant amount of the investees' operatingtotal 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 and, 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 policies through board involvement or other influence, are accounted for underinterest. A controlling financial interest requires both: (a) the equity method.
power to direct the activities that most significantly
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
impact the VIEs economic performance, and (b) the 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.
Cash and Cash Equivalents
InvestmentsCash and cash equivalents consist of cash on hand, cash balances due from banks, interest-earning deposits, Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities. For the consolidated statements of cash flows, we consider cash equivalents to be investments that are readily convertible to known amounts of cash, so near to their maturity that they present an insignificant risk of change in fair value due to changes in market interest rates, and purchased in conjunction with our cash management activities.
Investment Securities
Available-for-Sale Securities and the Allowance for Credit Losses on Available-for-Sale Securities
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification and meeting our asset/liability management objectives. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of SVBFG's stockholders' equity, until realized.
We analyze available-for-sale securities for impairment related to credit losses each quarter. Market valuations represent the current fair value of a security at a specified point in time and incorporates the risk of timing of interest due and the return of principal over the contractual life of each security. Gains and losses on securities are realized when there is a sale of the security prior to maturity. A credit impairment is recognized through a valuation allowance against the security with an offset through earnings; the allowance is limited partnershipsto the amount that fair value, calculated as the present value of expected future cash flow discounted at the security’s effective interest rate, is less than the amortized cost basis. We separate the amount of the impairment related to credit losses, if any, and the amount due to all other factors. The credit loss component is recognized in earnings and recorded as an allowance for credit losses for AFS securities.
We consider numerous factors in determining whether a credit loss exists and the period over which we hold voting intereststhe debt security is expected to recover. The following list is not meant to be all inclusive. All of morethe following factors are considered:
•The length of time and the extent to which the fair value has been less than 5 percent,the amortized cost basis (severity and duration);
•Adverse conditions specifically related to the security, an industry or geographic area; for example, changes in the financial condition of the issuer of the security, or in whichthe case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. Examples of those changes include any of the following:
◦Changes in technology;
◦The discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security; and
◦Changes in the quality of the credit enhancement.
•The historical and implied volatility of the fair value of the security;
•The payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
•Failure of the issuer of the security to make scheduled interest or principal payments;
•Any changes to the rating of the security by a rating agency; and
•Recoveries or additional declines in fair value after the balance sheet date.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, we haveuse estimates of future principal prepayments, provided by third-party market-data vendors, in addition to actual principal prepayment experience to calculate the constant effective yield necessary to apply the effective interest method in the amortization of purchase discounts or premiums on mortgage-backed securities and fixed rate collateralized mortgage obligations. The accretion and amortization of discounts and premiums, respectively, are included in interest income over the contractual terms of the underlying securities replicating the effective interest method.
Held-to-Maturity Securities and the Allowance for Credit Losses on Held-to-Maturity Securities
Debt securities purchased with the positive intent and ability to exercise significant influence overhold to its maturity are classified as held-to-maturity securities and are recorded at amortized cost, net of any allowance for credit losses.
Effective January 1, 2020, we measure expected credit losses ("ECL") on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the partnerships' operatingexception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and financial policies, are accountedhave a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ECL. Our municipal bond portfolio primarily consists of highly rated bonds and currently carry ratings no lower than Aa2. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for usingcurrent conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year. We do not estimate ECL on accrued interest receivable ("AIR") from held-to-maturity securities as AIR is reversed or written off when the equity method.
Our China Joint Venture partnership, for which we have 50 percent ownership, is accounted for under the equity method.
We recognize our proportionate sharefull collection of the results of operations of these equity method investeesAIR related to a security becomes doubtful. AIR from held-to-maturity securities totaled $55.0 million at December 31, 2020 and $45.2 million at December 31, 2019 and is excluded from the amortized cost disclosures within our HTM security disclosures in Note 8—“Investment Securities” as it is included and reported separately within "Accrued interest receivable and other assets" in our results of operations,consolidated balance sheets.
Expected credit loss on municipal bonds that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the most current financial information available fromdifference between the investee. We review our investments accounted for under the equity method at least quarterly for possible other-than-temporary impairment. Our review typically includes an analysis of facts and circumstances for each investment, the expectationsdiscounted value of the investment'sexpected future cash flows and capital needs, variabilitythe recorded amortized cost basis of its businessthe security.
Prior to the adoption of CECL, we applied the other-than-temporary impairment standards of ASC 320, Investment-Debt and Equity Securities, for our held-to-maturity securities. For periods prior to January 1, 2020, we separated the amount of the other-than-temporary impairment, if any, into the amount that is credit related (credit loss component) and the company'samount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security's amortized cost basis and the present value of expected future cash flows discounted at the security's effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The net unrealized gains, net of tax, are retained in other comprehensive income, and the carrying value of the held-to-maturity securities are amortized over the life of the securities in a manner consistent with the amortization of a premium or discount.
Non-Marketable and Other Equity Securities
Non-marketable and other equity securities include investments in venture capital and private equity funds, SPD-SVB, debt funds, private and public portfolio companies, including public equity securities held as a result of equity warrant assets exercised, and investments in qualified affordable housing projects. A majority of these investments are managed through our SVB Capital funds business in funds of funds and direct venture funds. Our accounting for investments in non-marketable and other equity securities depends on several factors, including the level of ownership, power to control and the legal structure of the subsidiary making the investment. As further described below, we base our accounting for such securities on: (i) fair value accounting, (ii) measurement alternative for other investments without a readily determinable fair value, (iii) equity method accounting and (iv) the proportional amortization method which is used only for qualified affordable housing projects.
Fair Value Accounting
Our managed funds are investment companies under the AICPA Audit and Accounting Guide for Investment Companies (codified in ASC 946) and accordingly, these funds report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as investment gains or losses in our consolidated statements of income. Our non-marketable and other equity securities recorded pursuant to fair value accounting consist of our investments through our managed funds of funds, which make investments in venture capital and private equity funds. A summary of our
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
ownership interests in the investments held under fair value accounting as of December 31, 2020 is presented in the following table:
| | | | | | | | |
| Limited partnership | | Company Direct and Indirect Ownership in Limited Partnership |
| Managed funds of funds | | |
| Strategic Investors Fund, LP | | 12.6 | % |
| Capital Preferred Return Fund, LP | | 20.0 | |
| Growth Partners, LP | | 33.0 | |
| | |
| | |
The general partner interests of these funds are controlled, and in some cases, owned by SVB Financial. The limited partners of these funds do not have substantive participating or kick-out rights. Therefore, these funds are consolidated and any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in our consolidated net income.
Under fair value accounting, investments are carried at their estimated fair value based on financial information obtained as the general partner of the fund or obtained from the funds' respective general partner. For direct private company investments, valuations are based upon consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategy. strategies and financing transactions subsequent to the acquisition of the investment. For direct equity investments in public companies, valuations are based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Sales restriction discounts generally range from 10 to 20 depending on the sale restrictions which typically range from three to six months. The valuation of non-marketable securities in shares of private company capital stock and the valuation of other securities in shares of public company stock with certain sales restrictions is subject to significant judgment. The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material.
For our fund investments, we utilize the net asset value per share as provided byobtained from the general partners of the fund investments.investments as the funds do not have a readily determinable fair value. The general partners of our fund investments prepare their financial statements using guidance consistent with fair value accounting. We account for differences between our measurement date and the date of the fund investment's net asset value by using the most recent available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements. We adjust the value of our investments for any contributions paid, distributions received from the investment and known significant fund transactions or market events about which we are aware through information provided by the fund managers or from publicly available transaction data during the reporting period.
We reduce our investment value when we consider declinesGains or losses resulting from changes in value to be other-than-temporary and recognize the estimated lossfair value of the investments and from distributions received are recorded as a lossgains on investment securities, net, a component of noninterest income. The portion of any investment gains or losses attributable to the limited partners is reflected as net income attributable to noncontrolling interests and adjusts our net income to reflect its percentage ownership.
Cost MethodOther Investments without a Readily Determinable Fair Value
Our cost method non-marketable securities and related accounting policies are described as follows:
Equity securities, such as preferred or common stockdirect investments in privately-heldprivate companies in which we hold an ownership interest in which we do not have the ability to exercise significant influence over the investees' operating and financial policies, are accounted for under the cost method.
Investments in limited partnerships in which we hold voting interests of less than 5 percent and in which we do not have the ability to exercise significant influence over the partnerships' operating and financial policies, are accounted for under the cost method. These non-marketable securities include investments in venture capital and private equity funds.
a readily determinable fair value. We recordmeasure these investments at cost and recognize distributions or returns received from net accumulated earnings of the investee since the date of acquisition as income. Our share of net accumulated earnings of the investee after the date of investment are recognized in consolidated net income only to the extent distributed by the investee. Distributions or returns received in excess of accumulated earnings are considered a return of investment and are recorded as reductions in the cost basis of the investment.
We review our investments accounted for under the cost method at least quarterly for possible other-than-temporary impairment. Our review typically includes an analysis of facts and circumstances of each investment, the expectations of the investment's future cash flows and capital needs, variability of its business and the company's exit strategy. To help determineless impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for our fundidentical or similar investments we utilizefrom the net asset value per share as provided by the general partnerssame issuer. Such changes are recognized through earnings. We consider a range of the fund investments.
We reduce our investment valuefactors when we consider declines in value to be other-than-temporary and recognize the estimated loss as a loss on investment securities, a component of noninterest income.
Gains or losses on cost method investment securities that result from a portfolio company being acquired by a publicly traded company are determined usingadjusting the fair value of these investments, including, but not limited to, the consideration received whenterm and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition occurs. The resulting gains or losses are recognized in consolidated net income in the period of acquisition.
Proportional Amortization Method
In order to fulfill our responsibilities under the Community Reinvestment Act, we invest as a limited partner in low income housing partnerships that operate qualified affordable housing projects and generate tax benefits, including federal low income housing tax credits, for investors. The partnerships are deemed to be VIEs because they do not have sufficient equity investment at risk and are structured with non-substantive voting rights. We are not the primary beneficiary of the VIEsinvestment and do not consolidatea discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
them. Our investments in low income housing partnerships are recorded in non-marketable and other securities within our investment securities portfolio on the consolidated balance sheet. As a practical expedient, we amortize the investment in proportion to the allocated tax benefits under the proportional amortization method of accounting and present such benefits net of investment amortization in income tax expense.
Loans
Loans are reported at the principal amount outstanding, net of unearned loan fees. Unearned loan fees reflect unamortized deferred loan origination and commitment fees net of unamortized deferred loan origination costs. In addition to cash loan fees, we often obtain equity warrant assets that give us an option to purchase a position in a client company's stock in consideration for providing credit facilities. The grant date fair values of these equity warrant assets are deemed to be loan fees and are deferred as unearned income and recognized as an adjustment of loan yield through loan interest income. The net amount of unearned loan fees is amortized into loan interest income over the contractual terms of the underlying loans and commitments using the constant effective yield method, adjusted for actual loan prepayment experience, or the straight-line method, as applicable.
Allowance for Loan Losses
The allowance for loan losses considers credit risk and is established through a provision for loan losses charged to expense. Our allowance for loan losses is established for estimated loan losses that are probable and incurred but not yet realized. Our evaluation process is designed to determine that the allowance for loan losses is appropriate at the balance sheet date. The process of estimating loan losses is inherently imprecise.
We maintain a systematic process for the evaluation of individual loans and pools of loans for inherent risk of loan losses. At the time of approval, each loan in our portfolio is assigned a Credit Risk Rating and industry niche. Credit Risk Ratings are assigned on a scale of 1 to 10, with 1 representing loans with a low risk of nonpayment, 9 representing loans with the highest risk of nonpayment, and 10 representing loans which have been charged-off. The credit risk ratings for each loan are monitored and updated on an ongoing basis. This Credit Risk Rating process includes, but is not limited to, consideration of such factors as payment status, the financial condition and operating performance of the borrower, borrower compliance with loan covenants, underlying collateral values and performance trends, the degree of access to additional capital, the presence of credit enhancements such as third party guarantees (where applicable), the degree to which the borrower is sensitive to external factors, the depth and experience of the borrower's management team, potential loan concentrations, and general economic conditions. Our policies require a committee of senior management to review, at least quarterly, credit relationships with a credit risk rating of 5 through 9 that exceed specific dollar values. Our review process evaluates the appropriateness of the credit risk rating and allocation of the allowance for loan losses, as well as other account management functions. The allowance for loan losses is determined based on a qualitative analysis and a formula allocation for similarly risk-rated loans by portfolio segment and individually for impaired loans. The formula allocation provides the average loan loss experience for each portfolio segment, which considers our quarterly historical loss experience since the year 2000, both by risk-rating category and client industry sector. The resulting loan loss factors for each risk-rating category and client industry sector are ultimately applied to the respective period-end client loan balances for each corresponding risk-rating category by client industry sector to provide an estimation of the allowance for loan losses. The probable loan loss experience for any one year period of time is reasonably expected to be greater or less than the average as determined by the loss factors. As such, management applies a qualitative allocation to the results of the aforementioned model to ascertain the total allowance for loan losses. This qualitative allocation is based on management's assessment of the risks that may lead to a loan loss experience different from our historical loan loss experience. Based on management's prediction or estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period and includes, but is not limited to, consideration of the following factors:
Changes in lending policies and procedures, including underwriting standards and collections, and charge-off and recovery practices;
Changes in national and local economic business conditions, including the market and economic condition of our clients' industry sectors;
Changes in the nature of our loan portfolio;
Changes in experience, ability, and depth of lending management and staff;
Changes in the trend of the volume and severity of past due and classified loans;
Changes in the trend of the volume of nonaccrual loans, troubled debt restructurings, and other loan modifications;
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Reserve floor for portfolio segments that would not draw a minimum reserve based on the lack of historical loan loss experience;
Reserve for large funded loan exposure;
Reserve for performing impaired loan exposure; and
Other factors as determined by management from time to time.
While the evaluation process of our allowance for loan losses uses historical and other objective information, the classification of loans and the establishment of the allowance for loan losses rely, to a great extent, on the judgment and experience of our management.
Allowance for Unfunded Credit Commitments
We record a liabilityAllowance for probable and estimable incurred losses associated with our unfunded credit commitments being fundedincludes an allowance for both our unfunded loan commitments and subsequently being charged off. Each quarter, everyour letters of credit. The increase of $53.1 million was due primarily to the day one impact of the adoption of CECL of $22.8 million as well as an $30.2 million increase for the year ended December 31, 2020, driven primarily by growth in unfunded client credit commitmentcommitments of $7.5 billion.
Net Deferred Tax Liabilities
Net deferred tax liabilities increased to$173.0 million due to an increase in unrealized gains recorded to accumulated other comprehensive income from our available-for-sale securities and the termination of our interest rate swap cash flow
hedge contracts, as discussed in the "Derivatives" section above, as well as gains from conversion of convertible debt options, partially offset by an increase in allowance for credit losses for loans.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $137.1 million was reflective primarily of a $68.2 million increase in investment securities payable due to unsettled purchases of fixed income investment securities and a $41.3 million increase in income tax payable.
Noncontrolling Interests
Noncontrolling interests totaled $213.8 million and $150.8 million at December 31, 2020 and 2019, respectively. The increase was due to net income attributable to noncontrolling interests of $85.9 million, partially offset by net capital distributions of $22.9 million primarily to investors in our managed funds of funds for the year ended December 31, 2020. For more information, refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Capital Resources
We maintain an adequate capital base to support anticipated asset growth, operating needs, and credit and other business risks, and to provide for SVB Financial and the Bank to be in compliance with applicable regulatory capital guidelines, including the joint agency rules implementing the "Basel III" capital rules (the "Capital Rules"). Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of our capital stock or other securities. Under the oversight of the Finance Committee of our Board of Directors, management engages in regular capital planning processes in an effort to optimize the use of the capital available to us and to appropriately plan for our future capital needs. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. In addition, we conduct capital stress tests as part of our annual capital planning process. The capital stress tests allow us to assess the impact of adverse changes in the economy and interest rates on our capital adequacy position.
Common Stock
On November 13, 2018, the Company announced a program to purchase up to $500 million of our outstanding common stock (the "Stock Repurchase Program"). The program completed on July 1, 2019, after we repurchased and retired 2.2 million shares of our outstanding common stock totaling $499.6 million.
On October 24, 2019, the Company’s Board of Directors authorized a new stock repurchase program that enabled the Company to repurchase up to $350 million of its outstanding common stock. Under the program, we purchased and retired 244,223 shares of our outstanding common stock totaling $60.0 million. This program expired on October 29, 2020.
Preferred Stock
On December 9, 2019, the Company issued depositary shares each representing a 1/40th ownership interest in 350,000 shares of Series A Preferred Stock with $0.001 par value and liquidation preference of $1,000 per share, or $25 per depositary share. The Series A Preferred Stock has no stated maturity and is allocatednot subject to any sinking fund or other obligation of SVB Financial Group. Dividends are approved by the Board of Directors and, if declared, are payable quarterly, in arrears, at a rate per annum equal to 5.25 percent.
As of December 31, 2020, there were 350,000 shares issued and outstanding of Series A Preferred Stock, which had a carrying value of $340.1 million and liquidation preference of $350 million. For the year ended December 31, 2020, the Company's Board of Directors declared and SVB Financial distributed quarterly cash dividends totaling $17.2 million to Series A Preferred Stock holders.
On February 2, 2021, the Company issued Series B Preferred Stock. Refer to Note 28—“Subsequent Events” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional information.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $8.2 billion at December 31, 2020, an increase of $1.7 billion, or 27.0 percent compared to $6.5 billion at December 31, 2019. This increase was primarily the result of net income of $1.2 billion in 2020, an increase in accumulated other comprehensive income reflective primarily of a $544.9 million ($393.3 million net of tax) increase in the fair value of our AFS securities portfolio driven by decreases in period-end market interest rates, and $182.0 million ($131.4 million net of tax) of remaining unrealized gains on cash flow hedge.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Capital Ratios
Regulatory capital ratios for SVB Financial and the Bank exceeded minimum federal regulatory guidelines under the current Capital Rules as well as for a well-capitalized bank holding company and insured depository institution, respectively, as of December 31, 2020, 2019 and 2018. See Note 23—“Regulatory Matters” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further information. Capital ratios for SVB Financial and the Bank, compared to the minimum capital ratios are set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Required Minimum (1) | | Well Capitalized Minimum |
| | 2020 | | 2019 | | 2018 | | |
| SVB Financial: | | | | | | | | | | |
| CET 1 risk-based capital ratio (2) (3) | | 11.04 | % | | 12.58 | % | | 13.41 | % | | 7.0 | % | | N/A |
| Tier 1 risk-based capital ratio (3) | | 11.89 | | | 13.43 | | | 13.58 | | | 8.5 | | | 6.0 | |
| Total risk-based capital ratio (3) | | 12.64 | | | 14.23 | | | 14.45 | | | 10.5 | | | 10.0 | |
| Tier 1 leverage ratio (2) (3) | | 7.45 | | | 9.06 | | | 9.06 | | | 4.0 | | N/A |
| Tangible common equity to tangible assets ratio (4)(5) | | 6.66 | | | 8.39 | | | 8.99 | | | N/A | | N/A |
| Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.87 | | | 12.76 | | | 13.28 | | | N/A | | N/A |
| Bank: | | | | | | | | | | |
| CET 1 risk-based capital ratio (3) | | 10.70 | % | | 11.12 | % | | 12.41 | % | | 7.0 | % | | 6.5 | % |
| Tier 1 risk-based capital ratio (3) | | 10.70 | | | 11.12 | | | 12.41 | | | 8.5 | | | 8.0 | |
| Total risk-based capital ratio (3) | | 11.49 | | | 11.96 | | | 13.32 | | | 10.5 | | | 10.0 | |
| Tier 1 leverage ratio (3) | | 6.43 | | | 7.30 | | | 8.10 | | | 4.0 | | | 5.0 | |
| Tangible common equity to tangible assets ratio (4)(5) | | 6.24 | | | 7.24 | | | 8.13 | | | N/A | | N/A |
| Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.58 | | | 11.31 | | | 12.28 | | | N/A | | N/A |
(1)Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital conservation buffer under the Capital Rules.
(2)"Well-Capitalized Minimum" CET 1 risk-based capital and Tier 1 leverage ratios are not formally defined under applicable banking regulations for bank holding companies.
(3)Capital ratios include regulatory capital phase-in of the allowance for credit risk-ratinglosses under the 2020 CECL Transition Rule for periods beginning December 31, 2020.
(4)See below for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.
(5)The FRB has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio, however, we believe these ratios provide meaningful supplemental information regarding our capital levels and are therefore provided above.
Risk-based capital ratios (CET 1, tier 1, total risk-based capital, and tier 1 leverage) for SVB Financial decreased as of December 31, 2020, compared to the same ratios as of December 31, 2019, primarily as a result of a proportionally higher increase in our risk-weighted assets relative to the increase in capital during 2020. The increase in risk-weighted assets was driven primarily by the increases in our loan and fixed income portfolios during 2020. The increase in average assets was driven by increases in fixed income investments and loan portfolios, as well as cash and cash equivalents reflective of strong deposit growth. The increase in capital was reflective primarily of net income of $1.2 billion.
Risk-based capital ratios (CET 1, tier 1, total risk-based capital, and tier 1 leverage) for Silicon Valley Bank (the "Bank") decreased as of December 31, 2020, compared to the same ratios as of December 31, 2019. The decreases were a result of the proportionally higher increase in our risk-weighted assets and average assets relative to the increase in capital during 2020. The increase in risk-weighted assets and average assets were driven by increases in our loan and fixed income
portfolios, as well as cash and cash equivalents 2020 reflective of strong deposit growth. The increases in capital includes for Silicon valley bank was driven by net income as well as a $700 million downstream capital infusion from our bank holding company.
Regulatory Capital Phase-In under the 2020 CECL Transition Rule
In March 2020, the federal banking agencies issued the 2020 CECL Transition Rule, which provides transitional relief to banking organizations with respect to the impact of CECL on regulatory capital. Under the rule, banking organizations that adopt CECL during the 2020 calendar year, such as SVB Financial and the Bank, may delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year period to phase out the aggregate capital benefit provided during the initial two-year delay. The rule prescribes a methodology for estimating the impact of differences in credit loss allowances reflected under CECL versus under the incurred loss methodology during the five-year transition period. We have elected to use the five-year transition option under the 2020 CECL Transition Rule.
Capital Simplification Rules
In July 2019, the federal banking agencies adopted final rules intended to simplify compliance with capital rules for non-advanced approaches banking organizations (the “Capital Simplification Rules”), such as SVB Financial and the Bank. The Capital Simplification Rules took effect for SVB Financial as of January 1, 2020 and simplify the capital treatment of mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions and minority interests for banking organizations.
All our reported capital ratios remain above the levels considered to be "well capitalized" under applicable banking regulations.
Non-GAAP Tangible Common Equity to Tangible Assets and Non-GAAP Tangible Common Equity to Risk-weighted Assets
The tangible common equity, or tangible book value, to tangible assets ratio and the tangible common equity to risk-weighted assets ratios are not required by GAAP or applicable bank regulatory requirements. However, we believe these ratios provide meaningful supplemental information regarding our capital levels. Our management uses, and believes that investors benefit from referring to, these ratios in evaluating the adequacy of the Company’s capital levels; however, this financial measure should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. These ratios are calculated by dividing total SVBFG stockholder’s equity, by total period-end assets and risk-weighted assets, after reducing both amounts by acquired intangibles, if any. The manner in which this ratio is calculated varies among companies. Accordingly, our ratio is not necessarily comparable to similar measures of other companies. The following table provides a reconciliation of non-GAAP financial measures with financial measures defined by GAAP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP tangible common equity and tangible assets
(Dollars in thousands, except ratios) | | SVB Financial |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| GAAP SVBFG stockholders’ equity | | $ | 8,219,700 | | | $ | 6,470,307 | | | $ | 5,116,209 | | | $ | 4,179,795 | | | $ | 3,642,554 | |
| Less: preferred stock | | 340,138 | | | 340,138 | | | — | | | — | | | — | |
| Less: intangible assets | | 204,120 | | | 187,240 | | | — | | | — | | | — | |
| Tangible common equity | | $ | 7,675,442 | | | $ | 5,942,929 | | | $ | 5,116,209 | | | $ | 4,179,795 | | | $ | 3,642,554 | |
| GAAP total assets | | $ | 115,511,007 | | | $ | 71,004,903 | | | $ | 56,927,979 | | | $ | 51,214,467 | | | $ | 44,683,660 | |
| Less: intangible assets | | 204,120 | | | 187,240 | | | — | | | — | | | — | |
| Tangible assets | | $ | 115,306,887 | | | $ | 70,817,663 | | | $ | 56,927,979 | | | $ | 51,214,467 | | | $ | 44,683,660 | |
| Risk-weighted assets | | $ | 64,680,666 | | | $ | 46,577,485 | | | $ | 38,527,853 | | | $ | 32,736,959 | | | $ | 28,248,750 | |
| Non-GAAP tangible common equity to tangible assets | | 6.66 | % | | 8.39 | % | | 8.99 | % | | 8.16 | % | | 8.15 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.87 | | | 12.76 | | | 13.28 | | | 12.77 | | | 12.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP tangible common equity and tangible assets
(Dollars in thousands, except ratios) | | Bank |
| December 31,
2020 | | December 31,
2019 | | December 31,
2018 | | December 31,
2017 | | December 31,
2016 |
| Tangible common equity | | $ | 7,068,964 | | | $ | 5,034,095 | | | $ | 4,554,814 | | | $ | 3,762,542 | | | $ | 3,423,427 | |
| Tangible assets | | $ | 113,303,370 | | | $ | 69,563,817 | | | $ | 56,047,134 | | | $ | 50,383,774 | | | $ | 44,059,340 | |
| Risk-weighted assets | | $ | 61,023,462 | | | $ | 44,502,150 | | | $ | 37,104,080 | | | $ | 31,403,489 | | | $ | 26,856,850 | |
| Non-GAAP tangible common equity to tangible assets | | 6.24 | % | | 7.24 | % | | 8.13 | % | | 7.47 | % | | 7.77 | % |
| Non-GAAP tangible common equity to risk-weighted assets | | 11.58 | | | 11.31 | | | 12.28 | | | 11.98 | | | 12.75 | |
SVB Financial's and the Bank's tangible common equity to tangible assets and SVB Financial's risk-weighted assets ratios decreased due to the proportionally higher increases in tangible and risk-weighted assets relative to tangible common equity. The increase in risk-tangible and risk-weighted assets were driven by robust asset growth during 2020 driven by increases in fixed income and loan portfolios. Increased capital was reflective primarily of net income.
The increase in the Bank's tangible common equity to tangible assets ratio was driven by the increase in capital due to the large unrealized gains from the available for sale and securities and unrealized gains on the cash flow hedges during 2020. See "SVBFG Stockholders’ Equity" above for further details on changes to the individual components of our equity balance.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. The actual liquidity needs and the credit risk that we have experienced have historically been lower than the contractual amount of these commitments because a significant portion of these commitments expire without being drawn upon. Refer to the discussion of our off-balance sheet arrangements in Note 21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
The following table summarizes our unfunded commercial commitments as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Commitments Expiring per Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| Commercial commitments: | | | | | | | | | | |
| Loan commitments available for funding | | $ | 28,975,133 | | | $ | 21,879,793 | | | $ | 5,258,406 | | | $ | 1,555,776 | | | $ | 281,158 | |
| Standby letters of credit | | 3,002,752 | | | 2,916,623 | | | 65,079 | | | 9,742 | | | 11,308 | |
| Commercial letters of credit | | 4,366 | | | 4,366 | | | — | | | — | | | — | |
| Total unfunded credit commitments | | $ | 31,982,251 | | | $ | 24,800,782 | | | $ | 5,323,485 | | | $ | 1,565,518 | | | $ | 292,466 | |
The following table summarizes our contractual obligations to make future payments as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due By Period |
| (Dollars in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
| SVBFG contractual obligations: | | | | | | | | | | |
| Deposits (1) (2) | | $ | 101,981,807 | | | $ | 101,981,807 | | | $ | — | | | $ | — | | | $ | — | |
| Borrowings (2) | | 864,181 | | | 20,553 | | | — | | | 348,348 | | | 495,280 | |
| Non-cancelable operating leases | | 276,924 | | | 51,547 | | | 97,037 | | | 74,498 | | | 53,842 | |
| Commitments to qualified affordable housing projects | | 370,208 | | | 167,026 | | | 170,552 | | | 13,977 | | | 18,653 | |
| Other obligations | | 2,258 | | | 1,962 | | | 296 | | | — | | | — | |
| Total obligations attributable to SVBFG | | $ | 103,495,378 | | | $ | 102,222,895 | | | $ | 267,885 | | | $ | 436,823 | | | $ | 567,775 | |
(1)Includes time deposits and deposits with no defined maturity, such as noninterest-bearing demand, interest-bearing checking, savings, money market and sweep accounts.
(2)Amounts exclude contractual interest.
Excluded from the tables above are unfunded commitment obligations of $22.1 million to our managed funds of funds and other fund investments for which neither the payment, timing, nor eventual obligation is certain. Subject to applicable regulatory requirements, including the Volcker Rule (see "Business - Supervision and Regulation" under Part I, Item 1 of this report), we make commitments to invest in venture capital and private equity funds, which in turn make investments generally in, or in some cases make loans to, privately-held companies. Commitments to invest in these funds are generally made for a 10-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to generally call most of the capital commitments over 5 to 7 years; however in certain cases, the funds may not call 100% of committed capital over the life of the fund. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. Additionally, our consolidated managed funds of funds have $4.3 million of remaining unfunded commitments to venture capital and private equity funds. See Note 8—“Investment Securities" of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for further disclosure related to non-marketable and other equity securities. Additional discussion of our off-balance sheet arrangements for these fund investments is included in Note 21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Liquidity
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations, including, as necessary, paying creditors, meeting depositors’ needs, accommodating loan demand and growth, funding investments, repurchasing securities and other operating or capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Our Asset/Liability Committee (“ALCO”), which is a management committee, provides oversight to the liquidity management process and recommends policy guidelines for the approval of the Finance Committee of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Additionally, we routinely conduct liquidity stress testing as part of our liquidity management practices.
Our deposit base is, and historically has been, our primary source of liquidity. Our deposit levels and cost of deposits may fluctuate from time to time due to a variety of factors, including market conditions, prevailing interest rates, changes in client deposit behaviors, availability of insurance protection, and our offering of deposit products. At December 31, 2020, our period-end total deposit balances increased to $102.0 billion, compared to $61.8 billion at December 31, 2019.
Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, short-term investment securities maturing within one year, AFS securities eligible and available for financing or pledging purposes with a maturity in excess of one year and anticipated near-term cash flows from investments.
We have certain facilities in place to enable us to access short-term borrowings on a secured and unsecured basis. Our secured facilities include collateral pledged to the FHLB of San Francisco and the discount window at the FRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of December 31, 2020, collateral pledged to the FHLB of San Francisco was comprised primarily of fixed income investment securities and loans and had a carrying value of $6.8 billion, of which $5.8 billion was available to support additional borrowings. As of December 31, 2020, collateral pledged to the discount window at the FRB was comprised of fixed income investment securities and had a carrying value of $0.9 billion, all of which was unused and available to support additional borrowings. Our total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.9 billion at December 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $4.0 billion at December 31, 2020.
In connection with our participation in the PPP under the CARES Act as discussed, we considered participating in the Federal Reserve’s Paycheck Protection Program Lending Facility ("PPPLF"). The PPPLF was established to allow participating institutions to facilitate lending under the PPP and extends credit to eligible PPP loan originators on a non-recourse basis, taking PPP loans as collateral at face value. Ultimately, we were able to extend credit to PPP borrowers without relying on the PPPLF. Additionally, interim final capital rules issued by federal bank regulatory agencies have neutralized the regulatory capital effects of participating in the PPP, in that loans outstanding are assessed a zero percent risk weight for regulatory capital purposes.
On a stand-alone basis, SVB Financial’s primary liquidity channels include dividends from the Bank, its portfolio of liquid assets, and its ability to raise debt and capital.The ability of the Bank to pay dividends is subject to certain regulations described in “Business—Supervision and Regulation—Restrictions on Dividends” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for 2020, 2019 and 2018, respectively: (For further details, see our Consolidated Statements of Cash Flows under "Consolidated Financial Statements and Supplementary Data" under Part II, Item 8 of this report.)
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Average cash and cash equivalents | | $ | 13,273,237 | | | $ | 6,524,342 | | | $ | 3,301,783 | |
| Percentage of total average assets | | 15.5 | % | | 10.3 | % | | 6.0 | % |
| Net cash provided by operating activities | | $ | 1,445,487 | | | $ | 1,164,129 | | | $ | 933,562 | |
| Net cash used for investing activities | | (31,205,721) | | | (9,371,882) | | | (4,800,375) | |
| Net cash provided by financing activities | | 40,653,214 | | | 11,417,997 | | | 4,515,277 | |
| Net increase in cash and cash equivalents | | $ | 10,892,980 | | | $ | 3,210,244 | | | $ | 648,464 | |
Average cash and cash equivalents increased to $13.3 billion in 2020, compared to $6.5 billion for 2019. Average deposits increased $20.0 billion which enabled us to grow our average loan portfolio by $7.3 billion in 2020.
2020
Cash provided by operating activities of $1.4 billion in 2020 included net income before noncontrolling interests of $1.3 billion and $200 million from changes in other assets and liabilities, offset by $49 million from changes from adjustments to reconcile to net income to net cash.
Cash used for investing activities of $31.2 billion in 2020 included $19.1 billion of net outflows from our fixed income securities portfolio due to $30.0 billion of purchases, offset by fixed income inflows of $10.9 billion in portfolio cash flows from sales, maturities and paydowns, and $11.9 billion of net outflows from funded loans.
Cash provided by financing activities of $40.7 billion in 2020 was driven primarily by the net increase in deposits of $40.2 billion and $0.5 billion from the issuance of our 3.125% Senior Notes.
Cash and cash equivalents at December 31, 2020 were $17.7 billion, compared to $6.8 billion at December 31, 2019.
2019
Cash provided by operating activities of $1.2 billion in 2019 included net income before noncontrolling interests of $1.2 billion. These net inflows were offset by $62 million of adjustments to reconcile net income to net cash and $82 million from changes in other assets and liabilities.
Cash used for investing activities of $9.4 billion in 2019 included $4.8 billion of net outflows from the net increase in loans funded and $4.4 billion of net outflows from our fixed income securities portfolio due to $10.4 billion of purchases, offset by fixed income inflows of $6.0 billion of portfolio cash flows from sales, maturities and paydowns.
Cash provided by financing activities of $11.4 billion in 2019 was driven primarily by the net increase in deposits of $12.4 billion and $0.3 billion in proceeds from issuance of preferred stock, partially offset by a $1.0 billion decrease in borrowings outstanding as of December 31, 2019 as well as $0.4 billion in cash outflows from the repurchase of our common stock under the Stock Repurchase Program.
Subsequent Events
Potential Fraudulent Client Activity
The Company recently became aware of potentially fraudulent activity conducted by JES Global Capital III, L.P. (“JES”), a client of the Bank, in connection with a loan transaction funded in early February 2021.
We are currently investigating this incident to determine our potential credit exposure, which is currently estimated to be up to $70 million, net of tax, relating to a Global Fund Banking capital call line of credit. We have been advised that a principal of JES was recently arrested, and the matter is pending in the U.S. District Court for the Southern District of New
York. We are continuing to work with the appropriate law enforcement authorities in connection with this matter and intend to pursue all available sources of recovery and other measures to mitigate the potential loss.
Based on our review of the potentially fraudulent activity, as well as our risk assessment review of the Global Fund Banking loan portfolio conducted in light of the incident, the Company currently believes this incident is an isolated occurrence involving a single business relationship.
This matter (and other updates about the first quarter of 2021) was initially disclosed by the Company in a Current Report on Form 8-K on February 26, 2021. We may be limited in any additional information we can disclose due to the ongoing investigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
Market risk is defined as the risk of adverse fluctuations in the market value of financial instruments due to changes in market interest rates. Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of the benchmark interest rates. Additionally, changes in interest rates can influence the rate of principal prepayments on mortgage securities, which affects the rate of amortization of purchase premiums and discounts. Other market risks include foreign currency exchange risk and equity price risk (including the effect of competition on product pricing). These risks and related impacts are important market considerations but are inherently difficult to assess through simulation results. Consequently, simulations used to analyze the sensitivity of net interest income to changes in interest rates will differ from actual results due to differences in the timing and frequency of rate resets, the magnitude of changes in market rates, the impact of competition, fluctuating business conditions and the impact of strategies taken by management to mitigate these risks.
Interest rate risk is managed by our ALCO. ALCO reviews the sensitivity of the market valuation on earning assets and funding liabilities and modeled 12-month projections of net interest income from changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and market conditions. Relevant metrics and guidelines, which are approved by the Finance Committee of our Board of Directors and are included in our Interest Rate Risk Policy, are monitored on an ongoing basis.
Interest rate risk is managed primarily through strategies involving our fixed income securities portfolio, available funding channels and capital market activities. In addition, our policies permit the use of off-balance sheet derivatives, such as interest rate swaps, to assist with managing interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the economic value of equity and net interest income under a variety of interest rate scenarios, balance sheet forecasts and business strategies. The simulation model provides a dynamic assessment of interest rate sensitivity which is embedded within our balance sheet. Rate sensitivity measures the potential variability in economic value and net interest income relating solely to changes in market interest rates over time. We review our interest rate risk position and sensitivity to market interest rates regularly.
Model Simulation and Sensitivity Analysis
A specific application of our simulation model involves measurement of the impact of changes in market interest rates on the economic value of equity (“EVE”). EVE is defined as the market value of assets, less the market value of liabilities. Another application of the simulation model measures the impact of changes in market interest rates on net interest income (“NII”) assuming a static balance sheet, in both size and composition as of the period-end reporting date. In the NII simulation, the level of market interest rates and the size and composition of the balance sheet are held constant over the simulation horizon. Simulated cash flows during the scenario horizon are assumed to be replaced as they occur, which maintains the balance sheet at its current size and composition. Yield and spread assumptions on cash and investment balances reflect current market rates and the shape of the yield curve. Yield and spread assumptions on loans reflect recent market impacts on product pricing. Similarly, we make certain deposit balance decay rate assumptions on demand deposits and interest-bearing deposits, which are replenished to hold the level and mix of funding liabilities constant. Changes in market interest rates that affect net interest income are principally short-term interest rates and include the following benchmark indexes: (i) the National Prime Rate, (ii) 1-month and 3-month LIBOR, and (iii) the Federal Funds target rate. Changes in these short-term rates impact interest earned on our variable rate loans and balances held as cash and cash equivalents. Additionally, simulated changes in deposit pricing relative to changes in market rates, commonly referred to as deposit beta, generally follow overall changes in short-term interest rates, although actual changes may lag in terms of timing and magnitude.
Both EVE and NII measures rely upon the use of models to simulate cash flow behavior for loans and deposits. These models were developed internally and are based on historical balance and rate observations. Investment portfolio cash flow is based on a combination of third-party prepayment models and internally managed prepayment vectors depending on security type. As part of our ongoing governance structure, each client'sof these models and assumptions are periodically reviewed and recalibrated as needed to ensure that they are representative of our understanding of existing behaviors.
During the fourth quarter of 2020, a modeling assumption change was made to align investment portfolio cash flows with an established benchmark model. This included recalibration of third-party prepayment models associated with certain mortgage-backed security classes. As a result of these changes, the measure of interest rate sensitivity of total investments was reduced resulting in an overall lower EVE sensitivity. This modeling change did not significantly impact NII sensitivity measures.
Simulation results presented include an "asymmetric" beta assumption that is applied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations that deposit repricing behavior in a falling rate environment would be different than repricing behavior in a rising rate environment. This model assumes the overall beta for interest-bearing deposits in a falling rate environment would be approximately 60 percent. That is, overall changes in interest-bearing deposit rates would be approximately 60 percent of the change in short-term market rates. The deposit beta assumption for an increasing rate environment is 50 percent. These repricing assumptions are reflected as changes in interest expense on interest-bearing deposit balances.
The following table presents our EVE and NII sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points ("bps") at December 31, 2020 and December 31, 2019. Net Interest Income sensitivity and the modeled Economic Value of Equity for December 31, 2019 has been revised to reflect the updated model assumptions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in interest rates (bps)
(Dollars in thousands) | | Estimated | | Estimated Increase/(Decrease) In EVE | | Estimated | | Estimated Increase/
(Decrease) In NII |
| EVE | | Amount | | Percent | | NII | | Amount | | Percent |
| December 31, 2020: | | | | | | | | | | | | |
| +200 | | $ | 9,499,738 | | | $ | (1,724,648) | | | (15.4) | % | | $ | 3,063,350 | | | $ | 691,748 | | | 29.2 | % |
| +100 | | 10,558,232 | | | (666,154) | | | (5.9) | | | 2,728,691 | | | 357,089 | | | 15.1 | |
| — | | 11,224,386 | | | — | | | — | | | 2,371,602 | | | — | | | — | |
| -100 | | 11,581,718 | | | 357,332 | | | 3.2 | | | 2,309,596 | | | (62,006) | | | (2.6) | |
| -200 | | 11,534,332 | | | 309,946 | | | 2.8 | | | 2,306,280 | | | (65,322) | | | (2.8) | |
| | | | | | | | | | | | |
| December 31, 2019 (as revised): | | | | | | | | | | | | |
| +200 | | $ | 7,503,986 | | | $ | (619,463) | | | (7.6) | % | | $ | 2,588,319 | | | $ | 523,423 | | | 25.3 | % |
| +100 | | 7,792,507 | | | (330,942) | | | (4.1) | | | 2,326,428 | | | 261,532 | | | 12.7 | |
| — | | 8,123,449 | | | — | | | — | | | 2,064,896 | | | — | | | — | |
| -100 | | 8,495,627 | | | 372,178 | | | 4.6 | | | 1,789,625 | | | (275,271) | | | (13.3) | |
| -200 | | 8,567,118 | | | 443,669 | | | 5.5 | | | 1,514,354 | | | (550,542) | | | (26.7) | |
Economic Value of Equity
The estimated EVE in the preceding table is based on a combination of valuation methodologies including discounted cash flow analysis and a multi-path lattice-based valuation. Both methodologies use publicly available market interest rates to determine discounting factors on projected cash flows. The model simulations and calculations are highly assumption-dependent and will change regularly as the composition of earning assets and funding liabilities change (including the impact of changes in the value of interest rate derivatives, if any), as interest rate environments evolve, and as we change our assumptions in response to relevant market conditions, competition or business circumstances. These calculations do not reflect forecast changes in our balance sheet or changes we may make to reduce our EVE exposure as a part of our overall interest rate risk management strategy.
As with any method of measuring interest rate risk, certain limitations are inherent in the method of analysis presented in the preceding table. We are exposed to yield curve risk, prepayment risk, basis risk and yield spread compression, which cannot be fully modeled and expressed using the above methodology. Accordingly, the results in the preceding table should not be relied upon as a precise indicator of actual results in the event of changing market interest rates. Additionally, the resulting EVE and NII estimates are not intended to represent and should not be construed to represent our estimate of the underlying EVE or forecast of NII.
Our base EVE as of December 31, 2020 increased $3.1 billion from December 31, 2019, driven by overall balance sheet growth and the significant decrease in market rates since the first quarter of 2020. For the period ended December 31, 2020, as compared to December 31, 2019, cash balances and fixed income investments in our AFS and HTM portfolios increased by $10.9 billion and $19.6 billion, respectively, while loan balances increased by $12.0 billion. Funding for these assets came primarily from growth of $40.2 billion in total deposits, which consists of $25.7 billion and $14.5 billion increase in noninterest bearing and interest-bearing accounts, respectively. The mix of noninterest bearing and interest-bearing deposits to total deposits remained relatively unchanged at December 31, 2020, compared to December 31, 2019.
Rapid deposit growth has exceeded the pace of our loan growth, and as a result, a significant amount of excess deposits not used to fund loan growth have contributed to the growth of our cash and investments balances. Much of the investment portfolio is held in fixed rate MBS and CMOs which generally have a higher market value sensitivity than variable rate loans or
cash. Thus, under an upward rate shock scenario, the market value of investments changes more than the market value of deposits resulting in a negative EVE sensitivity in those scenarios.
Due to the sudden decrease in market rates that occurred in March 2020, EVE sensitivity measures in the -100 and -200 bps rate shock scenarios do not represent the full magnitude of those rate shocks because we assume that U.S. Federal Fund rates are floored at zero. As a result, the December 31, 2020 EVE sensitivity of the -100 and -200 bps rate shock scenarios are similar.
The modeling assumption change described above combined with continued balance sheet growth and a lower overall rate environment are the primary contributing factors to the overall change in EVE sensitivity.
12-Month Net Interest Income Simulation
NII sensitivity is measured as the percentage change in projected 12-month net interest income earned in +/-100 and +/-200 basis point interest rate shock scenarios compared to a base scenario where balances and interest rates are held constant over the forecast horizon. At December 31, 2020, NII sensitivity was 15.1 percent in the +100 bps interest rate scenario, compared to 12.7 percent at December 31, 2019. Our NII sensitivity in the +200 bps interest rate shock scenario was 29.2 percent compared to 25.3 percent at December 31, 2019. NII sensitivity in the -100 bps scenario of negative 2.6 percent was lower at December 31, 2020, compared to a negative 13.3 percent at December 31, 2019. The -200 bps scenario currently indicates a lower percentage change in NII of negative 2.8 percent at December 31, 2020, compared to negative 26.7 percent at December 31, 2019. However, as noted above, the -100 and -200 bps scenarios are not complete rate shocks in this rate environment, since rates are assumed to be floored at zero. The December 31, 2020 NII sensitivity percentages are inclusive of the realized income or expense associated with interest rate swaps that were unwound reflective of the macro hedging process initiated in 2019 to reduce the impact of decreasing rates on NII. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition previously described, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at December 31, 2020 increased compared to December 31, 2019 by $306.7 million, primarily driven by growth in the balance sheet that has taken place year-to-date combined with an overall relatively lower rate environment, reflective of the decrease in the Federal Funds Rate in March 2020, compared to last year. Specifically, a large portion of the loan portfolio is indexed to the Prime rate, which decreased 150 bps in March of 2020 due to actions undertaken by the Federal Reserve to mitigate a possible economic downturn. The adverse impact of changes in interest rates on NII was partially tempered to a certain degree by continued growth in the loan portfolio, as well as continued balance sheet growth as previously described.
A majority of our loans are indexed to Prime and LIBOR. In the positive parallel simulated rate shock scenarios, interest income on assets that are tied to variable rate indexes, primarily our variable rate loans, are expected to benefit our base 12-month NII projections. The opposite is true for negative rate shock scenarios.
The 12-month NII simulations include repricing assumptions on our interest-bearing deposit products which we set at our discretion based on client needs and our overall funding mix. Repricing of interest-bearing deposits impacts estimated interest expense.
For the interest rate scenarios, the simulation model incorporates embedded rate floors on loans, where present, which prevents model benchmark rates from moving below zero percent in the down rate scenarios. The embedded rate floors are also a factor in the increasing rate scenarios to the extent a simulated increase in rates is needed before floored rates are cleared. In addition, we assume deposit balance decay rates based on a historical deposit study of our clients. These assumptions may change in future periods based on changes in client behavior and at management's discretion. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our actual sensitivity overall.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
SVB Financial Group:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of SVB Financial Group and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Change in Accounting Principle
As discussed in Notes 2 and 9 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL).
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses for loans and unfunded loan commitments evaluated on a collective basis
As discussed in Notes 2 and 9 of the consolidated financial statements, the Company’s allowance for credit losses (ACL) for loans and unfunded credit commitments were $447.8 million and $120.8 million as of December 31, 2020, respectively. The allowance principally relates to the Company’s loans and unfunded loan commitments evaluated on a collective basis (the collective ALL and the collective AULC, respectively). The collective ALL and the collective AULC include the measure of expected credit losses on a collective (pooled) basis for those loans and unfunded loan commitments that share similar risk characteristics. The Company estimated the collective ALL using a current expected credit losses methodology based on relevant information about historical experience, the current macroeconomic environment, and reasonable and supportable economic forecasts that affect the collectability of the loan balances. The quantitative expected credit losses are the product of multiplying the Company’s estimates of probability of default (PD), loss given default (LGD), and individual loan level exposure at default (EAD) on an undiscounted basis. The Company derives the PD, LGD, and EAD from internal historical default and loss experience adjusted for multiple probability-weighted economic forecast scenarios of macroeconomic assumptions over a reasonable and supportable forecast period of three years. After the reasonable and supportable forecast period, the Company reverts to historical averages using an autoregressive method of mean reversion that trends towards the mean historical loss over the remaining contractual lives, adjusted for prepayments. The Company also applies certain qualitative adjustments to the results of its quantitative model for asset-specific risk characteristics, and current conditions and reasonable and supportable forecasts based on its expectation of the risks that may lead to future loan loss experience different from its historical loan loss experience. These adjustments are based on qualitative factors not reflected in the quantitative model but are expected to impact the estimate of credit losses. In order to capture the unique risks of the loan portfolio within the PD, LGD, EAD model, the Company segments the portfolio into pools and by credit risk rating. The Company estimated the collective AULC using a similar methodology as the collective ALL adjusted by the probability of an unfunded loan commitment being funded. Certain qualitative adjustments to historical loss information are also applied to the collective AULC.
We identified the assessment of the December 31, 2020 collective ALL and collective AULC as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to measurement uncertainty. Specifically, the assessment encompassed the evaluation of the methodology, including the methods and model used to estimate (1) the PD, LGD, and EAD and their significant assumptions and inputs, and (2) certain qualitative adjustments. Significant assumptions and inputs include the economic forecast scenarios of macroeconomic assumptions and their weightings, the historical observation period, portfolio segmentation, and credit risk ratings. The assessment also included an evaluation of the conceptual soundness and performance of the PD, LGD, and EAD model. Auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the December 31, 2020 collective ALL and collective AULC estimates, including controls over the:
•periodic review and monitoring of the collective ALL and the collective AULC methodology
•identification and determination of significant assumptions used in the PD, LGD, and EAD model
•evaluation of the qualitative adjustments, including significant assumptions used in the measurement of the qualitative adjustments
•determination of credit risk ratings
•analysis of the collective ALL and collective AULC results, trends, and ratios.
We evaluated the Company’s process to develop the December 31, 2020 collective ALL and collective AULC estimates by testing certain sources of data, qualitative factors and assumptions that the Company used, and considered the relevance and reliability of such data, qualitative factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge who assisted in:
•evaluating that the Company’s collective ALL and collective AULC methodology and key assumptions for compliance with U.S. generally accepted accounting principles
•assessing the conceptual soundness and performance of the PD, LGD, and EAD model by inspecting the model documentation to determine whether the model is suitable for the intended use
•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ALL and the collective AULC compared with relevant credit risk factors and consistency with credit trends associated with the Company’s portfolio
•evaluating the historical observation period, focusing on the relevance of the full economic cycle relative to the Company’s current portfolio
•evaluating the approach to incorporate macroeconomic forecast assumptions in the PD, LGD, EAD model with respect to the Company’s business environment and the loan products used across the industry
•evaluating model validation findings and assessing their possible impact, if any
•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the Company’s business and environment and relevant industry practices
•testing individual credit risk ratings for a selection of loan and unfunded loan commitment borrower relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral, as applicable.
We also assessed the sufficiency of the audit evidence obtained related to the December 31, 2020 collective ALL and collective AULC estimates by evaluating the:
•cumulative results of the audit procedures
•qualitative aspects of the Company’s accounting practices
•potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Company's auditor since 1994.
San Francisco, California
March 1, 2021
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands, except par value and share data) | | 2020 | | 2019 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 17,674,763 | | | $ | 6,781,783 | |
| Available-for-sale securities, at fair value (cost of $30,244,896 and $13,894,348, respectively) | | 30,912,438 | | | 14,014,919 | |
| Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $392 and $0 (fair value of $17,216,871 and $14,115,272, respectively) (1) | | 16,592,153 | | | 13,842,946 | |
| Non-marketable and other equity securities | | 1,802,235 | | | 1,213,829 | |
| Total investment securities | | 49,306,826 | | | 29,071,694 | |
| Loans, amortized cost | | 45,181,488 | | | 33,164,636 | |
| Allowance for credit losses: loans | | (447,765) | | | (304,924) | |
| Net loans | | 44,733,723 | | | 32,859,712 | |
| Premises and equipment, net of accumulated depreciation and amortization | | 175,818 | | | 161,876 | |
| Goodwill | | 142,685 | | | 137,823 | |
| Other intangible assets, net | | 61,435 | | | 49,417 | |
| Lease right-of-use assets | | 209,932 | | | 197,365 | |
| Accrued interest receivable and other assets | | 3,205,825 | | | 1,745,233 | |
| Total assets | | $ | 115,511,007 | | | $ | 71,004,903 | |
| Liabilities and total equity | | | | |
| Liabilities: | | | | |
| Noninterest-bearing demand deposits | | $ | 66,519,240 | | | $ | 40,841,570 | |
| Interest-bearing deposits | | 35,462,567 | | | 20,916,237 | |
| Total deposits | | 101,981,807 | | | 61,757,807 | |
| Short-term borrowings | | 20,553 | | | 17,430 | |
| Lease liabilities | | 259,554 | | | 218,847 | |
| Other liabilities | | 3,971,974 | | | 2,041,752 | |
| Long-term debt | | 843,628 | | | 347,987 | |
| Total liabilities | | 107,077,516 | | | 64,383,823 | |
| Commitments and contingencies (Note 21 and Note 27) | | 0 | | 0 |
| SVBFG stockholders’ equity: | | | | |
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; 350,000 and 350,000 shares issued and outstanding, respectively | | 340,138 | | | 340,138 | |
| Common stock, $0.001 par value, 150,000,000 shares authorized; 51,888,463 and 51,655,607 shares issued and outstanding, respectively | | 52 | | | 52 | |
| Additional paid-in capital | | 1,585,244 | | | 1,470,071 | |
| Retained earnings | | 5,671,749 | | | 4,575,601 | |
| Accumulated other comprehensive income | | 622,517 | | | 84,445 | |
| Total SVBFG stockholders’ equity | | 8,219,700 | | | 6,470,307 | |
| Noncontrolling interests | | 213,791 | | | 150,773 | |
| Total equity | | 8,433,491 | | | 6,621,080 | |
| Total liabilities and total equity | | $ | 115,511,007 | | | $ | 71,004,903 | |
(1)Prior to our adoption of Accounting Standard Update (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) on January 1, 2020, the allowance for credit losses related to held-to-maturity (HTM) securities was not applicable and is therefore presented as 0 at December 31, 2019. See "Adoption of New Accounting Standards" in Note 2—“Summary of Significant Accounting Policies” for additional details.
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands, except per share amounts) | | 2020 | | 2019 | | 2018 |
| Interest income: | | | | | | |
| Loans | | $ | 1,520,021 | | | $ | 1,599,165 | | | $ | 1,358,480 | |
| Investment securities: | | | | | | |
| Taxable | | 634,992 | | | 568,851 | | | 541,605 | |
| Non-taxable | | 61,055 | | | 44,952 | | | 34,616 | |
| Federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | 25,542 | | | 96,440 | | | 35,208 | |
| Total interest income | | 2,241,610 | | | 2,309,408 | | | 1,969,909 | |
| Interest expense: | | | | | | |
| Deposits | | 60,219 | | | 177,672 | | | 29,306 | |
| Borrowings | | 25,107 | | | 35,135 | | | 46,615 | |
| Total interest expense | | 85,326 | | | 212,807 | | | 75,921 | |
| Net interest income | | 2,156,284 | | | 2,096,601 | | | 1,893,988 | |
| Provision for credit losses | | 219,510 | | | 106,416 | | | 87,870 | |
| Net interest income after provision for credit losses | | 1,936,774 | | | 1,990,185 | | | 1,806,118 | |
| Noninterest income: | | | | | | |
| Gains on investment securities, net | | 420,752 | | | 134,670 | | | 88,094 | |
| Gains on equity warrant assets, net | | 237,428 | | | 138,078 | | | 89,142 | |
| Client investment fees | | 132,200 | | | 182,068 | | | 130,360 | |
| Foreign exchange fees | | 178,733 | | | 159,262 | | | 138,812 | |
| Credit card fees | | 97,737 | | | 118,719 | | | 94,072 | |
| Deposit service charges | | 90,336 | | | 89,200 | | | 76,097 | |
| Lending related fees | | 57,533 | | | 49,920 | | | 41,949 | |
| Letters of credit and standby letters of credit fees | | 46,659 | | | 42,669 | | | 34,600 | |
| Investment banking revenue | | 413,985 | | | 195,177 | | | 0 | |
| Commissions | | 66,640 | | | 56,346 | | | 0 | |
| Other | | 98,145 | | | 55,370 | | | 51,858 | |
| Total noninterest income | | 1,840,148 | | | 1,221,479 | | | 744,984 | |
| Noninterest expense: | | | | | | |
| Compensation and benefits | | 1,318,457 | | | 989,734 | | | 726,980 | |
| Professional services | | 247,084 | | | 205,479 | | | 158,835 | |
| Premises and equipment | | 127,125 | | | 96,770 | | | 77,918 | |
| Net occupancy | | 100,889 | | | 69,279 | | | 54,753 | |
| Business development and travel | | 23,724 | | | 68,912 | | | 48,180 | |
| FDIC and state assessments | | 27,587 | | | 18,509 | | | 34,276 | |
| Other | | 190,175 | | | 152,579 | | | 87,251 | |
| Total noninterest expense | | 2,035,041 | | | 1,601,262 | | | 1,188,193 | |
| Income before income tax expense | | 1,741,881 | | | 1,610,402 | | | 1,362,909 | |
| Income tax expense | | 447,587 | | | 425,685 | | | 351,561 | |
| Net income before noncontrolling interests | | 1,294,294 | | | 1,184,717 | | | 1,011,348 | |
| Net income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | |
| Preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Net income available to common stockholders | | $ | 1,191,217 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Earnings per common share—basic | | $ | 23.05 | | | $ | 21.90 | | | $ | 18.35 | |
| Earnings per common share—diluted | | 22.87 | | | 21.73 | | | 18.11 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Net income before noncontrolling interests | | $ | 1,294,294 | | | $ | 1,184,717 | | | $ | 1,011,348 | |
| Other comprehensive income (loss), net of tax: | | | | | | |
| Change in foreign currency cumulative translation gains and losses: | | | | | | |
| Foreign currency translation gains (losses) | | 16,467 | | | 3,208 | | | (5,999) | |
| Related tax (expense) benefit | | (4,621) | | | (889) | | | 1,669 | |
| Change in unrealized gains and losses on available-for-sale securities: | | | | | | |
| Unrealized holding gains (losses) | | 606,038 | | | 189,813 | | | (22,348) | |
| Related tax (expense) benefit | | (168,521) | | | (52,697) | | | 6,315 | |
Reclassification adjustment for (gains) losses included in net
income | | (61,165) | | | 3,905 | | | 740 | |
| Related tax expense (benefit) | | 16,953 | | | (1,087) | | | (205) | |
| Reclassification of unrealized gains on equity securities to retained earnings for ASU 2016-01 | | 0 | | | 0 | | | (40,316) | |
| Related tax expense | | 0 | | | 0 | | | 11,145 | |
| Amortization of unrealized holding losses (gains) on securities transferred from available-for-sale to held-to-maturity | | 2,104 | | | (2,158) | | | (4,607) | |
| Related tax (expense) benefit | | (586) | | | 600 | | | 1,277 | |
| Reclassification of stranded tax effect to retained earnings for ASU 2018-02 | | 0 | | | 0 | | | (319) | |
| Change in unrealized gains and losses on cash flow hedges: | | | | | | |
| Unrealized gains (losses) | | 231,920 | | | (8,305) | | | 0 | |
| Related tax (expenses) benefit | | (64,281) | | | 2,306 | | | 0 | |
| Reclassification adjustment for (gains) losses included in net income | | (49,928) | | | 5,358 | | | 0 | |
| Related tax expense (benefit) | | 13,692 | | | (1,489) | | | 0 | |
| Other comprehensive income (loss), net of tax | | 538,072 | | | 138,565 | | | (52,648) | |
| Comprehensive income | | 1,832,366 | | | 1,323,282 | | | 958,700 | |
| Comprehensive income attributable to noncontrolling interests | | (85,926) | | | (47,861) | | | (37,508) | |
| Comprehensive income attributable to SVBFG | | $ | 1,746,440 | | | $ | 1,275,421 | | | $ | 921,192 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | Common Stock | | Additional
Paid-in Capital | | Retained Earnings | | Accumulated Other
Comprehensive Income (Loss) | | Total SVBFG
Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| (Dollars in thousands, except share data) | | | Shares | | Amount | | | | | | |
| Balance at December 31, 2017 | | $ | 0 | | | 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 | | — | | | — | | | — | | | — | | | (5,802) | | | — | | | (5,802) | | | — | | | (5,802) | |
| Cumulative adjustment for ASU 2016-01, net of tax | | — | | | — | | | — | | | — | | | 103,766 | | | (29,171) | | | 74,595 | | | — | | | 74,595 | |
| Reclassification of stranded tax effect for ASU 2018-02 | | — | | | — | | | — | | | — | | | 319 | | | (319) | | | 0 | | | — | | | 0 | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 456,845 | | | 1 | | | 15,809 | | | — | | | — | | | 15,810 | | | — | | | 15,810 | |
| Common stock issued under ESOP | | — | | | 9,672 | | | — | | | 2,577 | | | — | | | — | | | 2,577 | | | — | | | 2,577 | |
| Net income | | — | | | — | | | — | | | — | | | 973,840 | | | — | | | 973,840 | | | 37,508 | | | 1,011,348 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (28,494) | | | (28,494) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | (15,498) | | | (15,498) | | | — | | | (15,498) | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | (3,330) | | | (3,330) | | | — | | | (3,330) | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | (4,330) | | | (4,330) | | | — | | | (4,330) | |
| Share-based compensation, net | | — | | | — | | | — | | | 45,675 | | | — | | | — | | | 45,675 | | | — | | | 45,675 | |
| Common stock repurchases | | — | | | (715,207) | | | (1) | | | — | | | (147,122) | | | — | | | (147,123) | | | — | | | (147,123) | |
| Balance at December 31, 2018 | | $ | 0 | | | 52,586,498 | | | $ | 53 | | | $ | 1,378,438 | | | $ | 3,791,838 | | | $ | (54,120) | | | $ | 5,116,209 | | | $ | 148,634 | | | $ | 5,264,843 | |
| Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities (ASU 2017-08) (1) | | — | | | — | | | — | | | — | | | (583) | | | — | | | (583) | | | — | | | (583) | |
| Acquisition of SVB Leerink | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,256 | | | 5,256 | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 586,877 | | | 0 | | | 21,312 | | | — | | | — | | | 21,312 | | | — | | | 21,312 | |
| Common stock issued under ESOP | | — | | | 14,442 | | | — | | | 3,506 | | | — | | | — | | | 3,506 | | | — | | | 3,506 | |
| Issuance of Series A Preferred Stock | | 340,138 | | | — | | | — | | | — | | | — | | | — | | | 340,138 | | | — | | | 340,138 | |
| Net income | | — | | | — | | | — | | | — | | | 1,136,856 | | | — | | | 1,136,856 | | | 47,861 | | | 1,184,717 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (50,978) | | | (50,978) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | 139,934 | | | 139,934 | | | — | | | 139,934 | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | (1,558) | | | (1,558) | | | — | | | (1,558) | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | 2,319 | | | 2,319 | | | — | | | 2,319 | |
| Net change in unrealized gains and losses on cash flow hedges, net of tax | | — | | | — | | | — | | | — | | | — | | | (2,130) | | | (2,130) | | | — | | | (2,130) | |
| Share-based compensation, net | | — | | | — | | | — | | | 66,815 | | | — | | | — | | | 66,815 | | | — | | | 66,815 | |
| Common stock repurchases | | — | | | (1,532,210) | | | (1) | | | — | | | (352,510) | | | — | | | (352,511) | | | — | | | (352,511) | |
| Balance at December 31, 2019 | | $ | 340,138 | | | 51,655,607 | | | $ | 52 | | | $ | 1,470,071 | | | $ | 4,575,601 | | | $ | 84,445 | | | $ | 6,470,307 | | | $ | 150,773 | | | $ | 6,621,080 | |
| Cumulative adjustment for the day one adoption of ASC 326, net of tax (1) | | — | | | — | | | — | | | — | | | (35,049) | | | — | | | (35,049) | | | — | | | (35,049) | |
| Common stock issued under employee benefit plans, net of restricted stock cancellations | | — | | | 464,985 | | | 0 | | | 28,699 | | | — | | | — | | | 28,699 | | | — | | | 28,699 | |
| Common stock issued under ESOP | | — | | | 12,094 | | | — | | | 2,447 | | | — | | | — | | | 2,447 | | | — | | | 2,447 | |
| Net income | | — | | | — | | | — | | | — | | | 1,208,368 | | | — | | | 1,208,368 | | | 85,926 | | | 1,294,294 | |
| Capital calls and distributions, net | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (22,908) | | | (22,908) | |
| Net change in unrealized gains and losses on AFS securities, net of tax | | — | | | — | | | — | | | — | | | — | | | 393,305 | | | 393,305 | | | — | | | 393,305 | |
| Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax | | — | | | — | | | — | | | — | | | — | | | 1,518 | | | 1,518 | | | — | | | 1,518 | |
| Foreign currency translation adjustments, net of tax | | — | | | — | | | — | | | — | | | — | | | 11,846 | | | 11,846 | | | — | | | 11,846 | |
| Net change in unrealized gains and losses on cash flow hedges, net of tax | | — | | | — | | | — | | | — | | | — | | | 131,403 | | | 131,403 | | | — | | | 131,403 | |
| Share-based compensation, net | | — | | | — | | | — | | | 83,986 | | | — | | | — | | | 83,986 | | | — | | | 83,986 | |
| Common stock repurchases | | — | | | (244,223) | | | 0 | | | — | | | (60,020) | | | — | | | (60,020) | | | — | | | (60,020) | |
| Dividends on preferred stock | | — | | | — | | | — | | | — | | | (17,151) | | | — | | | (17,151) | | | — | | | (17,151) | |
| Other, net | | — | | | — | | | — | | | 41 | | | — | | | — | | | 41 | | | — | | | 41 | |
| Balance at December 31, 2020 | | $ | 340,138 | | | 51,888,463 | | | $ | 52 | | | $ | 1,585,244 | | | $ | 5,671,749 | | | $ | 622,517 | | | $ | 8,219,700 | | | $ | 213,791 | | | $ | 8,433,491 | |
(1)See Note 2- "Summary of Significant Accounting Policies" for additional details.
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income before noncontrolling interests | | $ | 1,294,294 | | | $ | 1,184,717 | | | $ | 1,011,348 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Provision for credit losses | | 219,510 | | | 106,416 | | | 87,870 | |
| Changes in fair value of equity warrant assets, net of proceeds from exercises | | (2,347) | | | 2,240 | | | (24,417) | |
| Changes in fair values of derivatives, net | | (48,013) | | | (18,506) | | | (11,043) | |
| Gains on investment securities, net | | (420,752) | | | (134,670) | | | (88,094) | |
| Distributions of earnings from non-marketable and other equity securities | | 85,587 | | | 95,131 | | | 72,015 | |
| Depreciation and amortization | | 100,840 | | | 82,717 | | | 57,906 | |
| Amortization of premiums and discounts on investment securities, net | | 75,178 | | | 15,513 | | | (28) | |
| Amortization of share-based compensation | | 83,986 | | | 66,815 | | | 45,675 | |
| Amortization of deferred loan fees | | (173,975) | | | (155,429) | | | (128,077) | |
| Deferred income tax expense (benefit) | | 6,911 | | | (3,072) | | | (21,061) | |
| Excess tax benefit from exercise of stock options and vesting of restricted shares | | (5,857) | | | (9,588) | | | (17,989) | |
| Losses from the write-off of premises and equipment and right-of-use assets | | 30,170 | | | 5,219 | | | 7,278 | |
| Other losses | | 0 | | | 8,959 | | | 0 | |
| Changes in other assets and liabilities: | | | | | | |
| Accrued interest receivable and payable, net | | (26,205) | | | (24,189) | | | (55,834) | |
| Accounts receivable and payable, net | | 18,765 | | | (17,019) | | | (23,020) | |
| Income tax receivable and payable, net | | 97,607 | | | (11,630) | | | (5,820) | |
| Accrued compensation | | 190,983 | | | (15,253) | | | 56,874 | |
| Foreign exchange spot contracts, net | | (20,790) | | | 59,998 | | | 24,018 | |
| Proceeds from termination of interest rate swaps | | 227,500 | | | 0 | | | 0 | |
| Other, net | | (287,905) | | | (74,240) | | | (54,039) | |
| Net cash provided by operating activities | | 1,445,487 | | | 1,164,129 | | | 933,562 | |
| Cash flows from investing activities: | | | | | | |
| Purchases of available-for-sale securities | | (23,207,791) | | | (9,872,095) | | | (668,264) | |
| Proceeds from sales of available-for-sale securities | | 2,654,212 | | | 2,189,087 | | | 474,482 | |
| Proceeds from maturities and paydowns of available-for-sale securities | | 4,183,888 | | | 1,643,357 | | | 3,436,064 | |
| Purchases of held-to-maturity securities | | (6,778,370) | | | (492,502) | | | (4,726,595) | |
| Proceeds from maturities and paydowns of held-to-maturity securities | | 4,035,952 | | | 2,124,513 | | | 1,891,761 | |
| Purchases of non-marketable and other equity securities | | (201,293) | | | (136,186) | | | (81,574) | |
| Proceeds from sales and distributions of capital of non-marketable and other equity securities | | 148,224 | | | 113,526 | | | 95,025 | |
| Net increase in loans | | (11,926,436) | | | (4,773,775) | | | (5,175,409) | |
| Purchases of premises and equipment | | (87,407) | | | (65,479) | | | (45,865) | |
| Business acquisitions | | (26,700) | | | (102,328) | | | 0 | |
| Net cash used for investing activities | | (31,205,721) | | | (9,371,882) | | | (4,800,375) | |
| Cash flows from financing activities: | | | | | | |
| Net increase in deposits | | 40,224,000 | | | 12,428,907 | | | 5,074,825 | |
| Net increase (decrease) in short-term borrowings | | 3,123 | | | (613,982) | | | (402,318) | |
| Principal payments of long-term debt | | 0 | | | (358,395) | | | 0 | |
| Proceeds from issuance of 3.125% Senior Notes | | 495,024 | | | 0 | | | 0 | |
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | | (22,908) | | | (50,978) | | | (28,494) | |
| Net proceeds from the issuance of preferred stock | | 0 | | | 340,138 | | | 0 | |
| Payment of preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Common stock repurchase | | (60,020) | | | (352,511) | | | (147,123) | |
| Proceeds from issuance of common stock, ESPP and ESOP | | 31,146 | | | 24,818 | | | 18,387 | |
| Net cash provided by financing activities | | 40,653,214 | | | 11,417,997 | | | 4,515,277 | |
| Net increase in cash and cash equivalents | | 10,892,980 | | | 3,210,244 | | | 648,464 | |
| Cash and cash equivalents at beginning of period | | 6,781,783 | | | 3,571,539 | | | 2,923,075 | |
| Cash and cash equivalents at end of period | | $ | 17,674,763 | | | $ | 6,781,783 | | | $ | 3,571,539 | |
| Supplemental disclosures: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest | | $ | 83,746 | | | $ | 217,961 | | | $ | 75,601 | |
| Income taxes | | 299,175 | | | 422,346 | | | 376,425 | |
| Noncash items during the period: | | | | | | |
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | | $ | 393,305 | | | $ | 139,934 | | | $ | (15,498) | |
| Distributions of stock from investments | | 11,913 | | | 8,917 | | | 5,277 | |
See accompanying notes to the consolidated financial statements.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.Nature of Business
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 diverse set 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 entity, SVB Financial Group (not including subsidiaries).
We offer commercial banking products and services through our principal subsidiary, the Bank, which is a California-chartered bank founded in 1983 and a member of the Federal Reserve System. Through its subsidiaries, the Bank also offers asset management, private wealth management and other investment services. In addition, through SVB Financial's other subsidiaries and divisions, we offer investment banking and non-banking products and services, such as funds management and M&A advisory services. We primarily focus on serving corporate clients in the following industries: technology, life science/healthcare, private equity/venture capital and premium wine. Our corporate clients range widely in terms of size and stage of maturity. Additionally, we focus on cultivating strong relationships with firms within the venture capital and private equity community worldwide, many of which are also our clients and may invest in our corporate clients.
Headquartered in Santa Clara, California, we operate in centers of innovation in the United States and around the world.
For reporting purposes, SVB Financial Group has 4 operating segments for which we report financial information in this report: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Leerink.
2. Summary of Significant Accounting Policies
Use of Estimates and Assumptions
The preparation of 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. Items that are subject to such estimates include: 1) measurements of fair value, which include the valuation of non-marketable and other equity securities and the valuation of equity warrant assets, 2) income taxes, and 3) the adequacy of the allowance for credit losses for loans and the allowance for credit losses for unfunded credit commitments. The following discussion of significant accounting policies includes further details regarding these estimates.
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 and, 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) the power to direct the activities that most significantly
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impact the VIEs economic performance, and (b) the 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash balances due from banks, interest-earning deposits, Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities. For the consolidated statements of cash flows, we consider cash equivalents to be investments that are readily convertible to known amounts of cash, so near to their maturity that they present an insignificant risk of change in fair value due to changes in market interest rates, and purchased in conjunction with our cash management activities.
Investment Securities
Available-for-Sale Securities and the Allowance for Credit Losses on Available-for-Sale Securities
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification and meeting our asset/liability management objectives. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of SVBFG's stockholders' equity, until realized.
We analyze available-for-sale securities for impairment related to credit losses each quarter. Market valuations represent the current fair value of a security at a specified point in time and incorporates the risk of timing of interest due and the return of principal over the contractual life of each security. Gains and losses on securities are realized when there is a sale of the security prior to maturity. A credit impairment is recognized through a valuation allowance against the security with an offset through earnings; the allowance is limited to the amount that fair value, calculated as the present value of expected future cash flow discounted at the security’s effective interest rate, is less than the amortized cost basis. We separate the amount of the impairment related to credit losses, if any, and the amount due to all other factors. The credit loss component is recognized in earnings and recorded as an allowance for credit losses for AFS securities.
We consider numerous factors in determining whether a credit loss exists and the period over which the debt security is expected to recover. The following list is not meant to be all inclusive. All of the following factors are considered:
•The length of time and the extent to which the fair value has been less than the amortized cost basis (severity and duration);
•Adverse conditions specifically related to the security, an industry or geographic area; for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, changes in the financial condition of the underlying loan obligors. Examples of those changes include any of the following:
◦Changes in technology;
◦The discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security; and
◦Changes in the quality of the credit enhancement.
•The historical and implied volatility of the fair value of the security;
•The payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;
•Failure of the issuer of the security to make scheduled interest or principal payments;
•Any changes to the rating of the security by a rating agency; and
•Recoveries or additional declines in fair value after the balance sheet date.
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In accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs, we use estimates of future principal prepayments, provided by third-party market-data vendors, in addition to actual principal prepayment experience to calculate the constant effective yield necessary to apply the effective interest method in the amortization of purchase discounts or premiums on mortgage-backed securities and fixed rate collateralized mortgage obligations. The accretion and amortization of discounts and premiums, respectively, are included in interest income over the contractual terms of the underlying securities replicating the effective interest method.
Held-to-Maturity Securities and the Allowance for Credit Losses on Held-to-Maturity Securities
Debt securities purchased with the positive intent and ability to hold to its maturity are classified as held-to-maturity securities and are recorded at amortized cost, net of any allowance for credit losses.
Effective January 1, 2020, we measure expected credit losses ("ECL") on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the exception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ECL. Our municipal bond portfolio primarily consists of highly rated bonds and currently carry ratings no lower than Aa2. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for current conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year. We do not estimate ECL on accrued interest receivable ("AIR") from held-to-maturity securities as AIR is reversed or written off when the full collection of the AIR related to a security becomes doubtful. AIR from held-to-maturity securities totaled $55.0 million at December 31, 2020 and $45.2 million at December 31, 2019 and is excluded from the amortized cost disclosures within our HTM security disclosures in Note 8—“Investment Securities” as it is included and reported separately within "Accrued interest receivable and other assets" in our consolidated balance sheets.
Expected credit loss on municipal bonds that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows and the recorded amortized cost basis of the security.
Prior to the adoption of CECL, we applied the other-than-temporary impairment standards of ASC 320, Investment-Debt and Equity Securities, for our held-to-maturity securities. For periods prior to January 1, 2020, we separated the amount of the other-than-temporary impairment, if any, into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between a security's amortized cost basis and the present value of expected future cash flows discounted at the security's effective interest rate. The amount due to all other factors is recognized in other comprehensive income.
Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The net unrealized gains, net of tax, are retained in other comprehensive income, and the carrying value of the held-to-maturity securities are amortized over the life of the securities in a manner consistent with the amortization of a premium or discount.
Non-Marketable and Other Equity Securities
Non-marketable and other equity securities include investments in venture capital and private equity funds, SPD-SVB, debt funds, private and public portfolio companies, including public equity securities held as a result of equity warrant assets exercised, and investments in qualified affordable housing projects. A majority of these investments are managed through our SVB Capital funds business in funds of funds and direct venture funds. Our accounting for investments in non-marketable and other equity securities depends on several factors, including the level of ownership, power to control and the legal structure of the subsidiary making the investment. As further described below, we base our accounting for such securities on: (i) fair value accounting, (ii) measurement alternative for other investments without a readily determinable fair value, (iii) equity method accounting and (iv) the proportional amortization method which is used only for qualified affordable housing projects.
Fair Value Accounting
Our managed funds are investment companies under the AICPA Audit and Accounting Guide for Investment Companies (codified in ASC 946) and accordingly, these funds report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as investment gains or losses in our consolidated statements of income. Our non-marketable and other equity securities recorded pursuant to fair value accounting consist of our investments through our managed funds of funds, which make investments in venture capital and private equity funds. A summary of our
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ownership interests in the investments held under fair value accounting as of December 31, 2020 is presented in the following table:
| | | | | | | | |
| Limited partnership | | Company Direct and Indirect Ownership in Limited Partnership |
| Managed funds of funds | | |
| Strategic Investors Fund, LP | | 12.6 | % |
| Capital Preferred Return Fund, LP | | 20.0 | |
| Growth Partners, LP | | 33.0 | |
| | |
| | |
The general partner interests of these funds are controlled, and in some cases, owned by SVB Financial. The limited partners of these funds do not have substantive participating or kick-out rights. Therefore, these funds are consolidated and any gains or losses resulting from changes in the estimated fair value of the investments are recorded as investment gains or losses in our consolidated net income.
Under fair value accounting, investments are carried at their estimated fair value based on financial information obtained as the general partner of the fund or obtained from the funds' respective general partner. For direct private company investments, valuations are based upon consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. For direct equity investments in public companies, valuations are based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Sales restriction discounts generally range from 10 to 20 depending on the sale restrictions which typically range from three to six months. The valuation of non-marketable securities in shares of private company capital stock and the valuation of other securities in shares of public company stock with certain sales restrictions is subject to significant judgment. The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material.
For our fund investments, we utilize the net asset value as obtained from the general partners of the fund investments as the funds do not have a readily determinable fair value. The general partners of our fund investments prepare their financial statements using guidance consistent with fair value accounting. We account for differences between our measurement date and the date of the fund investment's net asset value by using the most recent available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements. We adjust the value of our investments for any contributions paid, distributions received from the investment and known significant fund transactions or market events about which we are aware through information provided by the fund managers or from publicly available transaction data during the reporting period.
Gains or losses resulting from changes in the estimated fair value of the investments and from distributions received are recorded as gains on investment securities, net, a component of noninterest income. The portion of any investment gains or losses attributable to the limited partners is reflected as net income attributable to noncontrolling interests and adjusts our net income to reflect its percentage ownership.
Other Investments without a Readily Determinable Fair Value
Our direct investments in private companies do not have a readily determinable fair value. We measure these investments at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments from the same issuer. Such changes are recognized through earnings. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted.
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Equity Method
Our equity method non-marketable securities consist of investments in venture capital and private equity funds, privately-held companies, debt funds, and joint ventures. Our equity method non-marketable securities and related accounting policies are described as follows:
•Equity securities and investments in limited partnerships, such as preferred or common stock in privately-held companies in which we hold a voting interest of at least 20 percent, or in which we have the ability to exercise significant influence over the investees' operating and financial policies through voting interests, board involvement or other influence are accounted for under the equity method,
•Investments in limited partnerships in which we hold voting interests of more than 5 percent, or in which we have the ability to exercise significant influence over the partnerships' operating and financial policies, are accounted for using the equity method, and
•Our SPD-SVB (the Bank's joint venture bank in China) partnership, for which we have 50 percent ownership, is accounted for under the equity method.
We recognize our proportionate share of the results of operations of these equity method investees in our results of operations, based on the most current financial information available from the investee. We review our investments accounted for under the equity method at least quarterly for possible other-than-temporary impairment. Our review typically includes an analysis of facts and circumstances for each investment, the expectations of the investment's future cash flows and capital needs, variability of its business and the company's exit strategy. For our fund investments, we utilize the net asset value per share as provided by the general partners of the fund investments. We account for differences between our measurement date and the date of the fund investment's net asset value by using the most recent available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements. We adjust the value of our investments for any contributions paid, distributions received from the investment, and known significant fund transactions or market events about which we are aware through information provided by the fund managers or from publicly available transaction data during the reporting period.
We reduce our investment value when we consider declines in value to be other-than-temporary and recognize the estimated loss as a loss on investment securities, a component of noninterest income.
Proportional Amortization Method
In order to fulfill our responsibilities under the Community Reinvestment Act, we invest as a limited partner in low income housing partnerships that operate qualified affordable housing projects and generate tax benefits, including federal low income housing tax credits, for investors. The partnerships are deemed to be VIEs because they do not have sufficient equity investment at risk and are structured with non-substantive voting rights. We are not the primary beneficiary of the VIEs and do not consolidate them. Our investments in low income housing partnerships are recorded in non-marketable and other equity securities within our investment securities portfolio on the consolidated balance sheet. As a practical expedient, we amortize the investment in proportion to the allocated tax benefits under the proportional amortization method of accounting and present such benefits net of investment amortization in income tax expense.
Loans
Loans are reported at amortized cost which consists of the principal amount outstanding, net of unearned loan fees. Unearned loan fees reflect unamortized deferred loan origination and commitment fees net of unamortized deferred loan origination costs. In addition to cash loan fees, we often obtain equity warrant assets that give us an option to purchase a position in a client company's stock in consideration for providing credit facilities. The grant date fair values of these equity warrant assets are deemed to be loan fees and are deferred as unearned income and recognized as an adjustment of loan yield through loan interest income. The net amount of unearned loan fees is amortized into loan interest income over the contractual terms of the underlying loans and commitments using the constant effective yield method, adjusted for actual loan prepayment experience, or the straight-line method, as applicable.
Allowance for Credit Losses: Loans
The allowance for credit losses for loans considers credit risk and is adjusted by a provision for ECL charged to expense and reduced by the charge-off of loan amounts, net of recoveries. Our allowance for credit losses is an estimate of expected losses inherent with the Company's existing loans at the balance sheet date. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.
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Portfolio Segments and Risk-Based Segments
The process to estimate the ECL on loans involves procedures to appropriately consider the unique characteristics of our six loan portfolio segments. Our six portfolio segments are determined by using the following risk dimensions: (i) underwriting methodology, (ii) industry niche and (iii) life stage. The 6 portfolio segments are further disaggregated into 11 classes of financing receivable, or risk-based segments, and represents the level at which credit risk is monitored. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process to estimate ECL. For further information refer to Note 9—“Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments.” The following provides additional information regarding our six portfolio segments and the additional disaggregation of our 11 risk-based segments:
Global Fund Banking
The vast majority of our Global Fund Banking (formerly Private Equity/Venture Capital) portfolio segment consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by certain private equity and venture capital firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds' remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are often secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.
Investor Dependent - Accelerator (Early-Stage) and Growth (Mid-Stage and Later-Stage)
Investor Dependent loans are comprised of 2 portfolio segments: (i) Accelerator, which is comprised of Early-Stage clients, and (ii) Growth, which is comprised of Mid-Stage and Later-Stage clients. Our Investor Dependent loans are made primarily to technology and life science/healthcare companies. Investor Dependent loans typically have modest or negative cash flows and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or others, or in some cases, a successful sale to a third party or an IPO. Venture capital firms may provide financing selectively, at reduced amounts, or on less favorable terms, which may have an adverse effect on our borrowers' ability to repay their loans to us. When repayment is dependent upon the next round of venture investment and there is an indication that further investment is unlikely or will not occur, it is often likely that the company would need to be sold to repay the debt in full. If reasonable efforts have not yielded a likely buyer willing to repay all debt at the close of the sale or on commercially viable terms, the account will most likely be deemed to be non-performing or charged-off.
Our Accelerator, or Early-Stage, portfolio segment consists of pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million. Our Growth portfolio segment is disaggregated into two risk-based segments for disclosure purposes; Mid-Stage and Later-Stage. Mid-Stage companies consist of growth-stage enterprises with revenues of between $5 million and $15 million or, in the case of biotechnology, pre-revenue clinical-stage companies. Later-Stage consists of companies with revenues of $15 million or more. This disaggregation of our Investor Dependent loans is based in part on the materially different historical loss rate we have experienced with each risk-based segment, with historical loss rates being the highest in the Early-Stage portfolio segment, and declining in the Mid-Stage and Later-Stage risk-based segments, as a function of the relatively higher enterprise value and asset coverage that is created as a company progresses through the various stages of development.
Cash Flow and Balance Sheet Dependent
Our Cash Flow and Balance Sheet Dependent portfolio segment is disaggregated into Cash Flow Dependent and Balance Sheet Dependent loans. Additionally, our Cash Flow Dependent loans are disaggregated into two risk-based segments for disclosure purposes: (i) Sponsor Led Buyout and (ii) Other. Our Cash Flow Dependent loans are made primarily to technology and life science/healthcare companies and require the borrower to maintain cash flow from operations that is sufficient to service all debt. Borrowers must demonstrate normalized cash flow in excess of all fixed charges associated with operating the business. Sponsor Led Buyout loans are typically used to assist a select group of experienced private equity sponsors with the acquisition of businesses, are larger in size, and repayment is generally dependent upon the cash flows of the acquired company. The acquired companies are typically established, later-stage businesses of scale and characterized by reasonable levels of leverage with loan structures that include meaningful financial covenants. The sponsor's equity contribution is often 50 percent or more of the acquisition price.
Balance Sheet Dependent loans are made primarily to technology and life science/healthcare companies, which include asset-based loans, and are structured to require constant current asset coverage (i.e., cash, cash equivalents, accounts receivable and, to a much lesser extent, inventory) in an amount that exceeds the outstanding debt. These loans are generally made to companies in our Growth and Corporate Finance practices. The repayment of these arrangements
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is dependent on the financial condition, and payment ability, of third parties with whom our clients do business. As a result of the adoption of CECL and in connection with the revised approach to portfolio disaggregation discussed above, certain loans that were previously considered to be Balance Sheet Dependent have been reclassified as Investor Dependent - Later-Stage.
Private Bank
Our Private Bank clients are primarily private equity/venture capital professionals and executives in the innovation companies they support. We offer a customized suite of private banking services, including mortgages, home equity lines of credit, restricted and private stock loans, capital call lines of credit, lines of credit against liquid assets and other secured and unsecured lending products, as well as cash and wealth management services. In addition, we provide owner occupied commercial mortgages to Private Bank clients and real estate secured loans to eligible employees through our EHOP.
Premium Wine and Other
Our Premium Wine and Other portfolio segment consists of two risk-based segments for disclosure purposes: (i) Premium Wine and (ii) Other. Our Premium Wine clients primarily consist of premium wine producers, vineyards and wine industry or hospitality related businesses across the Western United States, primarily in California's Napa Valley, Sonoma County and Central Coast regions, as well as the Pacific Northwest. Our Other risk-based segment primarily includes our community development loans made as part of our responsibilities under the Community Reinvestment Act.
SBA Loans
SBA loans are included across allof our six portfolio segments and are separately disclosed as a single risk-based segment. We participated in the SBA's Paycheck Protection Program ("PPP") to support small businesses across the United States. Under this program, the SBA provides a guarantee to banks making unsecured term loans of up to $10 million for qualified initial borrowers, and up to $2 million for second-time borrowers, as provided by the CARES Act, the Economic Aid Act, and related regulations and guidance. The ability to disburse loans under the PPP was extended to March 31, 2021 after the enactment of the Economic Aid Act and we have also begun accepting forgiveness applications from clients, whereby clients apply for loans to be forgiven (paid off) by the SBA. Loans funded under this program are primarily made to clients in the technology, life science/healthcare, premium wine and energy resource industries. While the recipients were located across the United States, more than half were made to clients that applied from the western United States.
We maintain a systematic process for the evaluation of individual loans and portfolio segments for inherent risk of estimated credit losses for loans. At the time of approval, each loan in our portfolio is assigned a credit risk rating. Credit risk ratings are assigned on a scale of 1 to 10, with 1 representing loans with a low risk of nonpayment, 9 representing loans with the highest risk of nonpayment and 10 representing loans which have been charged-off. The credit risk ratings for each loan are monitored and updated on an ongoing basis. This credit risk rating process includes, but is not limited to, consideration of such factors as payment status, the financial condition and portfolio segment. We useoperating performance of the segmentborrower, borrower compliance with loan covenants, underlying collateral values and performance trends, the degree of access to additional capital, the presence of credit enhancements such as third party guarantees (where applicable), the degree to which the borrower is sensitive to external factors and the depth and experience of the borrower's management team. Our policies require a committee of senior management to review, at least quarterly, credit relationships with a credit risk rating of 5 through 9 that exceed specific dollar values.
Expected Credit Loss Measurement
The methodology for estimating the amount of ECL reported in the allowance for credit losses is the sum of two main components: (1) ECL assessed on a collective basis for pools of loans that share similar risk characteristics which includes a qualitative adjustment based on management’s assessment of the risks that may lead to a future loan loss experience different from our historical loan loss factors described underexperience and (2) ECL assessed for individual loans that do not share similar risk characteristics with other loans. We do not estimate ECL on AIR on loans as AIR is reversed or written off when the full collection of the AIR related to a loan becomes doubtful, which is when loans are placed on nonaccrual status. AIR on loans totaled $126.4 million at December 31, 2020 and $119.1 million at December 31, 2019 and is excluded from the amortized cost disclosures in Note 9—“Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments”, as it is included and reported separately within "Accrued interest receivable and other assets" in our consolidated balance sheets.
While the evaluation process of our allowance for credit losses on loans uses historical and other objective information, the classification of loans and the estimate of the allowance for credit losses for loans rely on the judgment and experience of
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our management. A committee comprised of senior management evaluates the appropriateness of the allowance for credit losses for loans, which includes review of loan portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
Loans That Share Similar Risk Characteristics with Other Loans
We derive an estimated ECL assumption from a non-discounted cash flow approach based on our portfolio segments discussed above. This approach incorporates a calculation of three predictive metrics: (1) probability of default ("PD"), (2) loss given default ("LGD") and (3) exposure at default ("EAD"), over the estimated life of the exposure. PD and LGD assumptions are developed based on quantitative models and inherent risk of credit loss, both of which involve significant judgment. Renewals and extensions within our control are not considered in the estimated contractual term of a loan. However, we include potential extensions if management has a reasonable expectation that we will execute a TDR with the borrower. The quantitative models are based on historical credit loss experience, adjusted for probability-weighted economic scenarios. These scenarios are used to support a reasonable and supportable forecast period of three years for all portfolio segments. To the extent the remaining contractual lives of loans in the portfolio extend beyond this three-year period, we revert to historical averages using an autoregressive method of mean reversion that will continue to gradually trend towards the mean historical loss over the remaining contractual lives of loans, adjusted for prepayments. The macroeconomic scenarios are reviewed on a quarterly basis.
We also apply a qualitative factor adjustment to the results obtained through our quantitative ECL models to consider model imprecision, emerging risk assessments, trends and other subjective factors that may not be adequately represented in quantitative ECL models. These adjustments to historical loss information are for asset specific risk characteristics, and also reflect our assessment of the extent that current conditions and reasonable and supportable forecasts differ from conditions that existed during the period over which historical information was evaluated. These adjustments are aggregated to become our qualitative allocation. Based on our qualitative assessment estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period and may include, but is not limited to, consideration of the following factors:
•Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
•Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
•Changes in the nature and volume of the portfolio and in the terms of loans;
•Changes in the experience, ability and depth of lending management and other relevant staff;
•Changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans;
•Changes in the quality of our loan review system;
•Changes in the value of underlying collateral for collateral-dependent loans;
•The existence and effect of any concentrations of credit, and changes in the level of such concentrations;
•The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in our existing portfolio; and
•The effect of limitations of available data, model imprecision and recent macro-economic factors that may not be reflected in the forecast information.
Loans That Do Not Share Similar Risk Characteristics
We monitor our loan pools to calculateensure all assets therein continue to share similar risk characteristics with other financial assets inside the pool. Changes in credit risk, borrower circumstances or the recognition of write-offs may indicate that a loan's risk profile has changed, and the asset should be removed from its current pool. For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ECL is measured as the difference between the amortized cost basis of the loan loss experience ifand the fair value of the collateral. The fair value of the collateral will be determined by the most recent appraisal, as adjusted to reflect a reasonable marketing period for the sale of the asset(s) and an estimate of reasonable selling expenses. Collateral-dependent loans will have independent appraisals completed and accepted at least annually.
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Allowance for Credit Losses: Unfunded Credit Commitments
We maintain a separate allowance for credit losses for unfunded credit commitments are funded. Separately, we usewhich is included in other liabilities and the related ECL in our provision for credit losses. We estimate the amount of expected losses by using historical trends to calculate a probability of an unfunded credit commitment being funded. We apply the loan funding probability factor to risk-factor adjusted unfunded credit commitments by credit risk-ratingfunded and derive historical lifetime expected loss factors for each portfolio segment to derive the allowance for unfunded credit commitments, similar to our funded loans.loan ECL. The allowancecollectively assessed ECL for unfunded credit commitments also includes certainthe same qualitative allocations as deemed appropriate by management. We include the allowanceapplied for our funded loan ECL. For unfunded credit commitments inrelated to loans that do not share similar risk characteristics with other liabilities and the related provisionloans, where applicable, a separate estimate of ECL will be included in our provisiontotal allowance for credit losses.losses on unfunded credit commitments. Loan commitments that are determined to be unconditionally cancellable by the Company do not require an allowance for credit losses on unfunded credit commitments.
Uncollectible Loans and Write-offs
Our charge-off policy applies to all loans, regardless of portfolio segment. Commercial loans are considered for a full or partial charge-off in the event that principal or interest is over 180 days past due and the loan lacks sufficient collateral and it is not in the process of collection, provided that a loss event has been defined and the charge-off is consistent with GAAP.collection. Consumer loans are considered for a full or partial charge-off in the event that principal or interest is over 120 days past due and the loan lacks sufficient collateral and it is not in the process of collection, provided that a loss event has been defined and the charge-off is consistent with GAAP.collection. We also consider writing off loans in the event of any of the following circumstances: 1) the loan, or a portion of the loan is deemed uncollectible due to: a) the borrower's inability to make recurring payments, b) material changes in the borrower's financial condition, or c) the expected sale of all or a portion of the borrower's business is insufficient to repay the loan in full, or 2) the loan has been identified for charge-off by regulatory authorities.
Troubled Debt Restructurings
A TDR arises from the modification of a loan where we have granted a concession to the borrower related to the borrower's financial difficulties that we would not have otherwise considered for economic or legal reasons. These concessions may include: (1) deferral of payment for more than an insignificant period of time that does not include sufficient offsetting borrower concessions; (2) interest rate reductions; (3) extension of the maturity date outside of ordinary course extension; (4) principal forgiveness; and/or (5) reduction of accrued interest.
We use the factors in ASC 310-40, Receivables, Troubled Debt Restructurings by Creditors, in analyzing when a borrower is experiencing financial difficulty, and when we have granted a concession, both of which must be present for a restructuring to meet the criteria of a TDR. If we determine that a TDR exists, we measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, we may also measure impairment based on a loan's observable market price, or the fair value of the collateral less selling costs if the loan is a collateral-dependent loan.
Impaired Loans
AIn April 2020, we implemented three loan is considered impaired when, based upon currently known information, it is deemed probablepayment deferral programs targeted to assist borrowers who were the most impacted by the COVID-19 pandemic. These programs included relief for venture-backed, private bank and wine borrowers who met certain criteria. For loans modified under these programs, in accordance with the provisions of Section 4013 of the CARES Act, we elected to not apply troubled debt restructuring classifications to borrowers who were current as of December 31, 2019. In addition, for loans that did not meet the CARES Act criteria, we will be unable to collect all amounts due accordingapplied the guidance in an interagency statement issued by bank regulatory agencies. Using this guidance, we may find that borrowers are not experiencing financial difficulty that may otherwise result in a TDR classification, in accordance with ASC Subtopic 310-40, if loan modifications are performed in response to the contractual termsCOVID-19 pandemic, provide short-term loan payment deferrals (e.g. six months in duration) and are granted to borrowers who were current as of the agreement. On a quarterly basis, we review our loan portfolio for impairment. Within each class of loans, we review individual loans for impairment based on credit risk ratings. Loans risk-rated 5 through 7 are performing loans; however, we consider them as demonstrating higher risk, which requires more frequent
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reviewimplementation date of the individual exposures;loan modification program. We evaluated all loans modified under these translate to an internal rating of "Performing (Criticized)"programs against the CARES Act and could be classifiedinteragency guidance, as a performing impaired loan.
For each loan identified as impaired, we measure the impairment based upon the present value of expected future cash flows discounted at the loan's effective interest rate. In limited circumstances, we may measure impairment based on the loan's observable market price or the fair value of the collateral less selling costs ifapplicable, and determined the loan is collateral dependent. Impaired collateral dependent loans will have independent appraisals completed and accepted at least annually. The fair valuemodifications would not be considered TDRs. We did not defer interest income recognition during periods of the collateral will be determined by the most recent appraisal, as adjusted to reflect a reasonable marketing period for the sale of the asset(s) and an estimate of reasonable selling expenses.
If it is determined that the value of an impaired loan is less than the recorded investment in the loan, net of previous charge-offs and payments collected, we recognize impairment through the allowance for loan losses as determined by our analysis.payment deferral, nor did any qualifying modification trigger nonaccrual status.
Nonaccrual Loans
Loans are generally placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection); or when we have determined, based upon currently known information, that the timely collection of principal or interest is not probable.
When a loan is placed on nonaccrual status, the accrued interest and fees are reversed against interest income and the loan is accounted for using the cost recovery method thereafter until qualifying for return to accrual status. Historically, loans that have been placed on nonaccrual status have remained as nonaccrual loans until the loan is either charged-off, or the principal balances have been paid off. For a loan to be returned to accrual status, all delinquent principal and interest must become current in accordance with the terms of the loan agreement and future collection of remaining principal and interest must be deemed probable. We apply a cost recovery
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method in which all cash received is applied to the loan principal until it has been collected. Under this approach, interest income is recognized after total cash flows received exceed the recorded investment at the date of initial nonaccrual. All of our nonaccrual loans have credit risk ratings of 8 or 9 and are classified under the nonperforming impaired category.
Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the terms of the related leases, whichever is shorter. The maximum estimated useful lives by asset classification are as follows:
|
| | | | | | | |
| Leasehold improvements | | Lesser of lease term or asset life |
| Furniture and equipment | | 7 years |
| Computer software | | 3-7 years |
| Computer hardware | | 3-5 years |
We capitalize the costs of computer software developed or obtained for internal use, including costs related to developed software, purchased software licenses and certain implementation costs.
For property and equipment that is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in noninterest expense in consolidated net income.
Lease Obligations
We lease all of our properties.have entered into leases for real estate and various equipment utilized for the business. At the inception of the lease, each propertylease is evaluated to determine whether the lease will be accounted for as an operating or capitalfinance lease. ForWe had 0 finance lease obligations at December 31, 2020 and 2019. We have made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from short-term leases that contain rent escalations or landlord incentives,for any class of underlying asset. In addition to excluding short-term leases, we recordhave implemented an accounting policy in which non-lease components are not separated from lease components in the total rent payable duringmeasurement of right-of-use ("ROU") asset and lease liabilities for all lease contracts.
ROU assets represent our right to use an underlying asset for the lease term usingand lease liabilities represent our obligation to make lease payments arising from the straight-line methodlease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the termlease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company reviews ROU assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ROU assets are reviewed for recoverability at the lowest level in which there are identifiable cash flows (“asset group”). The carrying amount of an asset group is not considered recoverable if it exceeds the sum of the leaseundiscounted cash flows expected to result from its use and recordeventual disposition. If the difference betweenasset group is determined not to be recoverable, then an impairment charge is recognized in the amount by which the carrying amount of the store asset group exceeds its fair value. The resulting impairment charge, if any, is allocated to the underlying assets on a pro rata basis using their relative carrying amounts.
Business Combinations
Business combinations are accounted for under the acquisition method of accounting. Acquired assets, including separately identifiable intangible assets, and assumed liabilities are recorded at their acquisition-date estimated fair values. The excess of the cost of acquisition over these fair values is recognized as goodwill. During the measurement period, which cannot exceed one year from the acquisition date, changes to estimated fair values are recognized as an adjustment to goodwill. Certain transaction costs are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill is not amortized and is subject, at a minimum, rents paidto an annual impairment assessment. A quantitative assessment will be completed if we have not recently completed a fair value assessment of the associated reporting unit and compared the straight-line rent as lease obligations. We had no capitalized lease obligations at December 31, 2017 and 2016.
assessed fair value of that reporting unit with its carrying amount, including goodwill. Should we be required to calculate the fair value of the entity, we would generally apply a discounted cash flow analysis that uses forecasted
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performance estimates, and a discount rate leveraging a reporting unit specific capital asset pricing model, which in turn uses assumptions related to market performance and various macroeconomic and reporting unit specific risks. If this quantitative assessment was recently completed and if we deem the estimate to be current and reliable, we will not perform a full quantitative assessment of the reporting unit’s fair value for that reporting period. Instead, we will qualitatively determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. As part of this qualitative analysis we consider macroeconomic factors that might impact the entity’s performance, entity-specific financial performance of the reporting unit, changes in management or strategy and other factors. We will evaluate goodwill for impairment more frequently if circumstances indicate that the fair value of our reporting units is less than their carrying value, including goodwill.
Intangible assets with finite lives are amortized over their estimated useful lives and all intangible assets are subject to impairment if events or circumstances indicate that the fair value is less than the carrying amount.
Fair Value Measurements
Our available-for-sale securities, derivative instruments and certain marketable, non-marketable and other equity securities are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements.
Fair Value Measurement-Definition and Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable and on the significance of those inputs in the fair value measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data and views of market participants. The three levels for measuring fair value are based on the reliability of inputs and are as follows:
Level 1
Fair value measurements based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. Assets utilizing Level 1 inputs include U.S. Treasury securities, foreign government debt securities, exchange-traded equity securities and certain marketable securities accounted for under fair value accounting.
Level 2
Fair value measurements based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Valuations for the available-for-sale securities are provided by independent pricing service providers who have experience in valuing these securities and are compared to the average of quoted market prices obtained from independent brokers. We perform a monthly analysis on the values received from third parties to ensureso that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and ongoing review of third partythird-party pricing methodologies, review of pricing trends and monitoring of trading volumes. Additional corroboration, such as obtaining a non-binding price from a broker, may be obtained depending on the frequency of trades of the security and the level of liquidity or depth of the market. We ensure pricesPrices received from independent brokers represent a reasonable estimate of the fair value and are validated through the use of observable market inputs including comparable trades, yield curve, spreads and, when available, market indices. As a result of this analysis, if the Company determinesIf we determine that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. Below is a summary of the significant inputs used for each class of Level 2 assets and liabilities:
U.S. agency debentures: Fair value measurements of U.S. agency debentures are based on the characteristics specific to bonds held, such as issuer name, issuance date, coupon rate, maturity date and any applicable issuer call option features. Valuations are based on market spreads relative to similar term benchmark market interest rates, generally U.S. Treasury securities.
Agency-issued mortgage-backed securities: Agency-issued mortgage-backed securities are pools of individual conventional mortgage loans underwritten to U.S. agency standards with similar coupon rates, tenor, and other attributes such as geographic location, loan size and origination vintage. Fair value measurements of these securities are
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based on observable price adjustments relative to benchmark market interest rates taking into consideration estimated loan prepayment speeds.
Agency-issued collateralized mortgage obligations: Agency-issued collateralized mortgage obligations are structured into classes or tranches with defined cash flow characteristics and are collateralized by U.S. agency-issued mortgage pass-through securities. Fair value measurements of these securities incorporate similar characteristics of mortgage pass-through securities such as coupon rate, tenor, geographic location, loan size and origination vintage, in addition to incorporating the effect of estimated prepayment speeds on the cash flow structure of the class or tranche. These measurements incorporate observable market spreads over an estimated average life after considering the inputs listed above.
Agency-issued commercial mortgage-backed securities: Fair value measurements of these securities are based on spreads to benchmark market interest rates (usually U.S. Treasury rates or rates observable in the swaps market), prepayment speeds, loan default rate assumptions and loan loss severity assumptions on underlying loans.
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Municipal bondsForeign exchange forward and notes: Bonds issued by municipal governments generally have stated coupon rates, final maturity datesoption contract assets and are subject to being called ahead of the final maturity date at the option of the issuer.liabilities: Fair value measurements of these securitiesassets and liabilities are priced based on spreads to other municipal benchmark bonds with similar characteristics; or, relative to marketspot and forward foreign currency rates on U.S. Treasury bonds of similar maturity.and option volatility assumptions.
Interest rate derivative and interest rate swap assets and liabilities: Fair value measurements of interest rate derivatives and interest rate swaps are priced considering the coupon rate of the fixed leg of the contract and the variable coupon rate on the floating leg of the contract. Valuation is based on both spot and forward rates on the swap yield curve and the credit worthiness of the contract counterparty.
Foreign exchange forward and option contract assets and liabilities:Other equity securities: Fair value measurements of these assets and liabilitiesequity securities of public companies are priced based on spot and forward foreign currency rates and option volatility assumptions.quoted market prices less a discount if the securities are subject to certain sales restrictions. Certain sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sale restrictions which typically range from three to six months.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions.
Level 3
The fair value measurement is derived from valuation techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions we believe market participants would use in pricing the asset. The valuation techniques are consistent with the market approach, income approach and/or the cost approach used to measure fair value. Below is a summary of the valuation techniques used for each class of Level 3 assets:
Other ventureVenture capital investments:and private equity fund investments not measured at net asset value: Fair value measurements are based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. The significant unobservable inputs used in the fair value measurement include the information about each portfolio company, including actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Significant changes to any one of these inputs in isolation could result in a significant change in the fair value measurement, however, we generally consider all factors available through ongoing communication with the portfolio companies and venture capital fund managers to determine whether there are changes to the portfolio company or the environment that indicate a change in the fair value measurement.
Other securities: Fair value measurements of equity securities of public companies are priced based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Certain sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sale restrictions which typically range from three to six months.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions. Modeled asset values are further adjusted by applying a discount of up to 20 percent for certain warrants that have certain sales restrictions or other features that indicate a discount to fair value is warranted. As sale restrictions are lifted, discounts are adjusted downward to zero once all restrictions expire or are removed.
Equity warrant assets (private portfolio): Fair value measurements of equity warrant assets of private portfolio companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public market indices whose members operate in similar industries as companies in our private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Overall model asset values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. There is a direct correlation between changes in the volatility and
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remaining life assumptions in isolation and the fair value measurement while there is an inverse correlation between changes in the liquidity discount assumption and the fair value measurement.
It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available,
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fair value measurement is based upon valuation approaches that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. Substantially all of our financial instruments use the foregoing methodologies, and are categorized as a Level 1 or Level 2 measurement in the fair value hierarchy. However, in certain cases, when market observable inputs for our valuation techniques may not be readily available, we are required to make judgments about assumptions we believe market participants would use in estimating the fair value of the financial instrument, and based on the significance of those judgments, the measurement may be determined to be a Level 3 fair value measurement.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring and provide more weighting to price quotes that are based upon orderly transactions. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Accordingly, the degree of judgment exercised by management in determining fair value is greater for financial assets and liabilities categorized as Level 3.
Fee-based Services Revenue Recognition
Refer to Note 14—16—“Noninterest Income” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for our fee-based services revenue recognition policies for our contracts with customers.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Our federal, state and foreign income tax provisions are based upon taxes payable for the current year, current year changes in deferred taxes related to temporary differences between the tax basis and financial statement balances of assets and liabilities, and a reserve for uncertain tax positions. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is provided, when it is determined based upon available evidence, that it is more likely than not that some portion of the deferred tax asset will not be realized. We file a consolidated federal income tax return, and consolidated, combined, or separate state income tax returns as appropriate. Our foreign incorporated subsidiaries file tax returns in the applicable foreign jurisdictions. We record interest and penalties related to unrecognized tax benefits in other noninterest expense, a component of consolidated net income.
Share-Based Compensation
For all stock-based awards granted, stock-based compensation expense is amortized on a straight-line basis over the requisite service period, including consideration of vesting conditions and anticipated forfeitures. The fair value of stock options are measured using the Black-Scholes option-pricing model and the fair value for restricted stock awards and restricted stock units are based on the quoted price of our common stock on the date of grant.
Earnings Per Share
Basic earnings per common share is computed using the weighted average number of common stock shares outstanding during the period. Diluted earnings per common share is computed using the weighted average number of common stock shares and potential common shares outstanding during the period. Potential common shares consist of stock options, ESPP shares and restricted stock units. Common stock equivalent shares are excluded from the computation if the effect is antidilutive.
Derivative Financial Instruments
All derivative instruments are recorded on the balance sheet at fair value. The accounting for changes in fair value of a derivative financial instrument depends on whether the derivative financial instrument is designated and qualifies as part of a
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hedging relationship and, if so, the nature of the hedging activity. Changes in fair value are recognized through earnings for derivatives that do not qualify for hedge accounting treatment, or that have not been designated in a hedging relationship.
Fair ValueCash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, changes in the fair value hedge,of the gain or loss on the hedging instrument isderivative are recorded in the statement ofaccumulated other comprehensive income and recognized in the same line itemearnings as the hedged item and is intended to offsetaffects earnings. Derivative amounts affecting earnings are recognized consistent with the loss or gain onclassification of the hedged item attributablein the line item "loans" as part of interest income, a component of consolidated net income. We assess hedge effectiveness under ASC 815, Derivatives and Hedging ("ASC 815"), on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting under ASC 815 can be applied. If the hedged risk. Any difference that does arise would behedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in accumulated other comprehensive income are reclassified into earnings in the resultline item "loans" as part of hedge ineffectiveness, and impacts earnings.interest income, a component of consolidated net income.
Equity Warrant Assets
In connection with negotiated credit facilities and certain other services, we may obtain equity warrant assets giving us the right to acquire stock in primarily private, venture-backed companies in the technology and life science/healthcare
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industries. We hold these assets for prospective investment gains. We do not use them to hedge any economic risks nor do we use other derivative instruments to hedge economic risks stemming from equity warrant assets.
We account for equity warrant assets in certain private and public client companies as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815, Derivatives and Hedging.815. In general, equity warrant assets entitle us to buy a specific number of shares of stock at a specific price within a specific time period. Certain equity warrant assets contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events. Substantially all of our warrant agreements contain net share settlement provisions, which permit us to receive at exercise a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These equity warrant assets are recorded at fair value and are classified as derivative assets, a component of other assets, on our consolidated balance sheet at the time they are obtained.
The grant date fair values of equity warrant assets received in connection with the issuance of a credit facility are deemed to be loan fees and recognized as an adjustment of loan yield through loan interest income. Similar to other loan fees, the yield adjustment related to grant date fair value of warrants is recognized over the life of that credit facility.
Any changes in fair value from the grant date fair value of equity warrant assets will be recognized as increases or decreases to other assets on our balance sheet and as net gains or losses on derivative instruments,equity warrant assets, in noninterest income, a component of consolidated net income. When a portfolio company completes an IPO on a publicly reported market or is acquired, we may exercise these equity warrant assets for shares or cash.
In the event of an exercise for shares, the basis or value in the securities is reclassified from other assets to investment securities on the balance sheet on the latter of the exercise date or corporate action date. The shares in public companies are classified as available-for-sale securities (provided they do not have a significant restriction from sale). Changes in fair value of securities designated as available-for-sale, after applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of SVBFG stockholders' equity. The shares in private companies are classified as non-marketable securities. Typically, we account for these securities at cost and only record adjustments to the value at the time of exit or liquidation though gains or losses on investments securities, in noninterest income, a component of consolidated net income.
The fair value of the equity warrant assets portfolio is a critical accounting estimate and is reviewed quarterly. We value our equity warrant assets using a Black-Scholes option pricing model, which incorporates the following significant inputs:
•An underlying asset value, which is estimated based on current information available in valuation reports, including any information regarding subsequent rounds of funding or performance of a company.
•Stated strike price, which can be adjusted for certain warrants upon the occurrence of subsequent funding rounds or other future events.
•Price volatility or risk associated with possible changes in the warrant price. The volatility assumption is based on historical price volatility of publicly traded companies within indices similar in nature to the underlying client companies issuing the warrant. The actual volatility input is based on the mean and median volatility for an individual public company within an index for the past 16 quarters, from which an average volatility was derived.
•Actual data on cancellationsterminations and exercises of our warrants are utilized as the basis for determining the expected remaining life of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or IPOs, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants.
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•The risk-free interest rate is derived from the Treasury yield curve and is calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant.
•Other adjustments, including a marketability discount, are estimated based on management's judgment about the general industry environment.
•Number of shares and contingencies associated with obtaining warrant positions such as the funding of associated loans.
When a company in the portfolio completes an IPO, or is acquired, we may exercise these equity warrant assets for shares or cash. In the event of an exercise for common stock shares, the basis or value in the common stock shares is reclassified from other assets to investment securities on the balance sheet on the latter of the exercise date or corporate action date. The common stock of public companies are classified as non-marketable and other equity securities. Changes in the fair value of the common stock shares is recorded as gains or losses on investments securities, in noninterest income, a component of consolidated net income. The common stock of private companies are classified as non-marketable and other equity securities. We account for these securities under the methodology under ASU 2016-01, other investments without a readily determinable fair value. The carrying value in the private common stock without a readily determinable fair value is based on the price at which the investment was acquired plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments and are recorded as gains or losses on investments securities, in noninterest income, a component of consolidated net income.
Foreign Exchange Forwards and Foreign Currency Option Contracts
We enter into foreign exchange forward contracts and foreign currency option contracts with clients involved in international activities, either as the purchaser or seller, depending upon the clients' need. We also enter into an opposite-wayopposite-
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way forward or option contract with a correspondent bank to economically hedge client contracts to mitigate the fair value risk to us from fluctuations in currency rates. Settlement, credit and operational risks remain. We also enter into forward contracts with correspondent banks to economically hedge currency exposure risk related to certain foreign currency denominated assets and liabilities. These contracts are not designated as hedging instruments and are recorded at fair value in our consolidated balance sheets. The contracts generally have terms of one year or less, although we may have contracts extending for up to five years. Generally, we have not experienced nonperformance on these contracts, have not incurred credit losses and anticipate performance by all counterparties to such agreements.Changes in the fair value of these contracts are recognized in consolidated net income under other noninterest income, a component of noninterest income. Period-end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities.
Interest Rate Contracts
We sell interest rate contracts to clients who wish to mitigate their interest rate exposure. We economically reduce the interest rate risk from this business by entering into opposite wayopposite-way contracts with correspondent banks. We do not designate any of these contracts (which are derivative instruments) as qualifying for hedge accounting. Contracts in an asset position are included in other assets and contracts in a liability position are included in other liabilities. The net change in the fair value of these derivatives is recorded through other noninterest income, in noninterest income, a component of consolidated net income.
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 the 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 an $18 million reduction of income tax expense (that previously would have been reflected as additional paid-in capital), or a benefit of $0.34 per diluted common share, for the year ended December 31, 2017. 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. 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). The new standard and amendments will be effective
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFinancial Instruments - (Continued)
January 1, 2018, either on a full retrospective approach or a modified retrospective approach. We plan to adopt the revenue guidance in the first quarter of 2018 using the modified retrospective transition approach to contracts which are not completed as of January 1, 2018. We completed a comprehensive scoping exercise to determine the revenue streams that are within the scope of this guidance and will recognize the cumulative-effect of adopting this guidance as an adjustment to opening retained earnings. 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 contract assessments, we did not identify any material changes to the timing or the amounts of our revenue recognition. There will be minor changes in the timing of recognizing fund management fees in noninterest income for a portion of our SVB Capital funds as the fees will be recognized at the time of distribution which typically occurs later in the fund life than had been previously recognized. Upon adoption, we will recognize a cumulative-effect adjustment to opening retained earnings of approximately $8 million on a pre-tax basis, with an immaterial impact to our net income on an ongoing basis. Furthermore, we will provide a disaggregation of our significant categories of revenue within the scope of this guidance and expand our qualitative disclosures of our noninterest income within the Consolidated Financial Statements beginning the first quarter of 2018.
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 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. The adoption of the new standard will result in the elimination of cost method accounting for equity investments and will impact our nonmarketable and other equity securities that are currently carried at cost. This guidance will be effective on January 1, 2018, and as a result, our equity investments measured at cost will be re-measured at fair value and the difference between cost and fair value will be recorded as a cumulative-effect adjustment to opening retained earnings as of January 1, 2018, for our cost method venture capital and private equity fund investments with readily determinable fair values. The adjustment to opening retained earnings for these investments will be approximately $100 million on a pre-tax basis and any subsequent changes in the fair value of these equity securities will be recorded as unrealized gains or losses in our consolidated statements of income. Additionally, in accordance with this guidance, net unrealized gains included in accumulated other comprehensive income of approximately $40 million on a pre-tax basis related to our available-for-sale equity securities, will be reclassified as an adjustment to retained earnings. Any subsequent changes in the fair value of these equity securities will be 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, we will update our valuation methods as necessary to conform to an “exit price” concept as required by the standard update.
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 $226 million as disclosed in Note 19—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.Credit Losses
In June 2016, the FASB issued a new accounting standard updateAccounting 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 a current expected credit loss measurement to estimate the allowance for credit losses over the contractual life of the financial assets (including loans, unfunded credit commitments and HTM securities) and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ThisWhile the CECL model does not apply to available-for-sale debt securities, ASU 2016-13 does require entities to record an allowance for credit losses when recognizing credit losses for available-for-sale securities, rather than reduce the amortized cost of the securities by direct write-offs, which allows for reversal of credit impairments in future periods based on improvements in credit. We adopted the guidance will be effectiveon January 1, 2020, onusing a modified retrospective approach, with earlyapproach. We recognized the cumulative effect of initially applying CECL as an adjustment to the opening balance of retained earnings, net of tax. 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 implementation process that included loss forecasting model development, evaluation of technical accounting topics, updates to our allowance for credit loss accounting policies, reporting processes and related internal controls, overall operational readiness for our adoption permitted, but not beforeof CECL as well as parallel runs for CECL alongside our previous allowance process. We provided quarterly updates to senior management and to the Audit and Credit Committees of the Board of Directors throughout the implementation process. For additional details regarding our allowance for credit losses methodology, see Note 9—“Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments.”
Upon the adoption of the standard on January 1, 2019. We currently have a working project team in place2020, and subject matter experts to assist with our review of key interpretive issues and assist in 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 havebased on our financial position, resultsloan, unfunded credit commitment, and HTM security portfolios composition at December 31, 2019, and the then current economic environment, we recorded a $48.5 million increase to the allowance for credit losses. After adjusting for deferred taxes, a $35.0 million decrease was recorded to retained earnings through a cumulative-effect adjustment.
Under the prior guidance, our loan portfolio and credit quality disclosures were disaggregated based on client market segments. Upon adoption of operationCECL, our technology (software/internet and stockholders’ equity.
In August 2016,hardware) and life science/healthcare market segments are disclosed by disaggregated risk-based segments determined by portfolio segments that align with their respective underwriting methodology and the FASB issued a new accounting standard update (ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receiptslevel at which credit risk is now monitored by management. The primary underwriting method for our technology and life science/healthcare portfolios are classified as Investor Dependent - Accelerator (Early-Stage) and Growth (Mid-Stage and Later-Stage) and Cash Payments), which clarifies the guidance on eight specific cash flow issues. This guidance will be effective January 1, 2018Flow (Sponsor Led Buyout and will be applied on a full retrospective basis beginning the first quarter of 2018. This guidance will impact the presentation between investingOther) and operating activities withinBalance Sheet Dependent, as noted above, and prior period amounts were reclassified for comparability. There are no other material changes to our consolidated statements of cash flows related to distributions and net gains from our nonmarketable and other securities portfolio.
current market segments.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Allowance for Loan Losses, Allowance for Unfunded Credit Commitments and Impaired Loans Superseded by Recently Adopted Accounting Standards (Applicable to the Years Ending December 31, 2019 and 2018)
Allowance for Loan Losses
The allowance for loan losses considers credit risk and is established through a provision for loan losses charged to expense. Our allowance for loan losses is established for estimated loan losses that are probable and incurred but not yet realized. Our evaluation process is designed to determine that the allowance for loan losses is appropriate at the balance sheet date. The process of estimating loan losses is inherently imprecise.
In February 2018,We maintain a systematic process for the FASB issuedevaluation of individual loans and pools of loans for inherent risk of loan losses. At the time of approval, each loan in our portfolio is assigned a new accounting standard update (ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): ReclassificationCredit Risk Rating and industry niche. Credit Risk Ratings are assigned on a scale of Certain Tax Effects from Accumulated Other Comprehensive Income)1 to address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from10, with 1 representing loans with a low risk of nonpayment, 9 representing loans with the TCJ Act.highest risk of nonpayment, and 10 representing loans which have been charged-off. The ASU changed current accounting wherebycredit risk ratings for each loan are monitored and updated on an entity may electongoing basis. This Credit Risk Rating process includes, but is not limited to, reclassifyconsideration of such factors as payment status, the stranded tax effect from AOCIfinancial condition and operating performance of the borrower, borrower compliance with loan covenants, underlying collateral values and performance trends, the degree of access to retained earnings in each period inadditional capital, the presence of credit enhancements such as third party guarantees (where applicable), the degree to which the effectborrower is sensitive to external factors, the depth and experience of the changeborrower's management team, potential loan concentrations, and general economic conditions. Our policies require a committee of senior management to review, at least quarterly, credit relationships with a credit risk rating of 5 through 9 that exceed specific dollar values. Our review process evaluates the appropriateness of the credit risk rating and allocation of the allowance for loan losses, as well as other account management functions. The allowance for loan losses is determined based on a qualitative analysis and a formula allocation for similar risk-rated loans categorized by portfolio segment, and individually for impaired loans. The formula allocation provides the average loan loss experience for each portfolio segment, which considers our quarterly historical loss experience since the year 2000, both by risk-rating category and client industry sector. The resulting loan loss factors for each risk-rating category and client industry sector are ultimately applied to the respective period-end client loan balances for each corresponding risk-rating category and client industry sector to provide an estimation of the allowance for loan losses. The probable loan loss experience for any one year period of time is reasonably expected to be greater or less than the average as determined by the loss factors. As such, management applies a qualitative allocation to the results of the aforementioned model to ascertain the total allowance for loan losses. This qualitative allocation is based on management's assessment of the risks that may lead to a loan loss experience that is different from our historical loan loss experience. Based on management's prediction or estimate of changing risks in the U.S. federal corporate income tax ratelending environment, the qualitative allocation may vary significantly from period to period and includes, but is not limited to, consideration of the following factors:
•Changes in lending policies and procedures, including underwriting standards and collections, and charge-off and recovery practices;
•Changes in national and local economic business conditions, including the market and economic condition of our clients' industry sectors;
•Changes in the TCJ Act (or portion thereof) is recorded. The ASU is effective for periods beginning after December 15, 2018 with early adoption is permitted. We have elected to early adopt ASU 2018-02nature of our loan portfolio;
•Changes in experience, ability, and depth of lending management and staff;
•Changes in the first quartertrend of 2018the volume and expect to reclassify approximately $0.3 million from accumulated other comprehensive income to retained earnings within our consolidated statementsseverity of stockholders' equitypast due and classified loans;
•Changes in the firsttrend of the volume of nonaccrual loans, troubled debt restructurings and other loan modifications;
•Reserve floor for portfolio segments that would not draw a minimum reserve based on the lack of historical loan loss experience;
•Reserve for large funded loan exposure;
•Reserve for performing impaired loan exposure; and
•Other factors as determined by management from time to time.
While the evaluation process of our allowance for loan losses uses historical and other objective information, the classification of loans and the establishment of the allowance for loan losses rely, to a great extent, on the judgment and experience of our management.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Allowance for Unfunded Credit Commitments
We record a liability for probable and estimable incurred losses associated with our unfunded credit commitments being funded and subsequently being charged off. Each quarter, every unfunded client credit commitment is allocated to a credit risk-rating in accordance with each client's credit risk rating and portfolio segment. We use the segment specific historical loan loss factors described above under "Allowance for Loan Losses" to calculate the loan loss experience if unfunded credit commitments are funded. Separately, we use historical trends to calculate a probability of 2018.an unfunded credit commitment being funded. We apply the loan funding probability factor to risk-factor adjusted unfunded credit commitments by credit risk-rating and portfolio segment to derive the allowance for unfunded credit commitments, similar to funded loans. The allowance for unfunded credit commitments also includes certain qualitative allocations as deemed appropriate by management. We include the allowance for unfunded credit commitments in other liabilities and the related provision in our provision for credit losses.
Impaired Loans
A loan is considered impaired when, based upon currently known information, it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the agreement. On a quarterly basis, we review our loan portfolio for impairment. Within each class of loans, we review individual loans for impairment based on credit risk ratings. Loans risk-rated 5 through 7 are performing loans; however, we consider them as demonstrating higher risk, which requires more frequent review of individual exposures. Such loans translate to an internal rating of "Performing (Criticized)" and could be classified as a performing impaired loan.
For each loan identified as impaired, we measure the impairment based upon the present value of expected future cash flows discounted at the loan's effective interest rate. In limited circumstances, we may measure impairment based on the loan's observable market price or the fair value of the collateral less selling costs if the loan is collateral dependent. Impaired collateral-dependent loans will have independent appraisals completed and accepted at least annually. The fair value of the collateral will be determined by the most recent appraisal, as adjusted to reflect a reasonable marketing period for the sale of the asset(s) and an estimate of reasonable selling expenses.
If it is determined that the value of an impaired loan is less than the recorded investment in the loan, net of previous charge-offs and payments collected, we recognize impairment through the allowance for loan losses as determined by our analysis.
Reclassifications
Certain prior period amounts primarily related to the changes to our income statement presentationadoption of net gainsthe ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on derivative instruments and provision for unfunded credit commitments,Financial Instruments) ("ASU 2016-13" or "CECL") as mentioned above have been reclassified to conform to current period presentations.
| |
3.3.Stockholders' Equity and EPS | Stockholders' Equity and EPS
|
Accumulated Other Comprehensive (Loss) Income
The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income for 2017, 20162020, 2019 and 20152018:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year ended December 31, |
| (Dollars in thousands) | | Income Statement Location | | 2020 | | 2019 | | 2018 |
| Reclassification adjustment for (gains) losses on available-for-sale securities included in net income | | Gains on investment securities, net | | $ | (61,165) | | | $ | 3,905 | | | $ | 740 | |
| Related tax expense (benefit) | | Income tax expense | | 16,953 | | | (1,087) | | | (205) | |
| Reclassification adjustment for (gains) losses on cash flow hedges included in net income | | Net interest income | | (49,928) | | | 5,358 | | | 0 | |
| Related tax expense (benefit) | | Income tax expense | | 13,692 | | | (1,489) | | | 0 | |
| Total reclassification adjustment for (gains) losses included in net income, net of tax | | | | $ | (80,448) | | | $ | 6,687 | | | $ | 535 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | |
| | | | | Year ended December 31, |
| (Dollars in thousands) | | Income Statement Location | | 2017 | | 2016 | | 2015 |
| Reclassification adjustment for losses (gains) included in net income | | Gains on investment securities, net | | $ | 5,189 |
| | $ | (12,195 | ) | | $ | (1,201 | ) |
| Related tax (benefit) expense | | Income tax expense | | (2,098 | ) | | 4,963 |
| | 481 |
|
| Total reclassification adjustment for losses (gains) included in net income, net of tax | | | | $ | 3,091 |
| | $ | (7,232 | ) | | $ | (720 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Balance, beginning of period, net of tax | | $ | (2,130) | | | $ | 0 | | | $ | 0 | |
| Net increase (decrease) in fair value, net of tax | | 167,639 | | | (5,999) | | | 0 | |
| Net realized (gain) loss reclassified to net income, net of tax | | (36,236) | | | 3,869 | | | 0 | |
| Balance, end of period, net of tax | | $ | 129,273 | | | $ | (2,130) | | | $ | 0 | |
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 option and restricted stock unit awards 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 2017, 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars and shares in thousands, except per share amounts) | | 2020 | | 2019 | | 2018 |
| Numerator: | | | | | | |
| Net income available to common stockholders | | $ | 1,191,217 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Denominator: | | | | | | |
| Weighted average common shares outstanding—basic | | 51,685 | | | 51,915 | | | 53,078 | |
| Weighted average effect of dilutive securities: | | | | | | |
| Stock options and ESPP | | 151 | | | 227 | | | 377 | |
| Restricted stock units | | 248 | | | 169 | | | 317 | |
| Weighted average common shares outstanding—diluted | | 52,084 | | | 52,311 | | | 53,772 | |
| Earnings per common share: | | | | | | |
| Basic | | $ | 23.05 | | | $ | 21.90 | | | $ | 18.35 | |
| Diluted | | 22.87 | | | 21.73 | | | 18.11 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars and shares in thousands, except per share amounts) | | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | | |
| Net income available to common stockholders | | $ | 490,506 |
| | $ | 382,685 |
| | $ | 343,904 |
|
| Denominator: | | | | | | |
| Weighted average common shares outstanding—basic | | 52,588 |
| | 51,915 |
| | 51,318 |
|
| Weighted average effect of dilutive securities: | | | | | | |
| Stock options and ESPP | | 385 |
| | 254 |
| | 387 |
|
| Restricted stock units | | 333 |
| | 180 |
| | 211 |
|
| Weighted average common shares outstanding—diluted | | 53,306 |
| | 52,349 |
| | 51,916 |
|
| Earnings per common share: | | | | | | |
| Basic | | $ | 9.33 |
| | $ | 7.37 |
| | $ | 6.70 |
|
| Diluted | | 9.20 |
| | 7.31 |
| | 6.62 |
|
The following table summarizes the weighted average common shares excluded from the diluted EPS calculation due to the antidilutive effect for 2017, 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Shares in thousands) | | 2020 | | 2019 | | 2018 |
| Stock options | | 279 | | | 167 | | | 59 | |
| Restricted stock units | | 10 | | | 250 | | | 85 | |
| Total | | 289 | | | 417 | | | 144 | |
Stock Repurchase Program
On October 24, 2019, our Board of Directors authorized a stock repurchase program that enabled us to repurchase up to $350 million of our outstanding common stock. The program expired on October 29, 2020. Prior to the program's expiration and for the year ended December 31, 2020, we had repurchased 244,223 shares of our outstanding common stock for $60.0 million under the stock repurchase program.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | |
| | | Year ended December 31, |
| (Shares in thousands) | | 2017 |
| 2016 |
| 2015 |
| Stock options | | 73 |
| | 272 |
| | 185 |
|
| Restricted stock units | | 1 |
| | 1 |
| | — |
|
| Total | | 74 |
| | 273 |
| | 185 |
|
On December 9, 2019, the Company issued depositary shares representing an ownership interest in 350,000 shares of Series A Preferred Stock with $0.001 par value and liquidation preference of $1,000 per share, or $25 per depositary share. All preferred shares were issued in the form of depositary shares, with each depositary share representing a 1/40th ownership interest in a share of the preferred stock. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or other obligation of the Company. Dividends are approved by the Board of Directors and, if declared, are payable quarterly, in arrears, at a rate per annum equal to 5.25 percent. The Series A Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after February 15, 2025. Prior to February 15, 2025, the Series A Preferred Stock is redeemable at the Company’s option, in whole and not in part, following any change in laws or regulations that would not allow the Company to treat the full liquidation value of the Series A Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Board of Governors of the Federal Reserve System ("the Federal Reserve"). The redemption amount is computed at the per share liquidation preference plus any declared but unpaid dividends. Redemptions are subject to certain regulatory provisions, including approval of the Federal Reserve. | |
As of December 31, 2020, there were 350,000 shares issued and outstanding of Series A Preferred Shares, which had a carrying value of $340.1 million and liquidation preference of $350.0 million. The following table summarizes our preferred stock at December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Series | | Description | | Amount outstanding (in millions) | | Carrying value
(in millions) | | Shares issued and outstanding | | Par Value | | Ownership interest per depositary share | | Liquidation preference per depositary share | | 2020 dividends paid per depositary share | | Series A | | 5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | | $ | 350 | | | $ | 340.1 | | | 350,000 | | $ | 0.001 | | | 1/40th | | $ | 25 | | | $ | 1.23 | |
On February 2, 2021, the Company issued Series B Preferred Stock. Refer to Note 28—“Subsequent Events” for additional information. 4. Share-Based Compensation 4.
| Share-Based Compensation
|
Share-based compensation expense was recorded net of estimated forfeitures for 2017, 20162020, 2019 and 2015,2018, such that expense was recorded only for those share-based awards that are expected to vest. In 2017, 20162020, 2019 and 2015,2018, we recorded share-based compensation and related benefits as follows:
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Share-based compensation expense | | $ | 36,900 |
| | $ | 35,494 |
| | $ | 32,239 |
| Share-based compensation expense | | $ | 83,986 | | | $ | 66,815 | | | $ | 45,675 | |
| Income tax benefit related to share-based compensation expense | | (12,845 | ) | | (12,505 | ) | | (11,395 | ) | Income tax benefit related to share-based compensation expense | | (20,426) | | | (16,152) | | | (10,997) | |
| Capitalized compensation costs | | 1,071 |
| | 5,580 |
| | 2,226 |
| Capitalized compensation costs | | 1,383 | | | 1,517 | | | 1,466 | |
Equity Incentive Plan
Our 2006 Equity Incentive Plan (the “2006 Incentive Plan”) was adopted in May 2006, and is amended from time to time. The 2006 Incentive Plan provides for the grant of various types of incentive awards, of which the following have been granted: (i) stock options; (ii) restricted stock awards; (iii) restricted stock units (subject to either time-and/or performance-based vesting); and (iv) other cash or stock settled equity awards. Eligible participants in the 2006 Incentive Plan include directors, employees and consultants.
Subject to the provisions of Section 16 of the 2006 Incentive Plan, the maximum aggregate number of shares that may be awarded and sold thereunder is 9,528,505.12,028,505.
Restricted stock awards/units are counted against the available-for-issuance limits of the 2006 Incentive Plan as two2 shares for every one share awarded. Further, if shares acquired under any such award are forfeited, repurchased by SVB Financial, used to satisfy the tax withholding obligations related to an award or otherwise canceled and would otherwise return to the 2006 Incentive Plan, two2 times the number of such shares will return to the 2006 Incentive Plan and will again become available for issuance.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Under the terms of the 2006 Incentive Plan and subject to certain exceptions: (i) restricted stock awards/units are subject to a minimum of at least three years of annual vesting, and (ii) performance-based restricted stock awards/units and stock options are subject to a minimum of at least one year of vesting. Generally in practice, restricted stock awards/units vest annually over four years and require continued employment or other service through the vesting period. Performance-based restricted stock awards/units granted to executives generally vest upon meeting certain performance-based objectives over a three year period and, typically the passage of time, and require continued employment or other service through the vesting period. Stock options typically vest annually over four years, from the grant date based on continued employment or other service, and expire no later than seven years after the grant date.
Employee Stock Purchase Plan
We maintain the 1999 ESPP under which participating employees may annually contribute up to 10 percent of their gross compensation (not to exceed $25,000)$25,000) to purchase shares of our common stock at 85 percent of its fair market value at either the beginning or end of each six-month offering period, whichever price is less. To be eligible to participate in the ESPP, an employee must, among other requirements, be employed by the Company on both the date of offering and date of purchase, and be employed customarily for at least 20 hours per week and at least five months per calendar year.We issued 122,882167,336 shares and received $18.2$30.2 million in cash under the ESPP in 2017.2020. At December 31, 2017,2020, a total of 1,614,3991,170,472 shares of our common stock were still available for future issuance under the ESPP.
Unrecognized Compensation Expense
As of December 31, 2017,2020, unrecognized share-based compensation expense was as follows: | | | (Dollars in thousands) | | Unrecognized Expense | | Weighted Average Expected Recognition Period - in Years | (Dollars in thousands) | | Unrecognized
Expense | | Weighted Average Expected Recognition Period - in Years |
| Stock options | | $ | 9,630 |
| | 2.59 | Stock options | | $ | 13,854 | | | 2.42 |
| Restricted stock units | | 50,530 |
| | 2.59 | |
| Restricted stock awards/units | | Restricted stock awards/units | | 119,764 | | | 2.59 |
| Total unrecognized share-based compensation expense | | $ | 60,160 |
| | Total unrecognized share-based compensation expense | | $ | 133,618 | | |
Valuation Assumptions
The fair values of share-based awards for employee stock options and employee stock purchases made under our ESPP were estimated using the Black-Scholes option pricing model. The fair values of restricted stock units were based on our closing stock price on the date of grant. The following weighted average assumptions and fair values were used for our employee stock options and restricted stock units:
| | | Equity Incentive Plan Awards | | 2017 | | 2016 | | 2015 | Equity Incentive Plan Awards | | 2020 | | 2019 | | 2018 |
| Weighted average expected term of options - in years | | 4.9 |
| | 4.8 |
| | 4.7 |
| Weighted average expected term of options - in years | | 4.6 | | 4.6 | | 4.8 |
| Weighted average expected volatility of the Company's underlying common stock | | 33.7 | % | | 31.7 | % | | 31.3 | % | Weighted average expected volatility of the Company's underlying common stock | | 41.9 | % | | 35.5 | % | | 34.7 | % |
| Risk-free interest rate | | 1.81 |
| | 1.32 |
| | 1.49 |
| Risk-free interest rate | | 0.37 | | | 2.26 | | | 2.82 | |
| Expected dividend yield | | — |
| | — |
| | — |
| Expected dividend yield | | 0 | | | 0 | | | 0 | |
| Weighted average grant date fair value - stock options | | $ | 57.81 |
| | $ | 31.17 |
| | $ | 37.86 |
| Weighted average grant date fair value - stock options | | $ | 66.44 | | | $ | 83.50 | | | $ | 105.81 | |
| Weighted average grant date fair value - restricted stock units | | 181.23 |
| | 100.35 |
| | 129.23 |
| Weighted average grant date fair value - restricted stock units | | 199.51 | | | 243.65 | | | 294.50 | |
The following weighted average assumptions and fair values were used for our ESPP:
| | | | | | | | | | | | | | | | | | | | |
| ESPP | | 2020 | | 2019 | | 2018 |
| Expected term in years | | 0.5 | | 0.5 | | 0.5 |
| Weighted average expected volatility of the Company's underlying common stock | | 51.9 | % | | 38.1 | % | | 32.2 | % |
| Risk-free interest rate | | 1.12 | | | 2.40 | | | 1.79 | |
| Expected dividend yield | | 0 | | | 0 | | | 0 | |
| Weighted average grant date fair value | | $ | 69.54 | | | $ | 52.90 | | | $ | 62.76 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| ESPP | | 2017 | | 2016 | | 2015 |
| Expected term in years | | 0.5 |
| | 0.5 |
| | 0.5 |
|
| Weighted average expected volatility of the Company's underlying common stock | | 31.2 | % | | 41.8 | % | | 25.9 | % |
| Risk-free interest rate | | 0.80 |
| | 0.45 |
| | 0.12 |
|
| Expected dividend yield | | — |
| | — |
| | — |
|
| Weighted average grant date fair value | | $ | 41.70 |
| | $ | 29.16 |
| | $ | 29.27 |
|
The expected term is based on the implied term of the stock options using factors based on historical exercise behavior.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The expected volatilities are based on a blended rate consisting of our historic volatility and our expected volatility over a five-yearfive-year term which is an indicator of expected volatility and future stock price trends. For 2017, 20162020, 2019 and 2015,2018, expected volatilities for the ESPP were equal to the historical volatility for the previous six-month periods. The expected risk-free interest rates were based on the yields of U.S. Treasury securities, as reported by the Federal Reserve Bank of New York, with maturities equal to the expected terms of the employee stock options.
Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the year ended December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options | | Weighted
Average
Exercise Price | | Weighted Average Remaining Contractual Life - in Years | | Aggregate Intrinsic Value of
In-The-Money Options |
| Outstanding at December 31, 2019 | | 625,407 | | | $ | 169.33 | | | | | |
| Granted | | 124,091 | | | 187.59 | | | | | |
| Exercised | | (173,536) | | | 106.42 | | | | | |
| Forfeited | | (15,931) | | | 232.60 | | | | | |
| Expired | | (1,030) | | | 71.11 | | | | | |
| Outstanding at December 31, 2020 | | 559,001 | | | 191.29 | | | 4.01 | | $ | 109,865,324 | |
| Vested and expected to vest at December 31, 2020 | | 538,524 | | | 190.30 | | | 3.94 | | 106,375,308 | |
| Exercisable at December 31, 2020 | | 276,191 | | | 157.07 | | | 2.47 | | 63,734,604 | |
|
| | | | | | | | | | | | | |
| | | 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 | | 116,995 |
| | 179.39 |
| | | | |
| Exercised | | (302,744 | ) | | 71.65 |
| | | | |
| Forfeited | | (16,759 | ) | | 122.97 |
| | | | |
| Outstanding at December 31, 2017 | | 808,049 |
| | 105.68 |
| | 3.69 | | $ | 103,506,420 |
|
| Vested and expected to vest at December 31, 2017 | | 787,182 |
| | 104.69 |
| | 3.64 | | 101,607,636 |
|
| Exercisable at December 31, 2017 | | 464,685 |
| | 84.86 |
| | 2.57 | | 69,197,233 |
|
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 $233.77$387.83 as of December 31, 2017.2020. The following table summarizes information regarding stock options outstanding and exercisable as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Options | | Exercisable Options |
| Range of Exercise Prices | | Shares | | Weighted Average Remaining Contractual Life - in Years | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| $101.14 - 105.84 | | 87,538 | | | 2.31 | | $ | 105.15 | | | 87,538 | | | $ | 105.15 | |
| 105.85 - 126.18 | | 42,249 | | | 0.33 | | 108.04 | | | 42,249 | | | 108.04 | |
| 126.19 - 173.94 | | 47,407 | | | 1.36 | | 130.42 | | | 46,673 | | | 129.81 | |
| 173.95 - 181.63 | | 64,974 | | | 3.33 | | 178.39 | | | 45,579 | | | 178.39 | |
| 181.64 - 195.34 | | 116,375 | | | 6.33 | | 184.86 | | | 0 | | | 0 | |
| 195.35 - 247.56 | | 15,765 | | | 5.69 | | 230.24 | | | 3,777 | | | 227.23 | |
| 247.57 - 277.95 | | 112,934 | | | 5.33 | | 250.43 | | | 15,367 | | | 250.43 | |
| 277.96- 306.22 | | 68,705 | | | 4.33 | | 305.46 | | | 33,875 | | | 305.46 | |
| 306.23 - 315.88 | | 790 | | | 6.84 | | 306.98 | | | 0 | | | 0 | |
| 315.89 - 324.77 | | 2,264 | | | 4.60 | | 324.77 | | | 1,133 | | | 324.77 | |
| Total | | 559,001 | | | 4.01 | | 191.29 | | | 276,191 | | | 157.07 | |
|
| | | | | | | | | | | | | | | | |
| | | Outstanding Options | | Exercisable Options |
| Range of Exercise Prices | | Shares | | Weighted Average Remaining Contractual Life - in Years | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| $42.79 - 63.62 | | 52,630 |
| | 0.52 | | $ | 59.22 |
| | 52,630 |
| | $ | 59.22 |
|
| 63.63 - 67.77 | | 84,961 |
| | 1.33 | | 64.37 |
| | 84,961 |
| | 64.37 |
|
| 67.78 - 79.77 | | 141,026 |
| | 2.33 | | 71.11 |
| | 141,026 |
| | 71.11 |
|
| 79.78 - 105.14 | | 11,686 |
| | 3.67 | | 98.17 |
| | 7,336 |
| | 96.09 |
|
| 105.15 - 105.84 | | 154,345 |
| | 5.33 | | 105.18 |
| | 31,958 |
| | 105.18 |
|
| 105.85 - 108.59 | | 148,456 |
| | 3.32 | | 107.96 |
| | 101,824 |
| | 107.95 |
|
| 108.60 - 149.65 | | 102,306 |
| | 4.27 | | 128.65 |
| | 44,950 |
| | 128.13 |
|
| 149.66 - 180.62 | | 108,266 |
| | 6.34 | | 178.15 |
| | — |
| | — |
|
| 180.63 - 217.69 | | 4,373 |
| | 6.80 | | 210.42 |
| | — |
| | — |
|
| Total | | 808,049 |
| | 3.69 | | 105.68 |
| | 464,685 |
| | 84.86 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We expect to satisfy the exercise of stock options by issuing shares under the 2006 Incentive Plan. All future awards of stock options and restricted stock units will be issued from the 2006 Incentive Plan. AtDecember 31, 20172020, 2,091,0642,682,494 shares were available for future issuance.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the year ended December 31, 2017:2020:
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
| Nonvested at December 31, 2019 | | 847,972 | | | $ | 236.54 | |
| Granted | | 460,671 | | | 199.51 | |
| Vested | | (261,302) | | | 209.30 | |
| Forfeited | | (52,292) | | | 225.66 | |
| Nonvested at December 31, 2020 | | 995,049 | | | 227.12 | |
|
| | | | | | | |
| | | Shares | | Weighted Average Grant Date Fair Value |
| Nonvested at December 31, 2016 | | 670,969 |
| | $ | 106.64 |
|
| Granted | | 247,591 |
| | 181.23 |
|
| Vested | | (228,198 | ) | | 102.47 |
|
| Forfeited | | (52,695 | ) | | 121.52 |
|
| Nonvested at December 31, 2017 | | 637,667 |
| | 135.86 |
|
The following table summarizes information regarding stock option and restricted stock unit activity during 2017, 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Total intrinsic value of stock options exercised | | $ | 25,380 | | | $ | 23,088 | | | $ | 40,681 | |
| Total grant date fair value of stock options vested | | 5,868 | | | 5,735 | | | 5,823 | |
| Total intrinsic value of restricted stock vested | | 55,782 | | | 56,101 | | | 63,917 | |
| Total grant date fair value of restricted stock vested | | 47,237 | | | 35,191 | | | 28,813 | |
5. Variable Interest Entities
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Total intrinsic value of stock options exercised | | $ | 36,173 |
| | $ | 18,186 |
| | $ | 27,430 |
|
| Total grant date fair value of stock options vested | | 6,094 |
| | 7,364 |
| | 21,052 |
|
| Total intrinsic value of restricted stock vested | | 40,925 |
| | 22,966 |
| | 34,009 |
|
| Total grant date fair value of restricted stock vested | | 23,383 |
| | 19,454 |
| | 19,428 |
|
| |
5. | 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 December 31, 20172020 and December 31, 2016:2019:
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | Consolidated VIEs | | Unconsolidated VIEs | | Maximum Exposure to Loss in Unconsolidated VIEs |
| December 31, 2017: | | | | | | |
| Assets: | | | | | | |
| Cash and cash equivalents | | $ | 6,674 |
| | $ | — |
| | $ | — |
|
| Non-marketable and other 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 |
| | $ | — |
|
| 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 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Consolidated VIEs | | Unconsolidated VIEs | | Maximum Exposure to Loss in Unconsolidated VIEs |
| December 31, 2020: | | | | | | |
| Assets: | | | | | | |
| Cash and cash equivalents | | $ | 14,859 | | | $ | 0 | | | $ | — | |
| Non-marketable and other equity securities (1) | | 422,049 | | | 858,617 | | | 858,617 | |
| Accrued interest receivable and other assets | | 937 | | | 0 | | | — | |
| Total assets | | $ | 437,845 | | | $ | 858,617 | | | $ | 858,617 | |
| Liabilities: | | | | | | |
| Other liabilities (1) | | 1,410 | | | 370,208 | | | — | |
| Total liabilities | | $ | 1,410 | | | $ | 370,208 | | | $ | — | |
| December 31, 2019: | | | | | | |
| Assets: | | | | | | |
| Cash and cash equivalents | | $ | 7,629 | | | $ | 0 | | | $ | — | |
| Non-marketable and other equity securities (1) | | 270,057 | | | 689,360 | | | 689,360 | |
| Accrued interest receivable and other assets | | 1,117 | | | 0 | | | — | |
| Total assets | | $ | 278,803 | | | $ | 689,360 | | | $ | 689,360 | |
| Liabilities: | | | | | | |
| Other liabilities (1) | | 2,854 | | | 302,031 | | | — | |
| Total liabilities | | $ | 2,854 | | | $ | 302,031 | | | $ | — | |
| |
(1) | Included in our unconsolidated non-marketable and other securities portfolio at December 31, 2017 and December 31, 2016 are investments in qualified affordable housing projects of $174.2 million and $112.4 million, respectively, and related other liabilities consisting of unfunded credit commitments of $100.9 million and $58.1 million, respectively.
|
(1)Included in our unconsolidated non-marketable and other equity securities portfolio at December 31, 2020 and December 31, 2019 are investments in qualified affordable housing projects of $616.2 million and $458.5 million, respectively, and related other liabilities consisting of unfunded commitments of $370.2 million and $302.0 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 in China ("SPD-SVB")),SPD-SVB, debt funds, private and public portfolio companies, including public equity securities held as a result of equity warrant assets exercised and investments in qualified affordable housing projects. A majority of these investments are through third party fundsinvestments held by SVB Financial in third-party funds 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 four3 of these SVB Capital funds and consolidate these funds for financial reporting purposes.
All investments are generally non-redeemable 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 19—21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.Commitments.”
The Bank also has variable interests in qualified affordablelow income housing projects 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 8—“Investment Securities" of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.Securities."
As of December 31, 2017,2020, our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $196.6$436.4 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $346.1$858.6 million.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Reserves on Deposit with the Federal Reserve Bank and Federal Bank Stock
| |
6.
| Reserves on Deposit with the Federal Reserve Bank and Federal Bank Stock
|
The Bank is required to maintain reserves against customer deposits by keeping balances with the Federal Reserve. The cash balances at the Federal Reserve are classified as cash and cash equivalents. Additionally, as a member of the FHLB and FRB, we are required to hold shares of FHLB and FRB stock under the Bank's borrowing agreement. FHLB and FRB stock are recorded at cost as a component of other assets, and any cash dividends received are recorded as a component of other noninterest income.
The tables below provide information on the required reserve balances at the Federal Reserve, as well as shares held at the FHLB and FRB for the years ended and as of December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Average required reserve balances at FRB San Francisco | | $ | 82,461 | | | $ | 315,784 | |
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| FHLB stock holdings | | $ | 17,250 | | | $ | 17,250 | |
| FRB stock holdings | | 43,982 | | | 43,008 | |
7. Cash and Cash Equivalents
|
| | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Average required reserve balances at FRB San Francisco | | $ | 397,235 |
| | $ | 370,002 |
|
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| FHLB stock holdings | | $ | 18,900 |
| | $ | 17,250 |
|
| FRB stock holdings | | 41,120 |
| | 40,342 |
|
| |
7.
| Cash and Cash Equivalents
|
The following table details our cash and cash equivalents at December 31, 20172020 and December 31, 2016:2019:
|
| | | | | | | | |
| (Dollars in thousands) | | December 31, 2017 | | December 31, 2016 |
| Cash and due from banks (1) | | $ | 2,672,290 |
| | $ | 2,476,588 |
|
| Securities purchased under agreements to resell (2) | | 247,876 |
| | 64,028 |
|
| Other short-term investment securities | | 2,909 |
| | 5,134 |
|
| Total cash and cash equivalents | | $ | 2,923,075 |
| | $ | 2,545,750 |
|
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2020 | | December 31, 2019 |
| Cash and due from banks (1) | | $ | 17,447,916 | | | $ | 6,492,443 | |
| Securities purchased under agreements to resell (2) | | 226,847 | | | 289,340 | |
| | | | |
| Total cash and cash equivalents | | $ | 17,674,763 | | | $ | 6,781,783 | |
| |
(1) | At December 31, 2017 and 2016, $0.6 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the FRB and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $1.1 billion and $0.7 billion, respectively.
|
| |
(2) | At December 31, 2017 and 2016, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $253 million and $66 million, respectively. None of these securities were sold or repledged as of December 31, 2017 and 2016.
|
(1)At December 31, 2020 and 2019, $13.7 billion and $3.7 billion, respectively, of our cash and due from banks was deposited at the FRB and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $3.0 billion and $2.1 billion, respectively.
(2)At December 31, 2020 and 2019, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $232 million and $295 million, respectively. NaN of these securities were sold or repledged as of December 31, 2020 and 2019.
Additional information regarding our securities purchased under agreements to resell for 20172020 and 20162019 are as follows:
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Average securities purchased under agreements to resell | | $ | 149,385 | | | $ | 166,205 | |
| Maximum amount outstanding at any month-end during the year | | 450,164 | | | 613,247 | |
|
| | | | | | | | |
| | | Year Ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Average securities purchased under agreements to resell | | $ | 94,094 |
| | $ | 90,362 |
|
| Maximum amount outstanding at any month-end during the year | | 377,073 |
| | 316,059 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Investment Securities
Our investment securities portfolio consists of: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.
business as well as public equity securities held as a result of equity warrant assets exercised.
Available-for-Sale Securities
The major components of our AFS investment securities portfolio at December 31, 20172020 and 20162019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (Dollars in thousands) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Carrying
Value |
| Available-for-sale securities, at fair value: | | | | | | | | |
| U.S. Treasury securities | | $ | 4,197,858 | | | $ | 271,977 | | | $ | (107) | | | $ | 4,469,728 | |
| U.S. agency debentures | | 233,727 | | | 4,165 | | | (585) | | | 237,307 | |
| Foreign government debt securities | | 24,491 | | | 1 | | | 0 | | | 24,492 | |
| Residential mortgage-backed securities: | | | | | | | | |
| Agency-issued mortgage-backed securities | | 13,271,482 | | | 232,850 | | | (651) | | | 13,503,681 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 8,076,832 | | | 40,010 | | | (10,278) | | | 8,106,564 | |
| Agency-issued commercial mortgage-backed securities | | 4,440,506 | | | 133,527 | | | (3,367) | | | 4,570,666 | |
| Total available-for-sale securities | | $ | 30,244,896 | | | $ | 682,530 | | | $ | (14,988) | | | $ | 30,912,438 | |
| | | | | December 31, 2017 | | | December 31, 2019 |
| (Dollars in thousands) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Carrying
Value | (Dollars in thousands) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Carrying
Value |
| Available-for-sale securities, at fair value: | | | | | | | | | Available-for-sale securities, at fair value: | | | | | | | | |
| U.S. Treasury securities | | $ | 6,865,068 |
| | $ | 1,113 |
| | $ | (25,679 | ) | | $ | 6,840,502 |
| U.S. Treasury securities | | $ | 6,815,874 | | | $ | 82,267 | | | $ | (4,131) | | | $ | 6,894,010 | |
| U.S. agency debentures | | 1,569,195 |
| | 3,569 |
| | (5,636 | ) | | 1,567,128 |
| U.S. agency debentures | | 100,000 | | | 0 | | | (453) | | | 99,547 | |
| Foreign government debt securities | | Foreign government debt securities | | 9,037 | | | 1 | | | 0 | | | 9,038 | |
| Residential mortgage-backed securities: | | | | | | | | | Residential mortgage-backed securities: | |
| Agency-issued mortgage-backed securities | | Agency-issued mortgage-backed securities | | 4,109,372 | | | 39,438 | | | (19) | | | 4,148,791 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 2,292,311 |
| | 258 |
| | (25,534 | ) | | 2,267,035 |
| Agency-issued collateralized mortgage obligations—fixed rate | | 1,520,414 | | | 17,929 | | | 0 | | | 1,538,343 | |
| Agency-issued collateralized mortgage obligations—variable rate | | 372,481 |
| | 1,375 |
| | (126 | ) | | 373,730 |
| |
| Equity securities | | 31,953 |
| | 40,525 |
| | (209 | ) | | 72,269 |
| |
| Agency-issued commercial mortgage-backed securities | | Agency-issued commercial mortgage-backed securities | | 1,339,651 | | | 1,078 | | | (15,539) | | | 1,325,190 | |
| | Total available-for-sale securities | | $ | 11,131,008 |
| | $ | 46,840 |
| | $ | (57,184 | ) | | $ | 11,120,664 |
| Total available-for-sale securities | | $ | 13,894,348 | | | $ | 140,713 | | | $ | (20,142) | | | $ | 14,014,919 | |
The following table summarizes sale activity of available-for-sale securities as recorded in the line item “Gains on investment securities, net," a component of noninterest income:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Sales proceeds | | $ | 2,654,212 | | | $ | 2,189,087 | | | $ | 474,482 | |
| Net realized gains and losses: | | | | | | |
| Gross realized gains | | 61,165 | | | 1,250 | | | 127 | |
| Gross realized losses | | 0 | | | (5,155) | | | (867) | |
| Net realized losses | | $ | 61,165 | | | $ | (3,905) | | | $ | (740) | |
|
| | | | | | | | | | | | | | | | |
| | | 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 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables summarize our unrealized losses on our AFS securities portfolioin an unrealized loss position for which an allowance for credit losses has not been recorded and summarized into categories of less than 12 months, or 12 months or longer as of December 31, 20172020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | Less than 12 months | | 12 months or longer (1) | | 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 | | $ | 59,929 | | | $ | (107) | | | $ | 0 | | | $ | 0 | | | $ | 59,929 | | | $ | (107) | |
| U.S. agency debentures | | 133,143 | | | (585) | | | 0 | | | 0 | | | 133,143 | | | (585) | |
| | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 903,767 | | | (651) | | | 0 | | | 0 | | | 903,767 | | | (651) | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 2,199,207 | | | (10,278) | | | 0 | | | 0 | | | 2,199,207 | | | (10,278) | |
| Agency-issued commercial mortgage-backed securities | | 989,389 | | | (3,367) | | | 0 | | | 0 | | | 989,389 | | | (3,367) | |
| Total available-for-sale securities (1) | | $ | 4,285,435 | | | $ | (14,988) | | | $ | 0 | | | $ | 0 | | | $ | 4,285,435 | | | $ | (14,988) | |
(1)As of December 31, 2020, we identified a total of 93 investments that were in unrealized loss positions with 0 investments in unrealized loss positions for a period of time greater than 12 months. Based on our analysis of the securities in an unrealized loss position as of December 31, 2020, the decline in value is unrelated to credit loss and is related to changes in market interest rates since purchase and therefore changes in value for securities are included in other comprehensive income. Market valuations and credit loss analyses on assets in the AFS securities portfolio are reviewed and monitored on a quarterly basis. As of December 31, 2020, we do not intend to sell any of our securities in an unrealized loss position prior to recovery of our amortized 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 amortized cost basis. NaN of the investments in our AFS securities portfolio were past due as of December 31, 2020.
Table of Contents | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| | | Less than 12 months | | 12 months or longer (1) | | 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 | | $ | 971,572 | | | $ | (3,996) | | | $ | 449,850 | | | $ | (135) | | | $ | 1,421,422 | | | $ | (4,131) | |
| U.S. agency debentures | | 99,547 | | | (453) | | | 0 | | | 0 | | | 99,547 | | | (453) | |
| | | | | | | | | | | | |
| Residential mortgage-backed securities: | | | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 4,014 | | | (19) | | | 0 | | | 0 | | | 4,014 | | | (19) | |
| Agency-issued commercial mortgage-backed securities | | 1,027,232 | | | (15,539) | | | 0 | | | 0 | | | 1,027,232 | | | (15,539) | |
| | | | | | | | | | | | |
| Total available-for-sale securities (1) | | $ | 2,102,365 | | | $ | (20,007) | | | $ | 449,850 | | | $ | (135) | | | $ | 2,552,215 | | | $ | (20,142) | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | |
(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. As of December 31, 2017, 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 December 31, 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 AFS 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, 2019, we identified a total of 58 investments that were in unrealized loss positions, of which 12 investments totaling $0.4 billion with unrealized losses of $0.1 million have been in an unrealized loss position for a period of time greater than 12 months.
| |
(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.
|
The following table summarizes thefixed income securities, carried at fair value, classified as AFS as of December 31, 20172020 by the remaining contractual principal maturities. For U.S. Treasury securities, and U.S. agency debentures and foreign government debt securities, 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 AFS 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.
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 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 | | $ | 6,840,502 |
| | $ | 1,967,480 |
| | $ | 4,873,022 |
| | $ | — |
| | $ | — |
|
| U.S. agency debentures | | 1,567,128 |
| | 481,280 |
| | 1,085,848 |
| | — |
| | — |
|
| Residential mortgage-backed securities: | | | | | | | | | | |
| Agency-issued collateralized mortgage obligations - fixed rate | | 2,267,035 |
| | — |
| | — |
| | 88,425 |
| | 2,178,610 |
|
| Agency-issued collateralized mortgage obligations - variable rate | | 373,730 |
| | — |
| | — |
| | — |
| | 373,730 |
|
| Total | | $ | 11,048,395 |
| | $ | 2,448,760 |
| | $ | 5,958,870 |
| | $ | 88,425 |
| | $ | 2,552,340 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (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 | | $ | 4,469,728 | | | $ | 10,092 | | | $ | 3,532,784 | | | $ | 926,852 | | | $ | 0 | |
| U.S. agency debentures | | 237,307 | | | 0 | | | 0 | | | 237,307 | | | 0 | |
| Foreign government debt securities | | 24,492 | | | 24,492 | | | 0 | | | 0 | | | 0 | |
| Residential mortgage-backed securities: | | | | | | | | | | |
| Agency-issued collateralized mortgage-backed securities | | 13,503,681 | | | 0 | | | 0 | | | 0 | | | 13,503,681 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 8,106,564 | | | 0 | | | 0 | | | 0 | | | 8,106,564 | |
| Agency -issued commercial mortgage-backed securities | | 4,570,666 | | | 0 | | | 0 | | | 1,502,572 | | | 3,068,094 | |
| Total | | $ | 30,912,438 | | | $ | 34,584 | | | $ | 3,532,784 | | | $ | 2,666,731 | | | $ | 24,678,339 | |
Held-to-Maturity Securities
The components of our HTM investment securities portfolio at December 31, 20172020 and 20162019 are as follows:
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| (Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| Held-to-maturity securities, at cost: | | | | | | | | |
| U.S. agency debentures (1) | | $ | 659,979 |
| | $ | 3,167 |
| | $ | (1,601 | ) | | $ | 661,545 |
|
| Residential mortgage-backed securities: | | | | | | | | |
| Agency-issued mortgage-backed securities | | 6,304,969 |
| | 4,854 |
| | (43,528 | ) | | 6,266,295 |
|
| Agency-issued collateralized mortgage obligations—fixed rate | | 2,829,979 |
| | 23 |
| | (54,372 | ) | | 2,775,630 |
|
| Agency-issued collateralized mortgage obligations—variable rate | | 255,782 |
| | 733 |
| | (34 | ) | | 256,481 |
|
| Agency-issued commercial mortgage-backed securities | | 1,868,985 |
| | 694 |
| | (25,563 | ) | | 1,844,116 |
|
| Municipal bonds and notes | | 743,761 |
| | 3,452 |
| | (3,000 | ) | | 744,213 |
|
| Total held-to-maturity securities | | $ | 12,663,455 |
| | $ | 12,923 |
| | $ | (128,098 | ) | | $ | 12,548,280 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| (Dollars in thousands) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value | | Allowance for Credit Losses (2) |
| Held-to-maturity securities, at cost: | | | | | | | | | | |
| U.S. agency debentures (1) | | $ | 402,265 | | | $ | 18,961 | | | $ | 0 | | | $ | 421,226 | | | $ | 0 | |
| Residential mortgage-backed securities: | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 7,739,763 | | | 240,121 | | | (2,211) | | | 7,977,673 | | | 0 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 1,735,451 | | | 23,227 | | | (296) | | | 1,758,382 | | | 0 | |
| Agency-issued collateralized mortgage obligations—variable rate | | 136,913 | | | 317 | | | 0 | | | 137,230 | | | 0 | |
| Agency-issued commercial mortgage-backed securities | | 2,942,959 | | | 123,846 | | | 0 | | | 3,066,805 | | | 0 | |
| Municipal bonds and notes | | 3,635,194 | | | 220,866 | | | (505) | | | 3,855,555 | | | 392 | |
| Total held-to-maturity securities | | $ | 16,592,545 | | | $ | 627,338 | | | $ | (3,012) | | | $ | 17,216,871 | | | $ | 392 | |
(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.
(2) Refer to Note 2—“Summary of Significant Accounting Policies” for more information on our credit loss methodology.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| (Dollars in thousands) | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| Held-to-maturity securities, at cost: | | | | | | | | |
| U.S. agency debentures (1) | | $ | 518,728 | | | $ | 6,640 | | | $ | (668) | | | $ | 524,700 | |
| Residential mortgage-backed securities: | | | | | | | | |
| Agency-issued mortgage-backed securities | | 6,992,009 | | | 142,209 | | | (2,066) | | | 7,132,152 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 1,608,032 | | | 592 | | | (8,502) | | | 1,600,122 | |
| Agency-issued collateralized mortgage obligations—variable rate | | 178,611 | | | 94 | | | (259) | | | 178,446 | |
| Agency-issued commercial mortgage-backed securities | | 2,759,615 | | | 56,914 | | | (4,508) | | | 2,812,021 | |
| Municipal bonds and notes | | 1,785,951 | | | 83,314 | | | (1,434) | | | 1,867,831 | |
| Total held-to-maturity securities | | $ | 13,842,946 | | | $ | 289,763 | | | $ | (17,437) | | | $ | 14,115,272 | |
| |
(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) | (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. |
Allowance for Credit Losses for HTM Securities
The following table summarizes the activity relating to our allowance for credit losses for HTM securities for 2020:
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020: | | Beginning Balance December 31, 2019 | | Day One Impact of Adopting ASC 326 | | | | | | Provision for HTM Securities | | Ending Balance December 31, 2020 |
| (Dollars in thousands) | | | | | | |
| Municipal bonds and notes | | $ | 0 | | | $ | 174 | | | | | | | $ | 218 | | | $ | 392 | |
| Total allowance for credit losses | | $ | 0 | | | $ | 174 | | | | | | | $ | 218 | | | $ | 392 | |
Credit Quality Indicators
On a quarterly basis, management monitors the credit quality for HTM securities through the use of standard credit ratings. The following tables summarizetable summarizes our unrealized losses on ouramortized cost of HTM securities portfolio into categories of less than 12 months and 12 months or longer as ofaggregated by credit quality indicator at December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | Less than 12 months | | 12 months or longer (1) | | 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 | | $ | 104,688 |
| | $ | (1,601 | ) | | $ | — |
| | $ | — |
| | $ | 104,688 |
| | $ | (1,601 | ) |
| Residential mortgage-backed securities: | | | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 4,270,377 |
| | (34,092 | ) | | 408,913 |
| | (9,436 | ) | | 4,679,290 |
| | (43,528 | ) |
Agency-issued collateralized mortgage obligations—fixed rate | | 1,011,709 |
| | (13,631 | ) | | 1,741,614 |
| | (40,741 | ) | | 2,753,323 |
| | (54,372 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | — |
| | — |
| | 9,812 |
| | (34 | ) | | 9,812 |
| | (34 | ) |
Agency-issued commercial mortgage-backed securities | | 979,361 |
| | (11,566 | ) | | 773,712 |
| | (13,997 | ) | | 1,753,073 |
| | (25,563 | ) |
| Municipal bonds and notes | | 344,796 |
| | (2,103 | ) | | 32,844 |
| | (897 | ) | | 377,640 |
| | (3,000 | ) |
| Total temporarily impaired securities (1) | | $ | 6,710,931 |
| | $ | (62,993 | ) | | $ | 2,966,895 |
| | $ | (65,105 | ) | | $ | 9,677,826 |
| | $ | (128,098 | ) |
| | | | | |
(1)(Dollars in thousands) | As of
| December 31, 2017, we identified a total of 753 investments that were in unrealized loss positions, of which 237 investments totaling $3.0 billion with unrealized losses of $65.1 million have been in an impaired position for a period of time greater than 12 months. As of December 31, 2017, 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, which is consistent with our classification of these securities. Based on our analysis as of December 31, 2017, we deem all impairments to be temporary. Market valuations and impairment analyses on assets in the HTM securities portfolio are reviewed and monitored on a quarterly basis. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2016 |
| | | Less than 12 months | | 12 months or longer (1) | | 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 | | $ | 118,721 |
| | $ | (1,198 | ) | | $ | — |
| | $ | — |
| | $ | 118,721 |
| | $ | (1,198 | ) |
| Residential mortgage-backed securities: | | | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 1,801,861 |
| | (23,558 | ) | | 21,917 |
| | (968 | ) | | 1,823,778 |
| | (24,526 | ) |
| Agency-issued collateralized mortgage obligations—fixed rate | | 2,729,889 |
| | (25,723 | ) | | 228,220 |
| | (5,551 | ) | | 2,958,109 |
| | (31,274 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | 251,012 |
| | (1,339 | ) | | — |
| | — |
| | 251,012 |
| | (1,339 | ) |
| Agency-issued commercial mortgage-backed securities | | 999,440 |
| | (7,494 | ) | | 14,934 |
| | (144 | ) | | 1,014,374 |
| | (7,638 | ) |
| Municipal bonds and notes | | 42,267 |
| | (877 | ) | | 30,586 |
| | (976 | ) | | 72,853 |
| | (1,853 | ) |
| Total temporarily impaired securities (1) | | $ | 5,943,190 |
| | $ | (60,189 | ) | | $ | 295,657 |
| | $ | (7,639 | ) | | $ | 6,238,847 |
| | $ | (67,828 | ) |
| 2020 |
| Municipal bonds and notes: |
|
| |
(1)Aaa | As of December 31, 2016, we identified a total of 462 investments that were in unrealized loss positions, of which 85 investments totaling
| $295.7 million with unrealized losses of | 2,070,311 | |
| Aa1 | | 1,144,500 | |
| Aa2 | | 420,383 | |
| | |
| Total | | $7.6 million have been in an impaired position for a period of time greater than 12 months. | 3,635,194 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the remaining contractual principal maturities on fixed income investment securities classified as HTM as of December 31, 2017.2020. For 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 HTM 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | Total | | One Year
or Less | | After One Year to
Five Years | | After Five Years to
Ten Years | | After
Ten Years |
| (Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| U.S. agency debentures | | $ | 402,265 | | | $ | 421,226 | | | $ | 4,675 | | | $ | 4,705 | | | $ | 148,478 | | | $ | 153,756 | | | $ | 249,112 | | | $ | 262,765 | | | $ | 0 | | | $ | 0 | |
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 7,739,763 | | | 7,977,673 | | | 4,762 | | | 4,951 | | | 20,389 | | | 21,150 | | | 540,731 | | | 559,727 | | | 7,173,881 | | | 7,391,845 | |
| Agency-issued collateralized mortgage obligations - fixed rate | | 1,735,451 | | | 1,758,382 | | | 0 | | | 0 | | | 5,952 | | | 6,073 | | | 494,532 | | | 505,156 | | | 1,234,967 | | | 1,247,153 | |
| Agency-issued collateralized mortgage obligations - variable rate | | 136,913 | | | 137,230 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 136,913 | | | 137,230 | |
| Agency-issued commercial mortgage-backed securities | | 2,942,959 | | | 3,066,805 | | | 0 | | | 0 | | | 0 | | | 0 | | | 102,359 | | | 119,922 | | | 2,840,600 | | | 2,946,883 | |
| Municipal bonds and notes | | 3,635,194 | | | 3,855,555 | | | 46,292 | | | 46,641 | | | 144,347 | | | 150,940 | | | 669,281 | | | 721,554 | | | 2,775,274 | | | 2,936,420 | |
| Total | | $ | 16,592,545 | | | $ | 17,216,871 | | | $ | 55,729 | | | $ | 56,297 | | | $ | 319,166 | | | $ | 331,919 | | | $ | 2,056,015 | | | $ | 2,169,124 | | | $ | 14,161,635 | | | $ | 14,659,531 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
| (Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| U.S. agency debentures | | $ | 659,979 |
| | $ | 661,545 |
| | $ | — |
| | $ | — |
| | $ | 102,496 |
| | $ | 102,739 |
| | $ | 557,483 |
| | $ | 558,806 |
| | $ | — |
| | $ | — |
|
| Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
| Agency-issued mortgage-backed securities | | 6,304,969 |
| | 6,266,295 |
| | 728 |
| | 723 |
| | 226,997 |
| | 225,149 |
| | 56,380 |
| | 55,697 |
| | 6,020,864 |
| | 5,984,726 |
|
| Agency-issued collateralized mortgage obligations - fixed rate | | 2,829,979 |
| | 2,775,630 |
| | — |
| | — |
| | — |
| | — |
| | 462,533 |
| | 451,069 |
| | 2,367,446 |
| | 2,324,561 |
|
| Agency-issued collateralized mortgage obligations - variable rate | | 255,782 |
| | 256,481 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 255,782 |
| | 256,481 |
|
| Agency-issued commercial mortgage-backed securities | | 1,868,985 |
| | 1,844,116 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,868,985 |
| | 1,844,116 |
|
| Municipal bonds and notes | | 743,761 |
| | 744,213 |
| | 7,073 |
| | 7,054 |
| | 73,054 |
| | 72,261 |
| | 233,728 |
| | 233,257 |
| | 429,906 |
| | 431,641 |
|
| Total | | $ | 12,663,455 |
| | $ | 12,548,280 |
| | $ | 7,801 |
| | $ | 7,777 |
| | $ | 402,547 |
| | $ | 400,149 |
| | $ | 1,310,124 |
| | $ | 1,298,829 |
| | $ | 10,942,983 |
| | $ | 10,841,525 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Non-marketable and Other Equity Securities
The major components of our non-marketable and other investmentequity securities portfolio at December 31, 20172020 and 20162019 are as follows:
|
| | | | | | | | |
| (Dollars in thousands) | | December 31, 2017 | | December 31, 2016 |
| Non-marketable and other securities: | | | | |
| Non-marketable securities (fair value accounting): | | | | |
| Venture capital and private equity fund investments (1) | | $ | 127,192 |
| | $ | 141,649 |
|
| Other venture capital investments (2) | | 919 |
| | 2,040 |
|
| Other securities (fair value accounting) (3) | | 310 |
| | 753 |
|
| Non-marketable securities (equity method accounting) (4): | | | | |
| Venture capital and private equity fund investments | | 89,809 |
| | 82,823 |
|
| Debt funds | | 21,183 |
| | 17,020 |
|
| Other investments | | 111,198 |
| | 123,514 |
|
| Non-marketable securities (cost method accounting): | | | | |
| Venture capital and private equity fund investments (5) | | 98,548 |
| | 114,606 |
|
| Other investments | | 27,680 |
| | 27,700 |
|
| Investments in qualified affordable housing projects, net (6) | | 174,214 |
| | 112,447 |
|
| Total non-marketable and other securities | | $ | 651,053 |
| | $ | 622,552 |
|
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2020 | | December 31, 2019 |
| Non-marketable and other equity securities: | | | | |
| Non-marketable securities (fair value accounting): | | | | |
| Consolidated venture capital and private equity fund investments (1) | | $ | 88,937 | | | $ | 87,180 | |
| Unconsolidated venture capital and private equity fund investments (2) | | 184,886 | | | 178,217 | |
| Other investments without a readily determinable fair value (3) | | 60,975 | | | 55,255 | |
| Other equity securities in public companies (fair value accounting) (4) | | 280,804 | | | 59,200 | |
| Non-marketable securities (equity method accounting) (5): | | | | |
| Venture capital and private equity fund investments | | 362,192 | | | 215,367 | |
| Debt funds | | 5,444 | | | 7,271 | |
| Other investments | | 202,809 | | | 152,863 | |
| Investments in qualified affordable housing projects, net (6) | | 616,188 | | | 458,476 | |
| Total non-marketable and other equity securities | | $ | 1,802,235 | | | $ | 1,213,829 | |
| |
(1) | The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and our ownership percentage of each fund at December 31, 2017 and 2016 (fair value accounting):
|
(1)The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and our ownership percentage of each fund at December 31, 2020 and 2019 (fair value accounting): | | | | | December 31, 2017 | | December 31, 2016 | | | December 31, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % | (Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
| Strategic Investors Fund, LP | | $ | 14,673 |
| | 12.6 | % | | $ | 18,459 |
| | 12.6 | % | Strategic Investors Fund, LP | | $ | 4,850 | | | 12.6 | % | | $ | 5,729 | | | 12.6 | % |
| Capital Preferred Return Fund, LP | | 54,147 |
| | 20.0 |
| | 57,627 |
| | 20.0 |
| Capital Preferred Return Fund, LP | | 49,574 | | | 20.0 | | | 45,341 | | | 20.0 | |
| Growth Partners, LP | | 58,372 |
| | 33.0 |
| | 59,718 |
| | 33.0 |
| Growth Partners, LP | | 34,513 | | | 33.0 | | | 35,976 | | | 33.0 | |
| Other private equity fund (i) | | — |
| | — |
| | 5,845 |
| | 58.2 |
| |
| Total venture capital and private equity fund investments | | $ | 127,192 |
| | | | $ | 141,649 |
| | | |
| CP I, LP | | CP I, LP | | 0 | | | 0 | | | 134 | | | 10.7 | |
| Total consolidated venture capital and private equity fund investments | | Total consolidated venture capital and private equity fund investments | | $ | 88,937 | | | $ | 87,180 | | |
(2)The carrying value represents investments in 162 and 205 funds (primarily venture capital funds) at December 31, 2020 and December 31, 2019, respectively, where our ownership interest is typically less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships operating activities and financial policies. We carry our unconsolidated venture capital and private equity fund investments at fair value based on the fund investments' net asset values per share as obtained from the general partners of the investments. For each fund investment, we adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example September 30th for our December 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
(3)These investments include direct equity investments in private companies. The carrying value is based on the price at which the investment was acquired plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted.
The following table shows the carrying amount of other investments without a readily determinable fair value at December 31, 2020, and the amounts recognized in earnings for the year ended December 31, 2020 and on a cumulative basis:
| |
(i) | At December 31, 2016, we had direct ownership interest of 41.5 percent in one other private equity fund and an indirect ownership interest of 12.6 percent through our ownership interest of Growth Partners, LP and an indirect ownership interest of 4.1 percent through our ownership interest of Capital Preferred Return Fund, LP. On January 3, 2017, such other private equity fund was closed resulting in an immaterial impact on the Company's financial statements.
|
| |
(2) | The following table shows the amounts of other venture capital investments held by the following consolidated funds and our ownership percentage of each fund at December 31, 2017 and 2016 (fair value accounting):
|
|
| | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| (Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
| CP I, LP | | $ | 919 |
| | 10.7 | % | | $ | 2,040 |
| | 10.7 | % |
| Total other venture capital investments | | $ | 919 |
| | | | $ | 2,040 |
| | |
| |
(3) | Investments classified as other securities (fair value accounting) represent direct equity investments in public companies held by our consolidated funds. |
| |
(4) | The following table shows the carrying value and our ownership percentage of each investment at December 31, 2017 and 2016 (equity method accounting):
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | Year ended December 31, 2020 | | Cumulative Adjustments |
| Measurement alternative: | | | | |
| Carrying value at December 31, 2020 | | $ | 60,975 | | | |
| Carrying value adjustments: | | | | |
| Impairment | | $ | (487) | | | $ | (947) | |
| Upward changes for observable prices | | 3,479 | | | 4,216 | |
| Downward changes for observable prices | | (2,799) | | | (3,898) | |
(4)Investments classified as other equity securities (fair value accounting) represent shares held in public companies as a result of exercising public equity warrant assets, direct equity investments in public companies held by our consolidated funds, and exchange traded funds held by SVB Leerink. Changes in equity securities measured at fair value are recognized through net income.
(5)The following table shows the carrying value and our ownership percentage of each investment at December 31, 2020 and 2019 (equity method accounting):
|
| | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| (Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
| Venture capital and private equity fund investments: | | | | | | | | |
| Strategic Investors Fund II, LP | | $ | 6,342 |
| | 8.6 | % | | $ | 7,720 |
| | 8.6 | % |
| Strategic Investors Fund III, LP | | 18,758 |
| | 5.9 |
| | 20,449 |
| | 5.9 |
|
| Strategic Investors Fund IV, LP | | 25,551 |
| | 5.0 |
| | 24,530 |
| | 5.0 |
|
| Strategic Investors Fund V funds | | 16,856 |
| | Various |
| | 12,029 |
| | Various |
|
| CP II, LP (i) | | 6,700 |
| | 5.1 |
| | 7,798 |
| | 5.1 |
|
| Other venture capital and private equity fund investments | | 15,602 |
| | Various |
| | 10,297 |
| | Various |
|
| Total venture capital and private equity fund investments | | $ | 89,809 |
| |
|
| | $ | 82,823 |
| | |
| Debt funds: | | | | | | | | |
| Gold Hill Capital 2008, LP (ii) | | $ | 18,690 |
| | 15.5 | % | | $ | 13,557 |
| | 15.5 | % |
| Other debt funds | | 2,493 |
| | Various |
| | 3,463 |
| | Various |
|
| Total debt funds | | $ | 21,183 |
| | | | $ | 17,020 |
| | |
| Other investments: |
| | | | | | | |
| SPD Silicon Valley Bank Co., Ltd. |
| $ | 75,337 |
| | 50.0 | % | | $ | 75,296 |
| | 50.0 | % |
| Other investments |
| 35,861 |
| | Various |
| | 48,218 |
| | Various |
|
| Total other investments |
| $ | 111,198 |
| | | | $ | 123,514 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
| Venture capital and private equity fund investments: | | | | | | | | |
| Strategic Investors Fund II, LP | | $ | 3,705 | | | 8.6 | % | | $ | 3,612 | | | 8.6 | % |
| Strategic Investors Fund III, LP | | 16,110 | | | 5.9 | | | 15,668 | | | 5.9 | |
| Strategic Investors Fund IV, LP | | 25,169 | | | 5.0 | | | 27,064 | | | 5.0 | |
| Strategic Investors Fund V funds | | 67,052 | | | Various | | 46,830 | | | Various |
| CP II, LP (i) | | 7,887 | | | 5.1 | | | 5,907 | | | 5.1 | |
| Other venture capital and private equity fund investments | | 242,269 | | | Various | | 116,286 | | | Various |
| Total venture capital and private equity fund investments | | $ | 362,192 | | | | | $ | 215,367 | | | |
| Debt funds: | | | | | | | | |
| Gold Hill Capital 2008, LP (ii) | | $ | 3,941 | | | 15.5 | % | | $ | 5,525 | | | 15.5 | % |
| Other debt funds | | 1,503 | | | Various | | 1,746 | | | Various |
| Total debt funds | | $ | 5,444 | | | | | $ | 7,271 | | | |
| Other investments: | | | | | | | | |
| SPD Silicon Valley Bank Co., Ltd. | | $ | 115,232 | | | 50.0 | % | | $ | 74,190 | | | 50.0 | % |
| Other investments | | 87,577 | | | Various | | 78,673 | | | Various |
| Total other investments | | $ | 202,809 | | | | | $ | 152,863 | | | |
| |
(i) | Our ownership includes direct ownership of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP.(i)Our ownership includes direct ownership interest of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP. (ii)Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent.
(6)The following table presents the balances of our investments in qualified affordable housing projects and related unfunded commitments included as a component of "other liabilities" on our consolidated balance sheets at December 31, 2020 and 2019: | | | | | | | | | | | | | | | | (Dollars in thousands) | | December 31, 2020 | | December 31, 2019 | | Investments in qualified affordable housing projects, net | | $ | 616,188 | | | $ | 458,476 | | | Other liabilities | | 370,208 | | | 302,031 | |
|
| |
(ii) | Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent.
|
| |
(5) | Represents investments in 235 and 252 funds (primarily venture capital funds) at December 31, 2017 and 2016, respectively, where our ownership interest is less than five percent of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships operating activities and financial policies. The carrying value, and estimated fair value, of these venture capital and private equity fund investments (cost method accounting) was $99 million, and $202 million, respectively, as of December 31, 2017. The carrying value, and estimated fair value, of the venture capital and private equity fund investments (cost method accounting) was $115 million, and $222 million, respectively, as of December 31, 2016.
|
| |
(6) | The following table presents the balances of our investments in qualified affordable housing projects and related unfunded commitments included as a component of "other liabilities" on our consolidated balance sheets at December 31, 2017 and 2016:
|
|
| | | | | | | | |
| (Dollars in thousands) | | December 31, 2017 | | December 31, 2016 |
| Investments in qualified affordable housing projects, net | | $ | 174,214 |
| | $ | 112,447 |
|
| Other liabilities | | 100,891 |
| | 58,095 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents other information relating to our investments in qualified affordable housing projects for the yearyears ended December 31, 2017, 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Tax credits and other tax benefits recognized | | $ | 56,969 | | | $ | 35,037 | | | $ | 24,047 | |
| Amortization expense included in provision for income taxes (i) | | 43,875 | | | 28,267 | | | 18,876 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Tax credits and other tax benefits recognized | | $ | 17,296 |
| | $ | 15,404 |
| | $ | 14,375 |
|
| Amortization expense included in provision for income taxes (i) | | 17,362 |
| | 12,145 |
| | 10,389 |
|
(i)All investments are amortized using the proportional amortization method and amortization expense is included in the provision for income taxes.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
(i) | All investments are amortized using the proportional amortization method and amortization expense is included in the provision for income taxes. Included in amortization expense for the year ended December 31, 2017 is a one-time cumulative effect adjustment of $3.8 million due to the decrease in value of deductions in the 2018 tax year and going forward, due to the TCJ Act federal corporate income tax rate reduction.
|
The following table presents the components ofnet gains and losses (realizedon non-marketable and unrealized)other equity securities in 2020, 2019 and 2018 as recorded in the line item “Gains on investment securities, in 2017, 2016net," a component of noninterest income:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Net gains (losses) on non-marketable and other equity securities: | | | | | | |
| Non-marketable securities (fair value accounting): | | | | | | |
| Consolidated venture capital and private equity fund investments | | $ | 32,439 | | | $ | 22,507 | | | $ | 20,999 | |
| Unconsolidated venture capital and private equity fund investments | | 59,909 | | | 31,482 | | | 39,075 | |
| Other investments without a readily determinable fair value | | 253 | | | 2,742 | | | 3,206 | |
| Other equity securities in public companies (fair value accounting) | | 104,865 | | | 7,772 | | | (25,483) | |
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments | | 161,828 | | | 73,813 | | | 49,341 | |
| Debt funds | | (403) | | | 1,647 | | | 541 | |
| Other investments | | 696 | | | (1,388) | | | 1,155 | |
| Total net gains on non-marketable and other equity securities | | $ | 359,587 | | | $ | 138,575 | | | $ | 88,834 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Less: realized net gains (losses) on sales of non-marketable and other equity securities | | 23,344 | | | 4,744 | | | (26,097) | |
| Net gains on non-marketable and other equity securities still held | | $ | 336,243 | | | $ | 133,831 | | | $ | 114,931 | |
9. Loans and 2015:Allowance for Credit Losses: Loans and Unfunded Credit Commitments
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Gross gains on investment securities: | | | | | | |
| Available-for-sale securities, at fair value (1) | | $ | 5,113 |
| | $ | 15,051 |
| | $ | 2,971 |
|
| Non-marketable securities (fair value accounting): | | | | | | |
| Venture capital and private equity fund investments | | 34,093 |
| | 25,041 |
| | 32,399 |
|
| Other venture capital investments | | 1,114 |
| | 17 |
| | 1,512 |
|
| Other securities (fair value accounting) | | 991 |
| | 691 |
| | 9,180 |
|
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments | | 15,013 |
| | 10,834 |
| | 26,415 |
|
| Debt funds | | 11,658 |
| | 1,406 |
| | 4,111 |
|
| Other investments | | 3,181 |
| | 15,739 |
| | 2,791 |
|
| Non-marketable securities (cost method accounting): | | | | | | |
| Venture capital and private equity fund investments | | 21,718 |
| | 18,428 |
| | 25,908 |
|
| Other investments | | 4,111 |
| | 293 |
| | 2,599 |
|
| Total gross gains on investment securities | | 96,992 |
| | 87,500 |
| | 107,886 |
|
| Gross losses on investment securities: | | | | | | |
| Available-for-sale securities, at fair value (1) | | (10,302 | ) | | (2,856 | ) | | (1,770 | ) |
| Non-marketable securities (fair value accounting): | | | | | | |
| Venture capital and private equity fund investments | | (6,907 | ) | | (19,077 | ) | | (9,210 | ) |
| Other venture capital investments | | (143 | ) | | (38 | ) | | (320 | ) |
| Other securities (fair value accounting) | | (750 | ) | | (781 | ) | | (1,559 | ) |
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments | | (541 | ) | | (6,764 | ) | | (909 | ) |
| Debt funds | | (2,708 | ) | | (458 | ) | | (774 | ) |
| Other investments | | (9,457 | ) | | (4,857 | ) | | (3,146 | ) |
| Non-marketable securities (cost method accounting): | | | | | | |
| Venture capital and private equity fund investments (2) | | (1,312 | ) | | (591 | ) | | (729 | ) |
| Other investments (3) | | (269 | ) | | (338 | ) | | (24 | ) |
| Total gross losses on investment securities | | (32,389 | ) | | (35,760 | ) | | (18,441 | ) |
| Gains on investment securities, net | | $ | 64,603 |
| | $ | 51,740 |
| | $ | 89,445 |
|
| |
(1) | Includes realized gains and losses on sales of AFS securities that are recognized in the income statement. Unrealized gains and losses on AFS securities are recognized in other comprehensive income. The cost basis of AFS securities sold is determined on a specific identification basis. |
| |
(2) | Includes OTTI of $1.3 million from the declines in value for 24 of the 235 investments held at December 31, 2017, $0.6 million from the declines in value for 26 of the 252 investments held at December 31, 2016 and $0.6 million from the declines in value for 22 of the 267 investments held at December 31, 2015. We concluded that any declines in value for the remaining investments were temporary, and as such, no OTTI was required to be recognized.
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
(3) | No OTTI was recognized for the years ended December 31, 2017, 2016, and 2015, respectively. We concluded that any declines in value for the investments were temporary, and as such, no OTTI was required to be recognized.
|
| |
9.
| Loans, Allowance for Loan Losses and Allowance for Unfunded Credit Commitments
|
We serve a variety of commercial clients in the technology, life science/healthcare, private equity/venture capital and premium wine industries. Our technology clients generally tend to be in the industries of hardware (semiconductors,(such as semiconductors, communications, data, storage and electronics), software/internet (such as infrastructure software, applications, software services, digital content and advertising technology), and energy and resource innovation ("ERI"). Because of the diverse nature of ERI products and services, for our loan-related reporting purposes, ERI-related loans are reported under our hardware, software/internet, life science/healthcare and other commercial loan categories, as applicable. Our life science/healthcare clients primarily tend to be in the industries of biotechnology, medical devices, healthcare information technology and healthcare services. Loans to our technology, life science/healthcare and ERI clients are reported under the Investor Dependent, Cash Flow Dependent and Balance Sheet Dependent risk-based segments below. Loans made to private equity/venture capital firm clients typically enable them to fund investments prior to their receipt of funds from capital calls.calls and are reported under the Global Fund Banking (previously Private Equity/Venture Capital) portfolio segment below. Loans to the premium wine industry focus on vineyards and wineries that produce grapes and wines of high quality.
In addition to commercial loans, we make consumer loans through SVB Private Bank and provide real estate secured loans to eligible employees through our EHOP. Our private banking clients are primarily private equity/venture capital professionals and executive leaders in the innovation companies they support. These products and services include real estate secured home equity lines of credit, which may be used to finance real estate investments and loans used to purchase, renovate or refinance personal residences. These products and services also include restricted stock purchase loans and capital call lines of credit.
We also provide community development loans made as part of our responsibilities under the Community Reinvestment Act.CRA. These loans are included within “Construction“construction loans” below and are primarily secured by real estate. Additionally, beginning in April 2020, we accepted applications under the PPP administered by the SBA under the CARES Act and originated loans to qualified small businesses. Disbursement of PPP funds under the CARES Act expired on August 8, 2020, however, on December 27, 2020, the Economic Aid Act was enacted, and allows borrowers to apply for PPP loans up to March 31, 2021, as well as allowing for certain PPP borrowers to apply for second draw loans.
The composition of loans, net of unearned income of $148 millionCECL Adoption
On January 1, 2020, we adopted the new credit loss guidance, CECL, and $125 millionall related amendments. Our loan portfolio was pooled into 6 portfolio segments that share similar risk characteristics and represent the level at December 31, 2017 and 2016, respectively, is presented in the following table:which we developed our
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Commercial loans: | | | | |
| Software/internet | | $ | 6,172,531 |
| | $ | 5,627,031 |
|
| Hardware | | 1,193,599 |
| | 1,180,398 |
|
| Private equity/venture capital | | 9,952,377 |
| | 7,691,148 |
|
| Life science/healthcare | | 1,808,827 |
| | 1,853,004 |
|
| Premium wine | | 204,105 |
| | 200,156 |
|
| Other | | 365,724 |
| | 393,551 |
|
| Total commercial loans | | 19,697,163 |
| | 16,945,288 |
|
| Real estate secured loans: | | | | |
| Premium wine (1) | | 669,053 |
| | 678,166 |
|
| Consumer loans (2) | | 2,300,506 |
| | 1,926,968 |
|
| Other | | 42,068 |
| | 43,487 |
|
| Total real estate secured loans | | 3,011,627 |
| | 2,648,621 |
|
| Construction loans | | 68,546 |
| | 64,671 |
|
| Consumer loans | | 328,980 |
| | 241,364 |
|
| Total loans, net of unearned income (3) | | $ | 23,106,316 |
| | $ | 19,899,944 |
|
| |
(1) | Included in our premium wine portfolio are gross construction loans of $100 million and $110 million at December 31, 2017 and 2016, respectively.
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
systematic methodology to determine our allowance for credit losses. Further, our portfolio segments were disaggregated and grouped into 10 classes of financing receivable that represent the level at which we monitor and assess credit risk, which we refer to as "risk-based segments". As such, our funded loans and credit quality disclosures below are primarily presented at the risk-based segment level of disaggregation. As of December 31, 2020, we have 6 portfolio segments and 11 risk-based segments reflective of the funding of SBA loans under the PPP. The comparative information below has been reclassified to conform to current period presentations. However, the financial results continue to be reported under the accounting standards in effect for those periods. Certain prior period credit quality disclosures related to impaired loans and our individually and collectively evaluated loan portfolio have been superseded with the new CECL guidance but are included below for reference purposes. The superseded tables provided below are not comparative to our credit quality disclosures under the new credit loss guidance for 2020.
The composition of loans at amortized cost basis broken out by risk-based segment at December 31, 2020 and 2019, respectively, is presented in the following table: | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Global fund banking | | $ | 25,543,198 | | | $ | 17,696,794 | |
| Investor dependent: | | | | |
| Early stage | | 1,485,866 | | | 1,624,221 | |
| Mid stage | | 1,564,870 | | | 1,047,398 | |
| Later stage | | 1,921,082 | | | 1,663,576 | |
| Total investor dependent | | 4,971,818 | | | 4,335,195 | |
| Cash flow dependent: | | | | |
| Sponsor led buyout | | 1,989,173 | | | 2,185,497 | |
| Other | | 2,945,360 | | | 2,238,741 | |
| Total cash flow dependent | | 4,934,533 | | | 4,424,238 | |
| Private bank (1) (5) | | 4,901,056 | | | 3,492,269 | |
| Balance sheet dependent | | 2,191,023 | | | 1,286,153 | |
| Premium wine (1) (5) | | 1,052,643 | | | 1,062,264 | |
| Other (1) (5) | | 27,687 | | | 867,723 | |
| SBA loans | | 1,559,530 | | | 0 | |
| Total loans (2) (3) (4) | | $ | 45,181,488 | | | $ | 33,164,636 | |
| Allowance for credit losses | | (447,765) | | | (304,924) | |
| Net loans | | $ | 44,733,723 | | | $ | 32,859,712 | |
| | |
(2) | Consumer loans secured by real estate at December 31, 2017 and 2016 were comprised of the following:
|
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Loans for personal residence | | $ | 1,995,840 |
| | $ | 1,655,349 |
|
| Loans to eligible employees | | 243,118 |
| | 199,291 |
|
| Home equity lines of credit | | 61,548 |
| | 72,328 |
|
| Consumer loans secured by real estate | | $ | 2,300,506 |
| | $ | 1,926,968 |
|
| |
(3) | Included within our total loan portfolio are credit card loans of $270 million and $224 million at December 31, 2017 and 2016, respectively.
|
Credit Quality(1)As of December 31, 2020, as a result of enhanced portfolio characteristic definitions for our risk-based segments, loans in the amount of $427 million and $53 million that would have been reported in Other under historical definitions, are now being reported in our Private Bank and Premium Wine risk-based segments, respectively.
The composition of(2)Total loans at amortized cost is net of unearned income of $148$226 million and $125$163 million at December 31, 20172020 and 2016, respectively, broken out2019, respectively.
(3)Included within our total loan portfolio are credit card loans of $400 million and $395 million at December 31, 2020 and 2019, respectively.
(4)Included within our total loan portfolio are construction loans of$118 million and $183 million at December 31, 2020 and 2019, respectively.
(5)Of our total loans, the table below includes those secured by portfolio segmentreal estate at amortized cost at December 31, 2020 and class2019 and were comprised of financing receivable, is as follows:the following:
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Commercial loans: | | | �� | |
| Software/internet | | $ | 6,172,531 |
| | $ | 5,627,031 |
|
| Hardware | | 1,193,599 |
| | 1,180,398 |
|
| Private equity/venture capital | | 9,952,377 |
| | 7,691,148 |
|
| Life science/healthcare | | 1,808,827 |
| | 1,853,004 |
|
| Premium wine | | 873,158 |
| | 878,322 |
|
| Other | | 476,338 |
| | 501,709 |
|
| Total commercial loans | | 20,476,830 |
| | 17,731,612 |
|
| Consumer loans: | | | | |
| Real estate secured loans | | 2,300,506 |
| | 1,926,968 |
|
| Other consumer loans | | 328,980 |
| | 241,364 |
|
| Total consumer loans | | 2,629,486 |
| | 2,168,332 |
|
| Total loans, net of unearned income | | $ | 23,106,316 |
| | $ | 19,899,944 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | Equal to or Greater Than 90 Days Past Due | | Total Past Due | | Current | | Loans Past Due 90 Days or More Still Accruing Interest |
| December 31, 2017: | | | | | | | | | | | | |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 14,257 |
| | $ | 6,526 |
| | $ | 141 |
| | $ | 20,924 |
| | $ | 6,101,147 |
| | $ | 141 |
|
| Hardware | | 1,145 |
| | 77 |
| | 50 |
| | 1,272 |
| | 1,163,278 |
| | 50 |
|
| Private equity/venture capital | | 86,566 |
| | 38,580 |
| | — |
| | 125,146 |
| | 9,835,317 |
| | — |
|
| Life science/healthcare | | 4,390 |
| | 191 |
| | — |
| | 4,581 |
| | 1,841,692 |
| | — |
|
| Premium wine | | 418 |
| | — |
| | — |
| | 418 |
| | 871,074 |
| | — |
|
| Other | | 445 |
| | — |
| | — |
| | 445 |
| | 490,292 |
| | — |
|
| Total commercial loans | | 107,221 |
| | 45,374 |
| | 191 |
| | 152,786 |
| | 20,302,800 |
| | 191 |
|
| Consumer loans: | | | | | | | | | | | | |
| Real estate secured loans | | 2,164 |
| | 532 |
| | — |
| | 2,696 |
| | 2,292,980 |
| | — |
|
| Other consumer loans | | 796 |
| | — |
| | — |
| | 796 |
| | 327,234 |
| | — |
|
| Total consumer loans | | 2,960 |
| | 532 |
| | — |
| | 3,492 |
| | 2,620,214 |
| | — |
|
| Total gross loans excluding impaired loans | | 110,181 |
| | 45,906 |
| | 191 |
| | 156,278 |
| | 22,923,014 |
| | 191 |
|
| Impaired loans | | 1,344 |
| | 11,902 |
| | 30,403 |
| | 43,649 |
| | 131,212 |
| | — |
|
| Total gross loans | | $ | 111,525 |
| | $ | 57,808 |
| | $ | 30,594 |
| | $ | 199,927 |
| | $ | 23,054,226 |
| | $ | 191 |
|
| December 31, 2016: | | | | | | | | | | | | |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 37,087 |
| | $ | 1,162 |
| | $ | 6 |
| | $ | 38,255 |
| | $ | 5,507,575 |
| | $ | 6 |
|
| Hardware | | 5,591 |
| | 36 |
| | 27 |
| | 5,654 |
| | 1,118,065 |
| | 27 |
|
| Private equity/venture capital | | 689 |
| | — |
| | — |
| | 689 |
| | 7,747,222 |
| | — |
|
| Life science/healthcare | | 283 |
| | 551 |
| | — |
| | 834 |
| | 1,827,490 |
| | — |
|
| Premium wine | | 1,003 |
| | 4 |
| | — |
| | 1,007 |
| | 876,185 |
| | — |
|
| Other | | 34 |
| | 300 |
| | — |
| | 334 |
| | 504,021 |
| | — |
|
| Total commercial loans | | 44,687 |
| | 2,053 |
| | 33 |
| | 46,773 |
| | 17,580,558 |
| | 33 |
|
| Consumer loans: | | | | | | | | | | | | |
| Real estate secured loans | | 850 |
| | — |
| | — |
| | 850 |
| | 1,923,266 |
| | — |
|
| Other consumer loans | | 1,402 |
| | — |
| | — |
| | 1,402 |
| | 237,353 |
| | — |
|
| Total consumer loans | | 2,252 |
| | — |
| | — |
| | 2,252 |
| | 2,160,619 |
| | — |
|
| Total gross loans excluding impaired loans | | 46,939 |
| | 2,053 |
| | 33 |
| | 49,025 |
| | 19,741,177 |
| | 33 |
|
| Impaired loans | | 34,636 |
| | 3,451 |
| | 11,180 |
| | 49,267 |
| | 185,193 |
| | — |
|
| Total gross loans | | $ | 81,575 |
| | $ | 5,504 |
| | $ | 11,213 |
| | $ | 98,292 |
| | $ | 19,926,370 |
| | $ | 33 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by portfolio segment and class of financing receivable for the years ended December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Impaired loans for which there is a related allowance for loan losses | | Impaired loans for which there is no related allowance for loan losses | | Total carrying value of impaired loans | | Total unpaid principal of impaired loans |
| December 31, 2017: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 49,645 |
| | $ | 61,009 |
| | $ | 110,654 |
| | $ | 129,006 |
|
| Hardware | | 15,637 |
| | 20,713 |
| | 36,350 |
| | 41,721 |
|
| Private equity/venture capital | | 658 |
| | — |
| | 658 |
| | 984 |
|
| Life science/healthcare | | 20,521 |
| | 1,166 |
| | 21,687 |
| | 26,360 |
|
| Premium wine | | — |
| | 2,877 |
| | 2,877 |
| | 2,911 |
|
| Other | | 32 |
| | — |
| | 32 |
| | 165 |
|
| Total commercial loans | | 86,493 |
| | 85,765 |
| | 172,258 |
| | 201,147 |
|
| Consumer loans: | | | | | | | | |
| Real estate secured loans | | 1,331 |
| | 850 |
| | 2,181 |
| | 3,712 |
|
| Other consumer loans | | 422 |
| | — |
| | 422 |
| | 436 |
|
| Total consumer loans | | 1,753 |
| | 850 |
| | 2,603 |
| | 4,148 |
|
| Total | | $ | 88,246 |
| | $ | 86,615 |
| | $ | 174,861 |
| | $ | 205,295 |
|
| December 31, 2016: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 121,658 |
| | $ | 1,090 |
| | $ | 122,748 |
| | $ | 129,648 |
|
| Hardware | | 65,395 |
| | — |
| | 65,395 |
| | 70,683 |
|
| Private equity/venture capital | | — |
| | — |
| | — |
| | — |
|
| Life science/healthcare | | 38,361 |
| | — |
| | 38,361 |
| | 41,130 |
|
| Premium wine | | 3,187 |
| | — |
| | 3,187 |
| | 3,187 |
|
| Other | | 867 |
| | — |
| | 867 |
| | 867 |
|
| Total commercial loans | | 229,468 |
| | 1,090 |
| | 230,558 |
| | 245,515 |
|
| Consumer loans: | | | | | | | | |
| Real estate secured loans | | 1,504 |
| | — |
| | 1,504 |
| | 2,779 |
|
| Other consumer loans | | 2,398 |
| | — |
| | 2,398 |
| | 2,398 |
|
| Total consumer loans | | 3,902 |
| | — |
| | 3,902 |
| | 5,177 |
|
| Total | | $ | 233,370 |
| | $ | 1,090 |
| | $ | 234,460 |
| | $ | 250,692 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our average impaired loans and interest income on impaired loans, broken out by portfolio segment and class of financing receivable during 2017, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, (Dollars in thousands) | | Average impaired loans | | Interest income on impaired loans |
| | 2017 |
| 2016 |
| 2015 | | 2017 | | 2016 | | 2015 |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 119,557 |
| | $ | 89,462 |
| | $ | 63,825 |
| | $ | 2,263 |
| | $ | 1,054 |
| | $ | 344 |
|
| Hardware | | 35,022 |
| | 39,108 |
| | 8,854 |
| | 1,061 |
| | 2,624 |
| | 574 |
|
| Private equity/venture capital | | 556 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Life science/healthcare | | 30,842 |
| | 40,620 |
| | 18,083 |
| | 90 |
| | 155 |
| | 132 |
|
| Premium wine | | 3,249 |
| | 2,056 |
| | 1,455 |
| | 152 |
| | 28 |
| | 12 |
|
| Other | | 576 |
| | 3,442 |
| | 2,758 |
| | — |
| | 6 |
| | 8 |
|
| Total commercial loans | | 189,802 |
| | 174,688 |
| | 94,975 |
| | 3,566 |
| | 3,867 |
| | 1,070 |
|
| Consumer loans: | | | | | | | | | | | | |
| Real estate secured loans | | 1,514 |
| | 588 |
| | 172 |
| | — |
| | — |
| | — |
|
| Other consumer loans | | 1,804 |
| | 1,136 |
| | 41 |
| | — |
| | 17 |
| | — |
|
| Total consumer loans | | 3,318 |
| | 1,724 |
| | 213 |
| | — |
| | 17 |
| | — |
|
| Total average impaired loans | | $ | 193,120 |
| | $ | 176,412 |
| | $ | 95,188 |
| | $ | 3,566 |
| | $ | 3,884 |
| | $ | 1,070 |
|
The following tables summarize the activity relating to our allowance for loan losses for 2017, 2016 and 2015 broken out by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2017 (Dollars in thousands) | | Beginning Balance December 31, 2016 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance December 31, 2017 |
| | | | | | |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 97,388 |
| | $ | (45,012 | ) | | $ | 4,649 |
| | $ | 38,462 |
| | $ | 617 |
| | $ | 96,104 |
|
| Hardware | | 31,166 |
| | (10,414 | ) | | 487 |
| | 6,051 |
| | 324 |
| | 27,614 |
|
| Private equity/venture capital | | 50,299 |
| | (323 | ) | | — |
| | 31,625 |
| | 867 |
| | 82,468 |
|
| Life science/healthcare | | 25,446 |
| | (8,210 | ) | | 189 |
| | 7,414 |
| | 85 |
| | 24,924 |
|
| Premium wine | | 4,115 |
| | — |
| | — |
| | (540 | ) | | (43 | ) | | 3,532 |
|
| Other | | 4,768 |
| | (1,156 | ) | | 1,850 |
| | (1,459 | ) | | (62 | ) | | 3,941 |
|
| Total commercial loans | | 213,182 |
| | (65,115 | ) | | 7,175 |
| | 81,553 |
| | 1,788 |
| | 238,583 |
|
| Consumer loans | | 12,184 |
| | (1,567 | ) | | 1,363 |
| | 4,386 |
| | 75 |
| | 16,441 |
|
| Total allowance for loan losses | | $ | 225,366 |
| | $ | (66,682 | ) | | $ | 8,538 |
| | $ | 85,939 |
| | $ | 1,863 |
| | $ | 255,024 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2016 (Dollars in thousands) | | Beginning Balance December 31, 2015 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance December 31, 2016 |
| | | | | | |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 103,045 |
| | $ | (68,784 | ) | | $ | 7,278 |
| | $ | 58,350 |
| | $ | (2,501 | ) | | $ | 97,388 |
|
| Hardware | | 23,085 |
| | (13,233 | ) | | 1,667 |
| | 20,851 |
| | (1,204 | ) | | 31,166 |
|
| Private equity/venture capital | | 35,282 |
| | — |
| | — |
| | 15,114 |
| | (97 | ) | | 50,299 |
|
| Life science/healthcare | | 36,576 |
| | (9,693 | ) | | 1,129 |
| | (2,543 | ) | | (23 | ) | | 25,446 |
|
| Premium wine | | 5,205 |
| | — |
| | — |
| | (1,260 | ) | | 170 |
| | 4,115 |
|
| Other | | 4,252 |
| | (5,045 | ) | | 1,880 |
| | 3,373 |
| | 308 |
| | 4,768 |
|
| Total commercial loans | | 207,445 |
| | (96,755 | ) | | 11,954 |
| | 93,885 |
| | (3,347 | ) | | 213,182 |
|
| Consumer loans | | 10,168 |
| | (102 | ) | | 258 |
| | 1,812 |
| | 48 |
| | 12,184 |
|
| Total allowance for loan losses | | $ | 217,613 |
| | $ | (96,857 | ) | | $ | 12,212 |
| | $ | 95,697 |
| | $ | (3,299 | ) | | $ | 225,366 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31, 2015
(Dollars in thousands) | | Beginning Balance December 31, 2014 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance December 31, 2015 |
| | | | | | |
| Commercial loans: | | | | | | | | | | | | |
| Software/internet | | $ | 80,981 |
| | $ | (33,246 | ) | | $ | 1,621 |
| | $ | 53,696 |
| | $ | (7 | ) | | $ | 103,045 |
|
| Hardware | | 25,860 |
| | (5,145 | ) | | 3,332 |
| | (1,035 | ) | | 73 |
| | 23,085 |
|
| Private equity/venture capital | | 27,997 |
| | — |
| | — |
| | 7,391 |
| | (106 | ) | | 35,282 |
|
| Life science/healthcare | | 15,208 |
| | (7,291 | ) | | 277 |
| | 28,400 |
| | (18 | ) | | 36,576 |
|
| Premium wine | | 4,473 |
| | — |
| | 7 |
| | 725 |
| | — |
| | 5,205 |
|
| Other | | 3,253 |
| | (4,990 | ) | | 809 |
| | 5,736 |
| | (556 | ) | | 4,252 |
|
| Total commercial loans | | 157,772 |
| | (50,672 | ) | | 6,046 |
| | 94,913 |
| | (614 | ) | | 207,445 |
|
| Consumer loans | | 7,587 |
| | (296 | ) | | 163 |
| | 2,716 |
| | (2 | ) | | 10,168 |
|
| Total allowance for loan losses | | $ | 165,359 |
| | $ | (50,968 | ) | | $ | 6,209 |
| | $ | 97,629 |
| | $ | (616 | ) | | $ | 217,613 |
|
The following table summarizes the activity relating to our allowance for unfunded credit commitments for 2017, 2016 and 2015:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Allowance for unfunded credit commitments, beginning balance | | $ | 45,265 |
| | $ | 34,415 |
| | $ | 36,419 |
|
| Provision for (reduction of) unfunded credit commitments | | 6,365 |
| | 10,982 |
| | (1,946 | ) |
| Foreign currency translation adjustments | | 140 |
| | (132 | ) | | (58 | ) |
| Allowance for unfunded credit commitments, ending balance (1) | | $ | 51,770 |
| | $ | 45,265 |
| | $ | 34,415 |
|
| |
(1) | See Note 19—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional disclosures related to our commitments to extend credit.
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of December 31, 2017 and 2016, broken out by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | December 31, 2016 |
| | | Individually Evaluated for Impairment | | Collectively Evaluated for Impairment
| | Individually Evaluated for Impairment | | Collectively Evaluated for Impairment
|
| (Dollars in thousands) | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans |
| Commercial loans: | | | | | | | | | | | | | | | | |
| Software/internet | | $ | 23,088 |
| | $ | 110,654 |
| | $ | 73,016 |
| | $ | 6,061,877 |
| | $ | 28,245 |
| | $ | 122,748 |
| | $ | 69,143 |
| | $ | 5,504,283 |
|
| Hardware | | 8,450 |
| | 36,350 |
| | 19,164 |
| | 1,157,249 |
| | 9,995 |
| | 65,395 |
| | 21,171 |
| | 1,115,003 |
|
| Private equity/venture capital | | 330 |
| | 658 |
| | 82,138 |
| | 9,951,719 |
| | — |
| | — |
| | 50,299 |
| | 7,691,148 |
|
| Life science/healthcare | | 9,315 |
| | 21,687 |
| | 15,609 |
| | 1,787,140 |
| | 8,709 |
| | 38,361 |
| | 16,737 |
| | 1,814,643 |
|
| Premium wine | | — |
| | 2,877 |
| | 3,532 |
| | 870,281 |
| | 520 |
| | 3,187 |
| | 3,595 |
| | 875,135 |
|
| Other | | 32 |
| | 32 |
| | 3,909 |
| | 476,306 |
| | 233 |
| | 867 |
| | 4,535 |
| | 500,842 |
|
| Total commercial loans | | 41,215 |
| | 172,258 |
| | 197,368 |
| | 20,304,572 |
| | 47,702 |
| | 230,558 |
| | 165,480 |
| | 17,501,054 |
|
| Total consumer loans | | 578 |
| | 2,603 |
| | 15,863 |
| | 2,626,883 |
| | 1,123 |
| | 3,902 |
| | 11,061 |
| | 2,164,430 |
|
| Total | | $ | 41,793 |
| | $ | 174,861 |
| | $ | 213,231 |
| | $ | 22,931,455 |
| | $ | 48,825 |
| | $ | 234,460 |
| | $ | 176,541 |
| | $ | 19,665,484 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Real estate secured loans: | | | | |
| Private bank: | | | | |
| Loans for personal residence | | $ | 3,392,237 | | | $ | 2,829,880 | |
| Loans to eligible employees | | 481,098 | | | 401,396 | |
| Home equity lines of credit | | 42,449 | | | 55,461 | |
| Other | | 142,895 | | | 38,880 | |
| Total private bank loans secured by real estate | | $ | 4,058,679 | | | $ | 3,325,617 | |
| Premium wine | | 824,008 | | | 820,730 | |
| Other | | 56,882 | | | 0 | |
| Total real estate secured loans | | $ | 4,939,569 | | | $ | 4,146,347 | |
Credit Quality Indicators
For each individual client, we establish an internal credit risk rating for that loan, which is used for assessing and monitoring credit risk as well as performance of the loan and the overall portfolio. Our internal credit risk ratings are also used to summarize the risk of loss due to failure by an individual borrower to repay the loan. For our internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk-rated 1 through 4 are performing loans and translate to an internal rating of “Pass”,“Pass,” with loans risk-rated 1 being cash secured. Loans risk-rated 5 through 7 are performing loans,loans; however, we consider them as demonstrating higher risk, which requires more frequent review of the individual exposures; these translate to an internal rating of “Performing (Criticized)“Criticized.”. When full repayment of a criticized loan has been deemed improbable under the original contractual terms but full repayment remains probable overall, the loan is considered to be a “Performing Impaired (Criticized)” loan. The loan is also considered for nonaccrual status if full repayment is determined to be improbable. All of our nonaccrual loans are risk-rated 8 or 9 and are classified under the nonperforming impaired category. (For a further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report). Loans rated 10 are charged-off and are not included as part of our loan portfolio balance. We review our credit quality indicators on a quarterly basis for performance and appropriateness of risk ratings as part of our evaluation process for our allowance for loan losses.
credit losses for loans.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the credit quality indicators, broken out by portfoliorisk-based segment, and class of financing receivables as of December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Pass | | Criticized | | Nonperforming (Nonaccrual) | | Total |
| December 31, 2020 | | | | | | | | |
| Global fund banking | | $ | 25,537,354 | | | $ | 5,833 | | | $ | 11 | | | $ | 25,543,198 | |
| Investor dependent: | | | | | | | | |
| Early stage | | 1,288,897 | | | 178,629 | | | 18,340 | | | 1,485,866 | |
| Mid stage | | 1,420,788 | | | 140,026 | | | 4,056 | | | 1,564,870 | |
| Later stage | | 1,744,662 | | | 147,763 | | | 28,657 | | | 1,921,082 | |
| Total investor dependent | | 4,454,347 | | | 466,418 | | | 51,053 | | | 4,971,818 | |
| Cash flow dependent: | | | | | | | | |
| Sponsor led buyout | | 1,795,972 | | | 153,205 | | | 39,996 | | | 1,989,173 | |
| Other | | 2,677,371 | | | 261,985 | | | 6,004 | | | 2,945,360 | |
| Total cash flow dependent | | 4,473,343 | | | 415,190 | | | 46,000 | | | 4,934,533 | |
| Private bank | | 4,862,176 | | | 32,728 | | | 6,152 | | | 4,901,056 | |
| Balance sheet dependent | | 2,104,645 | | | 86,378 | | | 0 | | | 2,191,023 | |
| Premium wine | | 910,397 | | | 141,248 | | | 998 | | | 1,052,643 | |
| Other | | 27,594 | | | 63 | | | 30 | | | 27,687 | |
| SBA loans | | 1,455,990 | | | 103,540 | | | 0 | | | 1,559,530 | |
| Total loans (1) | | $ | 43,825,846 | | | $ | 1,251,398 | | | $ | 104,244 | | | $ | 45,181,488 | |
| December 31, 2019 | | | | | | | | |
| Global fund banking | | $ | 17,708,550 | | | $ | 4,247 | | | $ | 0 | | | $ | 17,712,797 | |
| Investor dependent | | | | | | | | |
| Early stage | | 1,436,022 | | | 206,310 | | | 11,093 | | | 1,653,425 | |
| Mid stage | | 924,002 | | | 125,451 | | | 17,330 | | | 1,066,783 | |
| Later stage | | 1,490,561 | | | 201,819 | | | 6,296 | | | 1,698,676 | |
| Total investor dependent | | 3,850,585 | | | 533,580 | | | 34,719 | | | 4,418,884 | |
| Cash flow dependent | | | | | | | | |
| Sponsor led buyout | | 2,039,847 | | | 118,588 | | | 44,585 | | | 2,203,020 | |
| Other | | 2,141,766 | | | 93,400 | | | 17,681 | | | 2,252,847 | |
| Total cash flow dependent | | 4,181,613 | | | 211,988 | | | 62,266 | | | 4,455,867 | |
| Private bank | | 3,472,138 | | | 11,601 | | | 5,480 | | | 3,489,219 | |
| Balance sheet dependent | | 1,231,961 | | | 65,343 | | | 0 | | | 1,297,304 | |
| Premium wine | | 1,026,973 | | | 36,335 | | | 204 | | | 1,063,512 | |
| Other | | 890,059 | | | 62 | | | 0 | | | 890,121 | |
| Total loans (1) | | $ | 32,361,879 | | | $ | 863,156 | | | $ | 102,669 | | | $ | 33,327,704 | |
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis in accordance with the previous methodology.
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Pass | | Performing (Criticized) | | Performing Impaired (Criticized) | | Nonperforming Impaired (Nonaccrual) | | Total |
| December 31, 2017: | | | | | | | | | | |
| Commercial loans: | | | | | | | | | | |
| Software/internet | | $ | 5,655,739 |
| | $ | 466,332 |
| | $ | 31,794 |
| | $ | 78,860 |
| | $ | 6,232,725 |
|
| Hardware | | 1,112,574 |
| | 51,976 |
| | 20,165 |
| | 16,185 |
| | 1,200,900 |
|
| Private equity/venture capital | | 9,955,082 |
| | 5,381 |
| | — |
| | 658 |
| | 9,961,121 |
|
| Life science/healthcare | | 1,720,613 |
| | 125,660 |
| | 1,167 |
| | 20,520 |
| | 1,867,960 |
|
| Premium wine | | 834,537 |
| | 36,955 |
| | 2,476 |
| | 401 |
| | 874,369 |
|
| Other | | 469,721 |
| | 21,016 |
| | — |
| | 32 |
| | 490,769 |
|
| Total commercial loans | | 19,748,266 |
| | 707,320 |
| | 55,602 |
|
| 116,656 |
| | 20,627,844 |
|
| Consumer loans: | | | | | | | | | | |
| Real estate secured loans | | 2,282,375 |
| | 13,301 |
| | — |
| | 2,181 |
| | 2,297,857 |
|
| Other consumer loans | | 326,851 |
| | 1,179 |
| | — |
| | 422 |
| | 328,452 |
|
| Total consumer loans | | 2,609,226 |
| | 14,480 |
| | — |
| | 2,603 |
| | 2,626,309 |
|
| Total gross loans | | $ | 22,357,492 |
| | $ | 721,800 |
| | $ | 55,602 |
| | $ | 119,259 |
| | $ | 23,254,153 |
|
| December 31, 2016: | | | | | | | | | | |
| Commercial loans: | | | | | | | | | | |
| Software/internet | | $ | 4,924,923 |
| | $ | 620,907 |
| | $ | 46,143 |
| | $ | 76,605 |
| | $ | 5,668,578 |
|
| Hardware | | 985,889 |
| | 137,830 |
| | 58,814 |
| | 6,581 |
| | 1,189,114 |
|
| Private equity/venture capital | | 7,747,317 |
| | 594 |
| | — |
| | — |
| | 7,747,911 |
|
| Life science/healthcare | | 1,707,499 |
| | 120,825 |
| | 6,578 |
| | 31,783 |
| | 1,866,685 |
|
| Premium wine | | 865,354 |
| | 11,838 |
| | 2,696 |
| | 491 |
| | 880,379 |
|
| Other | | 480,845 |
| | 23,510 |
| | 464 |
| | 403 |
| | 505,222 |
|
| Total commercial loans | | 16,711,827 |
| | 915,504 |
| | 114,695 |
| | 115,863 |
| | 17,857,889 |
|
| Consumer loans: | | | | | | | | | | |
| Real estate secured loans | | 1,914,512 |
| | 9,604 |
| | — |
| | 1,504 |
| | 1,925,620 |
|
| Other consumer loans | | 238,256 |
| | 499 |
| | 786 |
| | 1,612 |
| | 241,153 |
|
| Total consumer loans | | 2,152,768 |
| | 10,103 |
| | 786 |
| | 3,116 |
| | 2,166,773 |
|
| Total gross loans | | $ | 18,864,595 |
| | $ | 925,607 |
| | $ | 115,481 |
| | $ | 118,979 |
| | $ | 20,024,662 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the credit quality indicators, broken out by risk-based segments and vintage year, as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans by Origination Year | | | | | | |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
| Global fund banking: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 439,494 | | | $ | 48,297 | | | $ | 68,491 | | | $ | 22,878 | | | $ | 2,389 | | | $ | 5,999 | | | $ | 24,947,428 | | | $ | 2,378 | | | $ | 25,537,354 | |
| Criticized | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 410 | | | 5,423 | | | 5,833 | |
| Nonperforming | | 3 | | 8 | | 0 | | 0 | | 0 | | 0 | | | 0 | | | 0 | | | 11 | |
| Total global fund banking | | $ | 439,497 | | | $ | 48,305 | | | $ | 68,491 | | | $ | 22,878 | | | $ | 2,389 | | | $ | 5,999 | | | $ | 24,947,838 | | | $ | 7,801 | | | $ | 25,543,198 | |
| Investor dependent: | | | | | | | | | | | | | | | | | | |
| Early stage: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 667,006 | | | $ | 370,189 | | | $ | 120,920 | | | $ | 32,163 | | | $ | 1,234 | | | $ | 405 | | | $ | 96,363 | | | $ | 617 | | | $ | 1,288,897 | |
| Criticized | | 46,889 | | | 72,495 | | | 26,170 | | | 10,204 | | | 3,557 | | | 334 | | | 18,980 | | | 0 | | | 178,629 | |
| Nonperforming | | 2,438 | | | 9,354 | | | 5,368 | | | 441 | | | 0 | | | 0 | | | 739 | | | 0 | | | 18,340 | |
| Total early stage | | $ | 716,333 | | | $ | 452,038 | | | $ | 152,458 | | | $ | 42,808 | | | $ | 4,791 | | | $ | 739 | | | $ | 116,082 | | | $ | 617 | | | $ | 1,485,866 | |
| Mid stage: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 840,431 | | | $ | 301,905 | | | $ | 145,588 | | | $ | 22,834 | | | $ | 5,086 | | | $ | 1,026 | | | $ | 101,423 | | | $ | 2,495 | | | $ | 1,420,788 | |
| Criticized | | 43,288 | | | 48,294 | | | 26,023 | | | 8,242 | | | 0 | | | 4,998 | | | 9,181 | | | 0 | | | 140,026 | |
| Nonperforming | | 10 | | | 614 | | | 218 | | | 2,539 | | | 0 | | | 675 | | | 0 | | | 0 | | | 4,056 | |
| Total mid stage | | $ | 883,729 | | | $ | 350,813 | | | $ | 171,829 | | | $ | 33,615 | | | $ | 5,086 | | | $ | 6,699 | | | $ | 110,604 | | | $ | 2,495 | | | $ | 1,564,870 | |
| Later stage: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 905,468 | | | $ | 393,584 | | | $ | 170,128 | | | $ | 37,967 | | | $ | 11 | | | $ | 8,087 | | | $ | 224,432 | | | $ | 4,985 | | | $ | 1,744,662 | |
| Criticized | | 22,286 | | | 55,254 | | | 30,252 | | | 1,142 | | | 0 | | | 1,547 | | | 37,282 | | | 0 | | | 147,763 | |
| Nonperforming | | 16,691 | | | 1,797 | | | 3,522 | | | 0 | | | 0 | | | 0 | | | 6,647 | | | 0 | | | 28,657 | |
| Total later stage | | $ | 944,445 | | | $ | 450,635 | | | $ | 203,902 | | | $ | 39,109 | | | $ | 11 | | | $ | 9,634 | | | $ | 268,361 | | | $ | 4,985 | | | $ | 1,921,082 | |
| Total investor dependent | | $ | 2,544,507 | | | $ | 1,253,486 | | | $ | 528,189 | | | $ | 115,532 | | | $ | 9,888 | | | $ | 17,072 | | | $ | 495,047 | | | $ | 8,097 | | | $ | 4,971,818 | |
| Cash flow dependent: | | | | | | | | | | | | | | | | | | |
| Sponsor led buyout: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 791,480 | | | $ | 451,561 | | | $ | 273,719 | | | $ | 166,820 | | | $ | 36,900 | | | $ | 0 | | | $ | 75,492 | | | $ | 0 | | | $ | 1,795,972 | |
| Criticized | | 500 | | | 70,324 | | | 39,020 | | | 21,607 | | | 13,003 | | | 0 | | | 8,751 | | | 0 | | | 153,205 | |
| Nonperforming | | 33 | | | 11,869 | | | 16,068 | | | 7,177 | | | 0 | | | 0 | | | 4,849 | | | 0 | | | 39,996 | |
| Total sponsor led buyout | | $ | 792,013 | | | $ | 533,754 | | | $ | 328,807 | | | $ | 195,604 | | | $ | 49,903 | | | $ | 0 | | | $ | 89,092 | | | $ | 0 | | | $ | 1,989,173 | |
| Other | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 879,542 | | | $ | 513,242 | | | $ | 179,169 | | | $ | 133,235 | | | $ | 38,808 | | | $ | 101 | | | $ | 933,274 | | | $ | 0 | | | $ | 2,677,371 | |
| Criticized | | 19,246 | | | 67,854 | | | 33,779 | | | 4,477 | | | 0 | | | 0 | | | 136,629 | | | 0 | | | 261,985 | |
| Nonperforming | | 0 | | | 0 | | | 4,552 | | | 0 | | | 0 | | | 0 | | | 1,452 | | | 0 | | | 6,004 | |
| Total other | | $ | 898,788 | | | $ | 581,096 | | | $ | 217,500 | | | $ | 137,712 | | | $ | 38,808 | | | $ | 101 | | | $ | 1,071,355 | | | $ | 0 | | | $ | 2,945,360 | |
| Total cash flow dependent | | $ | 1,690,801 | | | $ | 1,114,850 | | | $ | 546,307 | | | $ | 333,316 | | | $ | 88,711 | | | $ | 101 | | | $ | 1,160,447 | | | $ | 0 | | | $ | 4,934,533 | |
| Private bank: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 1,878,184 | | | $ | 1,152,903 | | | $ | 394,351 | | | $ | 352,857 | | | $ | 294,870 | | | $ | 405,909 | | | $ | 382,442 | | | $ | 660 | | | $ | 4,862,176 | |
| Criticized | | 3,480 | | | 9,985 | | | 4,486 | | | 1,202 | | | 5,101 | | | 7,725 | | | 749 | | | 0 | | | 32,728 | |
| Nonperforming | | 0 | | | 563 | | | 3,197 | | | 0 | | | 0 | | | 1,679 | | | 713 | | | 0 | | | 6,152 | |
| Total private bank | | $ | 1,881,664 | | | $ | 1,163,451 | | | $ | 402,034 | | | $ | 354,059 | | | $ | 299,971 | | | $ | 415,313 | | | $ | 383,904 | | | $ | 660 | | | $ | 4,901,056 | |
| Balance sheet dependent: | | | | | | | | | | | | | | | | | | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 837,613 | | | $ | 190,140 | | | $ | 198,532 | | | $ | 19,213 | | | $ | 0 | | | $ | — | | | $ | 857,642 | | | $ | 1,505 | | | $ | 2,104,645 | |
| Criticized | | 55,887 | | | 3,733 | | | 171 | | | 0 | | | 0 | | | 0 | | | 26,587 | | | 0 | | | 86,378 | |
| Nonperforming | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total balance sheet dependent | | $ | 893,500 | | | $ | 193,873 | | | $ | 198,703 | | | $ | 19,213 | | | $ | 0 | | | $ | 0 | | | $ | 884,229 | | | $ | 1,505 | | | $ | 2,191,023 | |
| Premium wine: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 126,476 | | | $ | 193,744 | | | $ | 70,783 | | | $ | 79,088 | | | $ | 114,812 | | | $ | 153,841 | | | $ | 135,461 | | | $ | 36,192 | | | $ | 910,397 | |
| Criticized | | 17,882 | | | 24,286 | | | 35,737 | | | 10,300 | | | 13,559 | | | 5,766 | | | 33,718 | | | 0 | | | 141,248 | |
| Nonperforming | | 0 | | | 0 | | | 0 | | | 0 | | | 998 | | | 0 | | | 0 | | | 0 | | | 998 | |
| Total Premium wine | | $ | 144,358 | | | $ | 218,030 | | | $ | 106,520 | | | $ | 89,388 | | | $ | 129,369 | | | $ | 159,607 | | | $ | 169,179 | | | $ | 36,192 | | | $ | 1,052,643 | |
| Other: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 0 | | | $ | 16,251 | | | $ | 10,910 | | | $ | 0 | | | $ | 0 | | | $ | 433 | | | $ | 0 | | | $ | 0 | | | $ | 27,594 | |
| Criticized | | 3 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 60 | | | 0 | | | 63 | |
| Nonperforming | | 0 | | | 30 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 30 | |
| Total other | | $ | 3 | | | $ | 16,281 | | | $ | 10,910 | | | $ | 0 | | | $ | 0 | | | $ | 433 | | | $ | 60 | | | $ | 0 | | | $ | 27,687 | |
| SBA loans: | | | | | | | | | | | | | | | | | | |
| Risk rating: | | | | | | | | | | | | | | | | | | |
| Pass | | $ | 1,455,990 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,455,990 | |
| Criticized | | 103,540 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 103,540 | |
| Nonperforming | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total SBA loans | | $ | 1,559,530 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,559,530 | |
| Total loans | | $ | 9,153,860 | | | $ | 4,008,276 | | | $ | 1,861,154 | | | $ | 934,386 | | | $ | 530,328 | | | $ | 598,525 | | | $ | 28,040,704 | | | $ | 54,255 | | | $ | 45,181,488 | |
Allowance for Credit Losses: Loans
For the year ending December 31, 2020, the ACL for all segments was impacted primarily by the unemployment rate forecast assumptions, macroeconomic conditions and the forecast volatility related to the economic downturn caused by the COVID-19 pandemic. In addition to the above drivers, the change in the ACL for the global fund banking and private bank portfolio segments was driven by substantial loan growth and the GDP growth rate forecast assumptions.
The economic forecast in Moody’s Analytics December 2020 forecast was utilized in our quantitative model for the ACL as of December 31, 2020. We determined the forecast to be a reasonable view of the outlook for the economy given the available information as of December 31, 2020. To the extent we identified credit risk considerations that were not captured by the Moody's Analytics December 2020 forecast, we addressed the risk through management's qualitative adjustments to our ACL.
The following tables summarize the activity relating to our allowance for credit losses for loans for 2020, 2019 and 2018 broken out by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | Beginning Balance December 31, 2019 | | Impact of adopting ASC 326 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loans | | Foreign Currency Translation Adjustments | | Ending Balance December 31, 2020 |
| (Dollars in thousands) | | | | | | | |
| Global fund banking | | $ | 107,285 | | | $ | (69,888) | | | $ | 0 | | | $ | 0 | | | $ | 8,367 | | | $ | (180) | | | $ | 45,584 | |
| Investor dependent: | | | | | | | | | | | | | | |
| Early stage | | 26,245 | | | 39,911 | | | (35,305) | | | 10,821 | | | 45,825 | | | (823) | | | 86,674 | |
| Growth stage | | 56,125 | | | 31,713 | | | (53,338) | | | 14,042 | | | 79,145 | | | (1,004) | | | 126,683 | |
| Total investor dependent | | 82,370 | | | 71,624 | | | (88,643) | | | 24,863 | | | 124,970 | | | (1,827) | | | 213,357 | |
| Cash flow and balance sheet dependent | | 80,820 | | | (1,269) | | | (11,187) | | | 2,846 | | | 53,369 | | | (330) | | | 124,249 | |
| Private bank | | 21,551 | | | 12,615 | | | (1,616) | | | 30 | | | 21,329 | | | (280) | | | 53,629 | |
| Premium wine and other | | 12,898 | | | 12,382 | | | (1,458) | | | 1,279 | | | (20,719) | | | 4,654 | | | 9,036 | |
| SBA loans | | 0 | | | 0 | | | 0 | | | 0 | | | 1,910 | | | 0 | | | 1,910 | |
| Total allowance for credit losses | | $ | 304,924 | | | $ | 25,464 | | | $ | (102,904) | | | $ | 29,018 | | | $ | 189,226 | | | $ | 2,037 | | | $ | 447,765 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 | | Beginning Balance December 31, 2018 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loans | | Foreign Currency Translation Adjustments | | Ending Balance December 31, 2019 |
| (Dollars in thousands) | | | | | | |
| Global fund banking | | $ | 93,781 | | | $ | (2,047) | | | $ | 2,047 | | | $ | 13,534 | | | $ | (30) | | | $ | 107,285 | |
| Investor dependent: | | | | | | | | | | | | |
| Early stage | | 25,885 | | | (31,568) | | | 9,088 | | | 22,462 | | | 378 | | | 26,245 | |
| Growth stage | | 46,216 | | | (53,255) | | | 4,945 | | | 58,337 | | | (118) | | | 56,125 | |
| Total investor dependent | | 72,101 | | | (84,823) | | | 14,033 | | | 80,799 | | | 260 | | | 82,370 | |
| Cash flow and balance sheet dependent | | 87,735 | | | (3,118) | | | 4,683 | | | (9,093) | | | 613 | | | 80,820 | |
| Private Bank | | 20,583 | | | (1,031) | | | 255 | | | 1,865 | | | (121) | | | 21,551 | |
| Premium wine and other | | 6,703 | | | (1,584) | | | 20 | | | 7,078 | | | 681 | | | 12,898 | |
| Total allowance for credit losses | | $ | 280,903 | | | $ | (92,603) | | | $ | 21,038 | | | $ | 94,183 | | | $ | 1,403 | | | $ | 304,924 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018: | | Beginning Balance December 31, 2017 | | Charge-offs | | Recoveries | | Provision for Loans | | Foreign Currency Translation Adjustments | | Ending Balance December 31, 2018 |
| (Dollars in thousands) | | | | | | |
| Global fund banking | | $ | 82,468 | | | $ | (112) | | | $ | 0 | | | $ | 11,698 | | | $ | (273) | | | $ | 93,781 | |
| Investor dependent: | | | | | | | | | | | | |
| Early stage | | 22,742 | | | (32,495) | | | 6,154 | | | 29,788 | | | (304) | | | 25,885 | |
| Growth stage | | 38,280 | | | (16,727) | | | 2,873 | | | 22,332 | | | (542) | | | 46,216 | |
| Total investor dependent | | 61,022 | | | (49,222) | | | 9,027 | | | 52,120 | | | (846) | | | 72,101 | |
| Cash flow and balance sheet dependent | | 87,620 | | | (16,223) | | | 2,064 | | | 15,304 | | | (1,030) | | | 87,735 | |
| Private Bank | | 16,441 | | | (289) | | | 486 | | | 3,986 | | | (41) | | | 20,583 | |
| Premium wine and other | | 7,473 | | | (2,071) | | | 59 | | | 1,184 | | | 58 | | | 6,703 | |
| Total allowance for credit losses | | $ | 255,024 | | | $ | (67,917) | | | $ | 11,636 | | | $ | 84,292 | | | $ | (2,132) | | | $ | 280,903 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the aging of our loans broken out by risk-based segments as of December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | 30 - 59
Days Past
Due | | 60 - 89
Days Past
Due | | Equal to or Greater
Than 90
Days Past
Due | | Total Past
Due | | Current | | Total | | Loans Past Due
90 Days or
More Still
Accruing
Interest |
| December 31, 2020: | | | | | | | | | | | | | | |
| Global fund banking | | $ | 27,606 | | | $ | 8 | | | $ | 11 | | | $ | 27,625 | | | $ | 25,515,573 | | | $ | 25,543,198 | | | $ | 0 | |
| Investor dependent: | | | | | | | | | | | | | | |
| Early stage | | 6,320 | | | 1,840 | | | 202 | | | 8,362 | | | 1,477,504 | | | 1,485,866 | | | 0 | |
| Mid stage | | 5,984 | | | 238 | | | 907 | | | 7,129 | | | 1,557,741 | | | 1,564,870 | | | 0 | |
| Later stage | | 5,363 | | | 0 | | | 0 | | | 5,363 | | | 1,915,719 | | | 1,921,082 | | | 0 | |
| Total investor dependent | | 17,667 | | | 2,078 | | | 1,109�� | | | 20,854 | | | 4,950,964 | | | 4,971,818 | | | 0 | |
| Cash flow dependent: | | | | | | | | | | | | | | |
| Sponsor led buyout | | 34 | | | 0 | | | 0 | | | 34 | | | 1,989,139 | | | 1,989,173 | | | 0 | |
| Other | | 6,510 | | | 58 | | | 0 | | | 6,568 | | | 2,938,792 | | | 2,945,360 | | | 0 | |
| Total cash flow dependent | | 6,544 | | | 58 | | | 0 | | | 6,602 | | | 4,927,931 | | | 4,934,533 | | | 0 | |
| Private bank | | 4,292 | | | 3,990 | | | 0 | | | 8,282 | | | 4,892,774 | | | 4,901,056 | | | 0 | |
| Balance sheet dependent | | 987 | | | 1,089 | | | 0 | | | 2,076 | | | 2,188,947 | | | 2,191,023 | | | 0 | |
| Premium wine | | 3,168 | | | 0 | | | 998 | | | 4,166 | | | 1,048,477 | | | 1,052,643 | | | 0 | |
| Other | | 3 | | | 28 | | | 82 | | | 113 | | | 27,574 | | | 27,687 | | | 0 | |
| SBA loans | | 0 | | | 0 | | | 0 | | | 0 | | | 1,559,530 | | | 1,559,530 | | | 0 | |
| Total loans (1) | | $ | 60,267 | | | $ | 7,251 | | | $ | 2,200 | | | $ | 69,718 | | | $ | 45,111,770 | | | $ | 45,181,488 | | | $ | 0 | |
| December 31, 2019: | | | | | | | | | | | | | | |
| Global fund banking | | $ | 97,739 | | | $ | 383 | | | $ | 3,150 | | | $ | 101,272 | | | $ | 17,611,525 | | | $ | 17,712,797 | | | $ | 3,150 | |
| Investor dependent: | | | | | | | | | | | | | | |
| Early stage | | 1,307 | | | 22,062 | | | 723 | | | 24,092 | | | 1,629,333 | | | 1,653,425 | | | 0 | |
| Mid stage | | 10,025 | | | 6,999 | | | 0 | | | 17,024 | | | 1,049,759 | | | 1,066,783 | | | 0 | |
| Later stage | | 8,113 | | | 500 | | | 10,569 | | | 19,182 | | | 1,679,494 | | | 1,698,676 | | | 0 | |
| Total investor dependent | | 19,445 | | | 29,561 | | | 11,292 | | | 60,298 | | | 4,358,586 | | | 4,418,884 | | | 0 | |
| Cash flow dependent | | | | | | | | | | | | | | |
| Sponsor led buyout | | 0 | | | 0 | | | 0 | | | 0 | | | 2,203,020 | | | 2,203,020 | | | 0 | |
| Other | | 2,426 | | | 3,061 | | | 2 | | | 5,489 | | | 2,247,358 | | | 2,252,847 | | | 0 | |
| Total cash flow dependent | | 2,426 | | | 3,061 | | | 2 | | | 5,489 | | | 4,450,378 | | | 4,455,867 | | | 0 | |
| Private bank | | 6,582 | | | 2,049 | | | 1,544 | | | 10,175 | | | 3,479,044 | | | 3,489,219 | | | 365 | |
| Balance sheet dependent | | 2,731 | | | 0 | | | 0 | | | 2,731 | | | 1,294,573 | | | 1,297,304 | | | 0 | |
| Premium wine | | 8,435 | | | 3,170 | | | 0 | | | 11,605 | | | 1,051,907 | | | 1,063,512 | | | 0 | |
| Other | | 17 | | | 0 | | | 0 | | | 17 | | | 890,104 | | | 890,121 | | | 0 | |
| Total loans (1) | | $ | 137,375 | | | $ | 38,224 | | | $ | 15,988 | | | $ | 191,587 | | | $ | 33,136,117 | | | $ | 33,327,704 | | | $ | 3,515 | |
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis in accordance with the previous methodology.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Nonaccrual Loans
The following table summarizes our nonaccrual loans with no allowance for credit loss at December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Nonaccrual Loans | | Nonaccrual Loans with no Allowance for Credit Loss | | Nonaccrual Loans | | Nonaccrual Loans with no Allowance for Credit Loss |
| Global fund banking | | $ | 11 | | | $ | 11 | | | $ | 0 | | | $ | 0 | |
| Investor dependent: | | | | | | | | |
| Early stage | | 18,340 | | | 3 | | | 11,093 | | | 460 | |
| Mid stage | | 4,056 | | | 3,159 | | | 17,330 | | | 274 | |
| Later stage | | 28,657 | | | 118 | | | 6,296 | | | 0 | |
| Total investor dependent | | 51,053 | | | 3,280 | | | 34,719 | | | 734 | |
| Cash flow dependent: | | | | | | | | |
| Sponsor led buyout | | 39,996 | | | 0 | | | 44,585 | | | 0 | |
| Other | | 6,004 | | | 1,138 | | | 17,681 | | | 2,782 | |
| Total cash flow dependent | | 46,000 | | | 1,138 | | | 62,266 | | | 2,782 | |
| Private bank | | 6,152 | | | 2,393 | | | 5,480 | | | 3,714 | |
| Balance sheet dependent | | 0 | | | 0 | | | 0 | | | 0 | |
| Premium wine | | 998 | | | 998 | | | 204 | | | 0 | |
| Other | | 30 | | | 30 | | | 0 | | | 0 | |
| SBA loans | | 0 | | | 0 | | | 0 | | | 0 | |
| Total nonaccrual loans (1) | | $ | 104,244 | | | $ | 7,850 | | | $ | 102,669 | | | $ | 7,230 | |
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis in accordance with the previous methodology.
Troubled Debt Restructurings
As of December 31, 20172020, we had 2217 TDRs with a total carrying value of $147.8$61.1 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. This compares to 20 TDRs with a total carrying value of $96.1 million as of December 31, 2016. There were 0 unfunded commitments available for funding of $0.6 million to the clients associated with these TDRs as of December 31, 2017. 2020.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our loans modified in TDRs, broken out by portfoliorisk-based segment, and class of financing receivables at December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | |
| (Dollars in thousands) | | December 31, 2020 | | December 31, 2019 |
| Loans modified in TDRs: | | | | |
| Global fund banking | | $ | 0 | | | $ | 0 | |
| Investor dependent | | | | |
| Early stage | | 6,705 | | | 9,471 | |
| Mid stage | | 4,050 | | | 5,189 | |
| Later stage | | 24,896 | | | 23,318 | |
| Total investor dependent | | 35,651 | | | 37,978 | |
| Cash flow dependent | | | | |
| Sponsor led buyout | | 21,529 | | | 55,443 | |
| Other | | 1,237 | | | 0 | |
| Total cash flow dependent | | 22,766 | | | 55,443 | |
| Private bank | | 0 | | | 2,104 | |
| Balance sheet dependent | | 0 | | | 0 | |
| Premium wine | | 2,661 | | | 13,457 | |
| Other | | 0 | | | 0 | |
| SBA loans | | 0 | | | 0 | |
| Total loans modified in TDRs (1) | | $ | 61,078 | | | $ | 108,982 | |
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Loans modified in TDRs: | | | | |
| Commercial loans: | | | | |
| Software/internet | | $ | 73,455 |
| | $ | 52,646 |
|
| Hardware | | 51,132 |
| | 14,870 |
|
| Private equity/venture capital | | 350 |
| | — |
|
| Life science/healthcare | | 19,235 |
| | 24,176 |
|
| Premium wine | | 3,198 |
| | 3,194 |
|
| Other | | — |
| | 387 |
|
| Total commercial loans | | 147,370 |
| | 95,273 |
|
| Consumer loans: | | | | |
| Other consumer loans | | 423 |
| | 786 |
|
| Total loans modified in TDRs | | $ | 147,793 |
| | $ | 96,059 |
|
(1)As of December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis in accordance with the previous methodology.
The following table summarizes the recorded investment in loans modified in TDRs, broken out by portfoliorisk-based segment, and class of financing receivable, for modifications made during 2017, 20162020, 2019 and 2015:2018:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Loans modified in TDRs during the period: | | | | | | |
| Commercial loans: | | | | | | |
| Software/internet | | $ | 42,184 |
| | $ | 23,574 |
| | $ | 56,790 |
|
| Hardware | | 51,132 |
| | 14,870 |
| | 286 |
|
| Private equity/venture capital | | 350 |
| | — |
| | — |
|
| Life science/healthcare | | — |
| | 1,638 |
| | 51,878 |
|
| Premium wine | | 177 |
| | 677 |
| | 898 |
|
| Other | | — |
| | — |
| | 519 |
|
| Total commercial loans | | 93,843 |
| | 40,759 |
| | 110,371 |
|
| Consumer loans: | | | | | | |
| Other consumer loans | | — |
| | 786 |
| | — |
|
| Total loans modified in TDRs during the period (1) | | $ | 93,843 |
| | $ | 41,545 |
| | $ | 110,371 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Loans modified in TDRs during the period: | | | | | | |
| Global fund banking | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Investor dependent | | | | | | |
| Early stage | | 6,112 | | | 9,471 | | | 660 | |
| Mid stage | | 897 | | | 3,445 | | | 6,657 | |
| Later stage | | 24,896 | | | 16,293 | | | 21,051 | |
| Total investor dependent | | 31,905 | | | 29,209 | | | 28,368 | |
| Cash flow dependent | | | | | | |
| Sponsor led buyout | | 21,529 | | | 48,153 | | | 0 | |
| Other | | 1,237 | | | 0 | | | 12,386 | |
| Total cash flow dependent | | 22,766 | | | 48,153 | | | 12,386 | |
| Private bank | | 0 | | | 1,792 | | | 320 | |
| Balance sheet dependent | | 0 | | | 0 | | | 0 | |
| Premium wine | | 998 | | | 11,017 | | | 0 | |
| Other | | 0 | | | 0 | | | 0 | |
| SBA loans | | 0 | | | 0 | | | 0 | |
| Total loans modified in TDRs during the period (1) (2) | | $ | 55,669 | | | $ | 90,171 | | | $ | 41,074 | |
| |
(1) | During 2017, we had $3.0 million of partial charge-offs on loans classified as TDRs. We had $3.6 million of partial charge-offs in 2016 and $23.5 million of partial charge-offs in 2015.
SVB FINANCIAL GROUP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (1)For the year ended December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis in accordance with the previous methodology. (2)There were $31.1 million, $11.3 million and $4.6 million of partial charge-offs during 2020, 2019 and 2018, respectively.
|
During 2017, $93.52020, $54.8 million of new TDRs were modified through payment deferrals granted to our clients and $0.3$0.9 million were modified through partial forgiveness of principal. During 2016 and 2015, all2019, $86.9 million of new TDRs were modified through payment deferrals granted to our clients.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The related allowance for loan losses for the majorityprincipal. During 2018, all new TDRs of $41.1 million were modified through payment deferrals granted to our TDRs is determined on an individual basis by comparing the carrying value of the loan to the present value of the estimated future cash flows, discounted at the pre-modification contractual interest rate. For certain TDRs, the related allowance for loan losses is determined based on the fair value of the collateral if the loan is collateral dependent.clients.
The following table summarizes the recorded investment in loans modified in TDRs within the previous 12 months that subsequently defaulted during their respective periods, broken out by portfolio segment2020, 2019 and class of financing receivable, during 2017, 2016 and 2015:2018:
|
| | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 (1) | | 2016 | | 2015 |
| TDRs modified within the previous 12 months that defaulted during the period: | | | | | | |
| Commercial loans: | | | | | | |
| Software/internet | | $ | — |
| | $ | — |
| | $ | 16,804 |
|
| Hardware | | — |
| | 134 |
| | 286 |
|
| Premium wine | | — |
| | 491 |
| | — |
|
| Life science/healthcare | | — |
| | — |
| | 943 |
|
| Total commercial loans | | — |
| | 625 |
| | 18,033 |
|
| Consumer loans: | | | | | | |
| Other consumer loans | | — |
| | 786 |
| | — |
|
| Total TDRs modified within the previous 12 months that defaulted in the period | | $ | — |
| | $ | 1,411 |
| | $ | 18,033 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| TDRs modified within the previous 12 months that defaulted during the period: | | | | | | |
| Global fund banking | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Investor dependent | | | | | | |
| Early stage | | 0 | | | 0 | | | 0 | |
| Mid stage | | 0 | | | 0 | | | 0 | |
| Later stage | | 0 | | | 10,639 | | | 0 | |
| Total investor dependent | | 0 | | | 10,639 | | | 0 | |
| Cash flow dependent | | | | | | |
| Sponsor led buyout | | 0 | | | 37,294 | | | 0 |
| Other | | 487 | | | 0 | | | 0 | |
| Total cash flow dependent | | 487 | | | 37,294 | | | 0 | |
| Private bank | | 0 | | | 0 | | | 0 | |
| Balance sheet dependent | | 0 | | | 0 | | | 0 | |
| Premium wine | | 998 | | | 0 | | | 0 | |
| Other | | 0 | | | 0 | | | 0 | |
| SBA loans | | 0 | | | 0 | | | 0 | |
| Total TDRs modified within the previous 12 months that defaulted in the period (1) | | $ | 1,485 | | | $ | 47,933 | | | $ | 0 | |
| |
(1) | (1)For the year ended December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis in accordance with the previous methodology.
There were no loans modified in TDRs within the previous 12 months that subsequently defaulted during 2017.
|
Charge-offs and defaults on previously restructured loans are evaluated to determine the impact to the allowance for loancredit losses for loans, if any. The evaluation of these defaults may impact the assumptions used in calculating the reserve on other TDRs and impairednonaccrual loans as well as management’s overall outlook of macroeconomic factors that affect the reserve on the loan portfolio as a whole. After evaluating the charge-offs and defaults experienced on our TDRs we determined that no change to our reserving methodology for TDRs was necessary to determine the allowance for loancredit losses for loans as of December 31, 2017.2020.
Allowance for Credit Losses: Unfunded Credit Commitments | |
10.
| Premises and Equipment
|
Premises and equipment at We maintain a separate allowance for credit losses for unfunded credit commitments that is determined using a methodology that is inherently similar to the methodology used for calculating the allowance for credit losses for loans. At December 31, 2017 and 2016 consisted of2020, our ACL estimates utilized the following:improved Moody's economic forecasts from December 2020 as mentioned above.
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Computer software | | $ | 203,359 |
| | $ | 189,867 |
|
| Computer hardware | | 63,881 |
| | 56,215 |
|
| Leasehold improvements | | 89,225 |
| | 70,909 |
|
| Furniture and equipment | | 38,146 |
| | 31,886 |
|
| Total | | 394,611 |
| | 348,877 |
|
| Accumulated depreciation and amortization | | (265,929 | ) | | (228,194 | ) |
| Premises and equipment, net | | $ | 128,682 |
| | $ | 120,683 |
|
Depreciation and amortization expense for premises and equipment was $38.0 million, $33.9 million and $28.3 million in 2017, 2016 and 2015, respectively.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the activity relating to our allowance for credit losses for unfunded credit commitments for 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Allowance for credit losses: unfunded credit commitments, beginning balance | | $ | 67,656 | | | $ | 55,183 | | | $ | 51,770 | |
| Impact of adopting ASC 326 | | 22,826 | | | 0 | | | 0 | |
| Provision for unfunded credit commitments | | 30,066 | | | 12,233 | | | 3,578 | |
| Foreign currency translation adjustments | | 248 | | | 240 | | | (165) | |
| Allowance for credit losses: unfunded credit commitments, ending balance (1) | | $ | 120,796 | | | $ | 67,656 | | | $ | 55,183 | |
(1)The “allowance for credit losses: unfunded credit commitments” is included as a component of “other liabilities” on our consolidated balance sheets. See Note 21—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” for additional disclosures related to our commitments to extend credit.
Credit Quality Disclosures Superseded by Recently Adopted Accounting Standards
The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by our previous portfolio segments and classes of financing receivable for the year ended December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Impaired loans for
which there is a related allowance for loan losses | | Impaired loans for
which there is no related allowance for loan losses | | Total carrying value of impaired loans | | Total unpaid principal of impaired loans |
| December 31, 2019: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 64,100 | | | $ | 31,472 | | | $ | 95,572 | | | $ | 109,736 | |
| Hardware | | 2,143 | | | 3,315 | | | 5,458 | | | 10,049 | |
| Private equity/venture capital | | 0 | | | 0 | | | 0 | | | 0 | |
| Life science/healthcare | | 25,941 | | | 5,671 | | | 31,612 | | | 70,600 | |
| Premium wine | | 204 | | | 11,718 | | | 11,922 | | | 12,010 | |
| Other | | 1,284 | | | 1,681 | | | 2,965 | | | 3,114 | |
| Total commercial loans | | 93,672 | | | 53,857 | | | 147,529 | | | 205,509 | |
| Consumer loans: | | | | | | | | |
| Real estate secured loans | | 1,766 | | | 3,714 | | | 5,480 | | | 8,527 | |
| | | | | | | | |
| Total consumer loans | | 1,766 | | | 3,714 | | | 5,480 | | | 8,527 | |
| Total | | $ | 95,438 | | | $ | 57,571 | | | $ | 153,009 | | | $ | 214,036 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes our average impaired loans and interest income recognized on impaired loans, broken out by our previous portfolio segments and classes of financing receivable during 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended December 31,
(Dollars in thousands) | | Average impaired loans | | Interest income recognized on impaired loans |
| 2019 | | 2018 | | 2019 | | 2018 |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 88,628 | | | $ | 112,493 | | | $ | 2,813 | | | $ | 1,513 | |
| Hardware | | 12,500 | | | 28,540 | | | 464 | | | 312 | |
| Private equity/venture capital | | 2,264 | | | 1,327 | | | 0 | | | 0 | |
| Life science/healthcare | | 44,827 | | | 30,144 | | | 919 | | | 756 | |
| Premium wine | | 2,912 | | | 2,605 | | | 311 | | | 68 | |
| Other | | 2,050 | | | 171 | | | 21 | | | 0 | |
| Total commercial loans | | 153,181 | | | 175,280 | | | 4,528 | | | 2,649 | |
| Consumer loans: | | | | | | | | |
| Real estate secured loans | | 7,159 | | | 4,028 | | | 54 | | | 15 | |
| Other consumer loans | | 7 | | | 358 | | | 0 | | | 0 | |
| Total consumer loans | | 7,166 | | | 4,386 | | | 54 | | | 15 | |
| Total average impaired loans | | $ | 160,347 | | | $ | 179,666 | | | $ | 4,582 | | | $ | 2,664 | |
The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of December 31, 2019, broken out by our previous portfolio segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| | Individually Evaluated for Impairment | | Collectively Evaluated for
Impairment |
| (Dollars in thousands) | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans |
| Commercial loans: | | | | | | | | |
| Software/internet | | $ | 26,613 | | | $ | 95,572 | | | $ | 73,610 | | | $ | 6,103,976 | |
| Hardware | | 1,214 | | | 5,458 | | | 18,430 | | | 1,365,701 | |
| Private equity/venture capital | | 0 | | | 0 | | | 115,805 | | | 17,801,324 | |
| Life science/healthcare | | 16,414 | | | 31,612 | | | 22,831 | | | 2,336,436 | |
| Premium wine | | 204 | | | 11,922 | | | 4,944 | | | 1,076,295 | |
| Other | | 203 | | | 2,965 | | | 3,150 | | | 556,689 | |
| Total commercial loans | | 44,648 | | | 147,529 | | | 238,770 | | | 29,240,421 | |
| Total consumer loans | | 211 | | | 5,480 | | | 21,295 | | | 3,771,206 | |
| Total | | $ | 44,859 | | | $ | 153,009 | | | $ | 260,065 | | | $ | 33,011,627 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10.Premises and Equipment
Premises and equipment at December 31, 2020 and 2019 consisted of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Computer software | | $ | 296,324 | | | $ | 261,643 | |
| Computer hardware | | 91,870 | | | 82,643 | |
| Leasehold improvements | | 124,057 | | | 121,907 | |
| Furniture and equipment | | 50,036 | | | 46,300 | |
| Total | | 562,287 | | | 512,493 | |
| Accumulated depreciation and amortization | | (386,469) | | | (350,617) | |
| Premises and equipment, net | | $ | 175,818 | | | $ | 161,876 | |
Depreciation and amortization expense for premises and equipment was $52.8 million, $42.0 million and $38.1 million for the years ended 2020, 2019 and 2018, respectively.
11. Leases
We have operating leases for our corporate offices and certain equipment utilized at those properties. We are obligated under a number of noncancelable operating leases for premises and equipment that expire at various dates, through 2030, and in most instances, include options to renew or extend at market rates and terms. Such leases may provide for periodic adjustments of rentals during the term of the lease based on changes in various economic indicators.
Total recorded balances for the lease assets and liabilities are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Assets: | | | | |
| Right-of-use assets - operating leases | | $ | 209,932 | | | $ | 197,365 | |
| Liabilities: | | | | |
| Lease liabilities - operating leases | | 259,554 | | | 218,847 | |
| | | | |
| | | | |
| | | | |
The components of our lease cost and supplemental cash flow information related to leases for the year ended December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Operating lease cost | | $ | 69,249 | | | $ | 41,049 | |
| Short-term lease cost | | 1,404 | | | 1,823 | |
| Variable lease cost | | 3,692 | | | 3,477 | |
| Less: sublease income | | (2,265) | | | (4,492) | |
| Total lease expense, net | | $ | 72,080 | | | $ | 41,857 | |
| Supplemental cash flows information: | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Cash paid for operating leases | | $ | 50,194 | | | $ | 44,976 | |
| Noncash items during the period: | | | | |
| Lease obligations in exchange for obtaining right-of-use assets: | | | | |
| Operating leases | | $ | 75,244 | | | $ | 33,167 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below presents additional information related to the Company's leases as of December 31, 2020 and 2019:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| Weighted-average remaining term (in years) - operating leases | | 6.05 | | 6.29 |
| Weighted-average discount rate - operating leases (1) | | 2.38 | % | | 2.92 | % |
| | | | |
| | | | |
| | | | |
(1)The incremental borrowing rate used to calculate the lease liability was determined based on the facts and circumstances of the economic environment and the Company’s credit standing as of the effective date of ASC 842. Additionally, the total lease term and total lease payments were also considered in determining the rate. Based on these considerations the Company identified credit terms available under its existing credit lines which represent a collateralized borrowing rate that has varying credit terms that could be matched to total lease terms and total lease payments in ultimately determining the implied borrowing rate in each lease contract.
The following table presents our undiscounted future cash payments for our operating lease liabilities as of December 31, 2020:
| | | | | | | | | |
Years ended December 31,
(Dollars in thousands) | | Operating Leases | |
| 2021 | | $ | 51,547 | | |
| 2022 | | 48,847 | | |
| 2023 | | 48,190 | | |
| 2024 | | 42,418 | | |
| 2025 | | 32,080 | | |
| 2026 and thereafter | | 53,842 | | |
| Total lease payments | | $ | 276,924 | | |
| Less: imputed interest | | (17,370) | | |
| Total lease liabilities | | $ | 259,554 | | |
Lease Exits
The Company periodically reviews its lease portfolio to assess whether leased office space is adequate for its operations. Due to the ongoing impacts of COVID-19 and the continuation of the work-from-home policy, we decided to exit various locations during the three months ended December 31, 2020.
The Company exited from a portion of its corporate headquarters. In relation to this exit, net occupancy expenses were $7.6 million due to the accelerated depreciation of ROU assets and leasehold improvements, as well as additional termination costs. Premises and equipment expenses included $0.6 million related to the accelerated depreciation of furniture and fixtures. Both net occupancy and premises and equipment are included in the noninterest expense section of our consolidated statements of income.
Additionally, the Company decided to exit leases for portions of various office locations and market these spaces for sublease. When a company plans to utilize an ROU asset for less than it was initially intended, ASC 842, Leases, requires an evaluation for impairment and disclosure in accordance with ASC 360-10-45-2, Impairment or Disposal of Long-Lived Assets. Using each location as a standalone asset group, we determined impairment charges are required. Impairment charges that totaled $16.8 million are included in net occupancy expense in the consolidated statements of income and represent the present value of remaining lease obligations on the cease use dates. The related leasehold improvements, furniture and fixtures for these locations were also impaired with a loss recorded to premises and equipment, of $4.4 million, which is included in the noninterest expense section of the consolidated statements of income. This impairment charge represents the historical cost of the asset less any accumulated depreciation.
12. Goodwill and Other Intangible Assets
Goodwill
Goodwill at December 31, 2020 was $142.7 million, comprised of revenue generating synergies from our acquisition of SVB Leerink in 2019 as well as our acquisition of WRG's debt fund business in December 2020.
The changes in goodwill were as follows for the year ended December 31, 2020 and 2019:
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | |
| (Dollars in thousands) | | Goodwill |
| Beginning balance at December 31, 2018 | | $ | 0 | |
| Acquisitions | | 137,823 | |
| Ending balance at December 31, 2019 | | $ | 137,823 | |
| Acquisitions | | 4,862 | |
| Ending balance at December 31, 2020 | | $ | 142,685 | |
During 2020, we completed our annual goodwill impairment test as of September 30, 2020, as a result, we determined there was 0 impairment as of December 31, 2020. For more information on our annual impairment policies, see Note 2—“Summary of Significant Accounting Policies."
Other Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of other intangible assets as of December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| (Dollars in thousands) | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount |
| Other intangible assets: | | | | | | | | | | | | |
| Customer relationships | | $ | 42,000 | | | $ | 7,636 | | | $ | 34,364 | | | $ | 42,000 | | | $ | 3,818 | | | $ | 38,182 | |
| Other | | 36,300 | | | 9,229 | | | 27,071 | | | 18,900 | | | 7,665 | | | 11,235 | |
| Total other intangible assets, net | | $ | 78,300 | | | $ | 16,865 | | | $ | 61,435 | | | $ | 60,900 | | | $ | 11,483 | | | $ | 49,417 | |
For the year ended December 31, 2020, we recorded amortization expense of $5.4 million. Assuming no future impairments of other intangible assets or additional acquisitions or dispositions, the following table presents the Company's future expected amortization expense for other intangible assets that will continue to be amortized as of December 31, 2020:
| | | | | | | | | |
Years ended December 31,
(Dollars in thousands) | | Other
Intangible Assets | |
| 2021 | | $ | 8,217 | | |
| 2022 | | 8,141 | | |
| 2023 | | 8,141 | | |
| 2024 | | 8,141 | | |
| 2025 | | 6,900 | | |
| 2026 and thereafter | | 21,895 | | |
| Total future amortization expense | | $ | 61,435 | | |
13. Deposits
The following table presents the composition of our deposits at December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Noninterest-bearing demand | | $ | 66,519,240 | | | $ | 40,841,570 | |
| Interest-bearing checking and savings accounts | | 4,800,831 | | | 568,256 | |
| Money market | | 28,406,195 | | | 17,749,736 | |
| Money market deposits in foreign offices | | 616,570 | | | 352,437 | |
| Sweep deposits in foreign offices | | 950,510 | | | 2,057,715 | |
| Time | | 688,461 | | | 188,093 | |
| Total deposits | | $ | 101,981,807 | | | $ | 61,757,807 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Noninterest-bearing demand | | $ | 36,655,497 |
| | $ | 31,975,457 |
|
| Interest bearing checking and savings accounts | | 556,121 |
| | 375,710 |
|
| Money market | | 5,975,220 |
| | 5,331,054 |
|
| Money market deposits in foreign offices | | 111,201 |
| | 107,657 |
|
| Sweep deposits in foreign offices | | 908,890 |
| | 1,133,872 |
|
| Time | | 47,146 |
| | 56,118 |
|
| Total deposits | | $ | 44,254,075 |
| | $ | 38,979,868 |
|
The aggregate amount of time deposit accounts individually equal to or greater than $250,000 totaled $37$682 million and $43$180 million at December 31, 20172020 and 2016,2019, respectively. At December 31, 2017,2020, time deposit accounts individually equal to or greater than $250,000 totaling $37$682 million were scheduled to mature within one year.
| |
14. Short-Term Borrowings and Long-Term Debt 12.
| Short-Term Borrowings and Long-Term Debt
|
The following table represents outstanding short-term borrowings and long-term debt at December 31, 20172020 and 2016:2019:
|
| | | | | | | | | | | | | | |
| | | | | | | Carrying Value |
| (Dollars in thousands) | | Maturity | | Principal value at December 31, 2017 | | December 31,
2017 | | December 31,
2016 |
| Short-term borrowings: | | | | | | | | |
| Short-term FHLB advances | | January 2, 2018 | | $ | 700,000 |
| | $ | 700,000 |
| | $ | 500,000 |
|
| Federal funds purchased | | January 2, 2018 | | 330,000 |
| | 330,000 |
| | — |
|
| Other short-term borrowings | | (1) | | 3,730 |
| | 3,730 |
| | 12,668 |
|
| Total short-term borrowings | | | | | | $ | 1,033,730 |
| | $ | 512,668 |
|
| Long-term debt: | | | | | | | | |
| 3.50% Senior Notes | | January 29, 2025 | | $ | 350,000 |
| | $ | 347,303 |
| | $ | 346,979 |
|
| 5.375% Senior Notes | | September 15, 2020 | | 350,000 |
| | 348,189 |
| | 347,586 |
|
| 6.05% Subordinated Notes | | (2) | | — |
| | — |
| | 46,646 |
|
| 7.0% Junior Subordinated Debentures | | (3) | | — |
| | — |
| | 54,493 |
|
| Total long-term debt | | | | | | $ | 695,492 |
| | $ | 795,704 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Carrying Value |
| (Dollars in thousands) | | Maturity | | Principal value at December 31, 2020 | | December 31,
2020 | | December 31,
2019 |
| Short-term borrowings: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other short-term borrowings | | (1) | | $ | 20,553 | | | $ | 20,553 | | | $ | 17,430 | |
| Total short-term borrowings | | | | | | $ | 20,553 | | | $ | 17,430 | |
| Long-term debt: | | | | | | | | |
| 3.50% Senior Notes | | January 29, 2025 | | $ | 350,000 | | | $ | 348,348 | | | $ | 347,987 | |
| 3.125% Senior Notes | | June 5, 2030 | | 500,000 | | | 495,280 | | | 0 | |
| Total long-term debt | | | | | | $ | 843,628 | | | $ | 347,987 | |
| |
(1) | Represents cash collateral received from certain counterparties in relation to market value exposures of derivative contracts in our favor. |
| |
(2) | Our 6.05% Subordinated Notes were repaid on June 1, 2017 and the interest rate swap agreement related to this issuance was terminated upon repayment of the 6.05% Subordinated Notes. At December 31, 2016, included in the carrying value of our 6.05% Subordinated Notes were $0.8 million related to hedge accounting associated with the notes.
|
| |
(3) | On December 21, 2017, we redeemed in full the outstanding aggregate principal amount of $51.5 million of our 7.0% Junior Subordinated Debentures due October 15, 2033, relating to our 7.0% Cumulative Trust Preferred Securities issued by SVB Capital II.
|
(1)Represents cash collateral received from certain counterparties in relation to market value exposures of derivative contracts in our favor.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The aggregate annual maturities of long-term debt obligations as of December 31, 20172020 are as follows: |
| | | | |
Year ended December 31, (Dollars in thousands): | | Amount |
| 2018 | | $ | — |
|
| 2019 | | — |
|
| 2020 | | 348,189 |
|
| 2021 | | — |
|
| 2022 | | — |
|
| 2023 and thereafter | | 347,303 |
|
| Total | | $ | 695,492 |
|
| | | | | | | | |
Year ended December 31,
(Dollars in thousands) | | Amount |
| 2021 | | $ | 0 | |
| 2022 | | 0 | |
| 2023 | | 0 | |
| 2024 | | 0 | |
| 2025 | | 348,348 | |
| 2026 and thereafter | | 495,280 | |
| Total | | $ | 843,628 | |
Interest expense related to short-term borrowings and long-term debt was $36.1$25.1 million,, $37.3 $35.1 million and $34.9$46.6 million in 2017, 20162020, 2019 and 2015,2018, respectively. Interest expense is net of the hedge accounting impact from our interest rate swap agreements related to our 6.05% Subordinated Notes. The weighted average interest rate associated with our short-term borrowings was 1.39 percent as of December 31, 2017 and 0.590.80 percent as of December 31, 2016.2020 and 1.55 percent as of December 31, 2019.
3.50% Senior Notes
In January 2015, SVB Financial issued $350 million of 3.50% Senior Notes due in January 2025. We received net proceeds of approximately $346.4 million after deducting underwriting discounts and commissions and issuance costs. The balance of our 3.50% Senior Notes at December 31, 20172020 was $347.3$348.3 million, which is reflective of $3.0$1.6 million of debt issuance costs and a $0.3$0.1 million discount.
5.375%3.125% Senior Notes
In September 2010, SVB FinancialOn June 5, 2020, the Company issued $350$500.0 million of 5.375%3.125% Senior Notes due in September 2020.June 2030 ("3.125% Senior Notes"). The 3.125% Senior Notes may be redeemed by us, at our option, at any time prior to March 5, 2030, at a redemption price equal to the full aggregate principal amount plus a “make-whole” premium payment. We received net proceeds from this offering of $345approximately $495.4 million after deducting underwriting discounts and commissions and other expenses. We used approximately $250issuance costs. The balance of our 3.125% Senior Notes at December 31, 2020 was $495.3 million, which is reflective of the net proceeds from the sale of the notes to meet obligations due on our 3.875% Convertible Notes, which matured in April 2011. The remaining net proceeds were used for general corporate purposes, including working capital.
6.05% Subordinated Notes
In May 2007, the Bank issued 6.05% Subordinated Notes, due in June 2017, in an aggregate principal amount of $250 million ("6.05% Subordinated Notes"). Concurrent with the issuance of the 6.05% Subordinated Notes, we entered into a fixed-to-variable interest rate swap agreement. See Note 13—“Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details. Our 6.05% Subordinated Notes, issued by the Bank, were repaid on June 1, 2017. The interest rate swap agreement relating to this issuance was terminated upon repayment of the notes.
7.0% Junior Subordinated Debentures
In October 2003, SVB Financial issued $50 million in 7.0% Junior Subordinated Debentures to a special-purpose trust, SVB Capital II. Distributions to SVB Capital II are cumulative and are payable quarterly at a fixed rate of 7.0% per annum of the face value of the junior subordinated debentures. Distributions for 2017 were $3.3 million and $3.5 million for each of years 2016 and 2015. The junior subordinated debentures were mandatorily redeemable upon maturity in October 2033, or could be redeemed prior to maturity in whole or in part, at our option, at any time. Issuance costs of $2.2 million related to the junior subordinated debentures were deferred and were being amortized over the period until redemption. On December 21, 2017, we redeemed in full the outstanding aggregate principal amount of $51.5$4.3 million of our 7.0% Junior Subordinated Debentures due October 15, 2033, relating to our 7.0% Cumulative Trust Preferred Securities issued by SVB Capital II and the remaining deferreddebt issuance costs were recognized upon redemption.and a $0.4 million discount.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Short-term Borrowings
We have certain facilities in place to enable us to access short-term borrowings on a secured (using loans and available-for-sale securities as collateral) and an unsecured basis. TheseOur secured facilities include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of December 31, 2017, we borrowed $330 million against our uncommitted federal
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
funds lines. We also pledge securitiescollateral pledged to the FHLB of San Francisco and the discount window at the FRB. The fair valueFRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of December 31, 2020, collateral pledged to the FHLB of San Francisco (comprisedwas comprised primarily of fixed income investment securities and loans and U.S. Treasury securities) at December 31, 2017 totaled $3.4had a carrying value of $6.8 billion, of which $2.7$5.8 billion was available to support additional borrowings. The fair valueAs of December 31, 2020, collateral pledged atto the discount window ofat the FRB (comprised primarilywas comprised of U.S. Treasuryfixed income investment securities and U.S. agency debentures) at December 31, 2017 totaled $1.0had a carrying value of $0.9 billion,, all of which was unused and available to support additional borrowings. Our total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.9 billion at December 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $4.0 billion at December 31, 2020.
On February 2, 2021, the Company issued $500 million of Senior Notes. The notes. Refer to Note 28—“Subsequent Events” for additional information. | |
13.15.Derivative Financial Instruments | Derivative Financial Instruments
|
We primarily use derivative financial instruments to manage interest rate risk and currency exchange rate risk and to assist customers with their risk management objectives.objectives, which may include currency exchange rate risks and interest rate risks. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.
Interest Rate Risk
Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk foron our 6.05% Subordinated Notes,variable-interest rate loan portfolio, we enteredenter into a fixed-for-floating interest rate swap agreement atcontracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the time of debt issuance based upon LIBOR with matched-terms. Net cash benefits associated with ourmarket interest rates. We designate these interest rate swap are recordedcontracts as a reduction in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow methodhedges that qualify for hedge accounting under ASC 815, Derivatives and adjusted for credit valuation associated with counterparty risk. ChangesHedging ("ASC 815"), and record them in other assets and other liabilities. For qualifying cash flow hedges, changes in the fair value of the interest rate swapsderivative are reflectedrecorded in eitheraccumulated other assets (for swapscomprehensive income and recognized in an asset position) or other liabilities (for swaps in a liability position). On June 1, 2017, our interest rate swap was terminated upon repaymentearnings as the hedged item affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the 6.05% Subordinated Notes.hedged item in the line item "Loans" as part of interest income, a component of consolidated net income.
We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in accumulated other comprehensive income are reclassified into earnings in the line item "loans" as part of interest income, a component of consolidated net income. As of March 31, 2020, all derivatives previously classified as hedges with notional balances totaling $5.0 billion and a net asset fair value of $227.5 million were terminated. As of December 31, 2020, the total unrealized gains on terminated cash flow hedges remaining in AOCI is $179.0 million, or $129.3 million net of tax. The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gains will be reclassified into earnings is approximately four years.
Currency Exchange Risk
We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are recorded in the line item "Other""other" as part of noninterest income, a component of consolidated net income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded in the line item "Other""other" as part of noninterest income, a component of consolidated net income.
Other Derivative Instruments
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.Policies.”
Counterparty Credit Risk
We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.
The total notional or contractual amounts and fair value of our derivative financial instruments at December 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 | | December 31, 2019 |
| | Notional or
Contractual
Amount | | Fair Value | | Notional or
Contractual
Amount | | Fair Value |
| (Dollars in thousands) | | | Derivative Assets (1) | | Derivative Liabilities (1) | | | Derivative Assets (1) | | Derivative Liabilities (1) |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Interest rate risks: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 0 | | | $ | 0 | | | $ | — | | | $ | 1,915,000 | | | $ | 22,676 | | | $ | — | |
| Interest rate swaps | | 0 | | | — | | | 0 | | | 3,085,000 | | | — | | | 25,623 | |
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
| Currency exchange risks: | | | | | | | | | | | | |
| Foreign exchange forwards | | 68,381 | | | 306 | | | — | | | 0 | | | 0 | | | — | |
| Foreign exchange forwards | | 566,988 | | | — | | | 20,566 | | | 300,250 | | | — | | | 2,154 | |
| Other derivative instruments: | | | | | | | | | | | | |
| Equity warrant assets | | 253,153 | | | 203,438 | | | — | | | 225,893 | | | 165,473 | | | — | |
| Client foreign exchange forwards | | 8,025,973 | | | 214,969 | | | — | | | 4,661,517 | | | 114,546 | | | — | |
| Client foreign exchange forwards | | 7,490,723 | | | — | | | 188,565 | | | 4,326,059 | | | — | | | 94,745 | |
| Client foreign currency options | | 97,529 | | | 1,702 | | | — | | | 154,985 | | | 1,308 | | | — | |
| Client foreign currency options | | 97,522 | | | — | | | 1,702 | | | 154,985 | | | — | | | 1,308 | |
| Client interest rate derivatives | | 1,082,265 | | | 67,854 | | | — | | | 1,275,190 | | | 28,811 | | | — | |
| Client interest rate derivatives (2) | | 1,250,975 | | | — | | | 26,646 | | | 1,372,914 | | | — | | | 14,154 | |
| Total derivatives not designated as hedging instruments | | | | 488,269 | | | 237,479 | | | | | 310,138 | | | 112,361 | |
| Total derivatives | | | | $ | 488,269 | | | $ | 237,479 | | | | | $ | 332,814 | | | $ | 137,984 | |
(1)Derivative assets and liabilities are included in "accrued interest receivable and other assets" and "other liabilities", respectively, on our consolidated balance sheets.
(2)The amount reported reflects reductions of approximately $45.4 million and $17.4 million of derivative liabilities at December 31, 2020 and 2019, respectively, reflecting variation margin treated as settlement of the related derivative fair values for legal and accounting purposes as required by central clearing houses.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The total notional or contractual amounts, fair value, collateral and net exposure of our derivative financial instruments at December 31, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2017 | | December 31, 2016 |
| (Dollars in thousands) | | Balance Sheet Location | | Notional or Contractual Amount | | Fair Value | | Collateral (1) | | Net Exposure (2) | | Notional or Contractual Amount | | Fair Value | | Collateral (1) | | Net Exposure (2) |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
Interest rate risks: | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | Other assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 45,964 |
| | $ | 810 |
| | $ | 89 |
| | $ | 721 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
Currency exchange risks: | | | | | | | | | | | | | | | | | | |
| Foreign exchange forwards | | Other assets | | 50,889 |
| | 414 |
| | 39 |
| | 375 |
| | 219,950 |
| | 3,057 |
| | — |
| | 3,057 |
|
| Foreign exchange forwards | | Other liabilities | | 425,055 |
| | (5,201 | ) | | — |
| | (5,201 | ) | | 54,338 |
| | (968 | ) | | — |
| | (968 | ) |
| Net exposure | | | | | | (4,787 | ) | | 39 |
| | (4,826 | ) | | | | 2,089 |
| | — |
| | 2,089 |
|
Other derivative instruments: | | | | | | | | | | | | | | | | | | |
| Equity warrant assets | | Other assets | | 211,253 |
| | 123,763 |
| | — |
| | 123,763 |
| | 211,434 |
| | 131,123 |
| | — |
| | 131,123 |
|
| Other derivatives: | | | | | | | | | | | | | | | | | | |
| Client foreign exchange forwards | | Other assets | | 2,203,643 |
| | 95,035 |
| | 3,691 |
| | 91,344 |
| | 1,251,308 |
| | 54,587 |
| | 12,579 |
| | 42,008 |
|
| Client foreign exchange forwards | | Other liabilities | | 2,092,207 |
| | (90,253 | ) | | — |
| | (90,253 | ) | | 1,068,991 |
| | (43,317 | ) | | — |
| | (43,317 | ) |
| Client foreign currency options | | Other assets | | 102,678 |
| | 1,187 |
| | — |
| | 1,187 |
| | 775,000 |
| | 10,383 |
| | — |
| | 10,383 |
|
| Client foreign currency options | | Other liabilities | | 102,678 |
| | (1,187 | ) | | — |
| | (1,187 | ) | | 775,000 |
| | (10,383 | ) | | — |
| | (10,383 | ) |
| Client interest rate derivatives | | Other assets | | 726,984 |
| | 11,753 |
| | — |
| | 11,753 |
| | 583,511 |
| | 10,110 |
| | — |
| | 10,110 |
|
| Client interest rate derivatives | | Other liabilities | | 782,586 |
| | (11,940 | ) | | — |
| | (11,940 | ) | | 627,639 |
| | (9,770 | ) | | — |
| | (9,770 | ) |
| Net exposure | | | | | | 4,595 |
| | 3,691 |
| | 904 |
| | | | 11,610 |
| | 12,579 |
| | (969 | ) |
| Net | | | | | | $ | 123,571 |
| | $ | 3,730 |
| | $ | 119,841 |
| | | | $ | 145,632 |
| | $ | 12,668 |
| | $ | 132,964 |
|
| |
(1) | Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets. |
| |
(2) | Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of December 31, 2017 remain at investment grade or higher and there were no material changes in their credit ratings for the year ended December 31, 2017. |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of our derivative activity and the related impact on our consolidated statements of income for 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year ended December 31, |
| (Dollars in thousands) | | Statement of income location | | 2020 | | 2019 | | 2018 |
| Derivatives designated as hedging instruments: | | | | | | | | |
Interest rate risks: | | | | | | | | |
| Amounts reclassified from accumulated other comprehensive income into income | | Interest income—loans | | $ | 49,928 | | | $ | (5,358) | | | $ | 0 | |
| | | | | | | | |
| | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | |
Currency exchange risks: | | | | | | | | |
| Gains (losses) on revaluations of internal foreign currency instruments, net | | Other noninterest income | | $ | 39,247 | | | $ | 1,444 | | | $ | (373) | |
| (Losses) gains on internal foreign exchange forward contracts, net | | Other noninterest income | | (39,716) | | | (1,853) | | | 52 | |
| Net losses associated with internal currency risk | | | | $ | (469) | | | $ | (409) | | | $ | (321) | |
Other derivative instruments: | | | | | | | | |
| Gains (losses) on revaluations of client foreign currency instruments, net | | Other noninterest income | | $ | 2,560 | | | $ | (15,146) | | | $ | 4,998 | |
| (Losses) gains on client foreign exchange forward contracts, net | | Other noninterest income | | (3,017) | | | 15,900 | | | (4,011) | |
| Net (losses) gains associated with client currency risk | | | | $ | (457) | | | $ | 754 | | | $ | 987 | |
| Net gains on equity warrant assets | | Gains on equity warrant assets, net | | $ | 237,428 | | | $ | 138,078 | | | $ | 89,142 | |
| Net gains (losses) on other derivatives | | Other noninterest income | | $ | 28,056 | | | $ | (1,190) | | | $ | (179) | |
|
| | | | | | | | | | | | | | |
| | | | | Year ended December 31, |
| (Dollars in thousands) | | Statement of income location | | 2017 | | 2016 | | 2015 |
| Derivatives designated as hedging instruments: | | | | | | | | |
Interest rate risks: | | | | | | | | |
| Net cash benefit associated with interest rate swaps | | Interest expense—borrowings | | $ | 1,053 |
| | $ | 2,341 |
| | $ | 2,526 |
|
| Changes in fair value of interest rate swaps | | Other noninterest income | | (7 | ) | | (35 | ) | | (20 | ) |
| Net gains associated with interest rate risk derivatives | | | | $ | 1,046 |
| | $ | 2,306 |
| | $ | 2,506 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | |
Currency exchange risks: | | | | | | | | |
| Gains (losses) on revaluations of internal foreign currency instruments, net | | Other noninterest income | | $ | 33,161 |
| | $ | (16,676 | ) | | $ | (12,735 | ) |
| (Losses) gains on internal foreign exchange forward contracts, net | | Other noninterest income | | (32,286 | ) | | 16,136 |
| | 12,377 |
|
| Net gains (losses) associated with internal currency risk | | | | $ | 875 |
| | $ | (540 | ) | | $ | (358 | ) |
Other derivative instruments: | | | | | | | | |
| Gains on revaluations of client foreign currency instruments, net | | Other noninterest income | | $ | 10,882 |
| | $ | 4,215 |
| | $ | 115 |
|
| (Losses) gains on client foreign exchange forward contracts, net | | Other noninterest income | | (9,969 | ) | | (5,674 | ) | | 694 |
|
| Net gains (losses) associated with client currency risk | | | | $ | 913 |
| | $ | (1,459 | ) | | $ | 809 |
|
| Net gains on equity warrant assets | | Gains on equity warrant assets, net | | $ | 54,555 |
| | $ | 37,892 |
| | $ | 70,963 |
|
| Net (losses) gains on other derivatives | | Other noninterest income | | $ | (564 | ) | | $ | 262 |
| | $ | (209 | ) |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Balance Sheet Offsetting
Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract. The following table summarizes our assets subject to enforceable master netting arrangements as of December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Gross Amounts of Recognized Assets | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements | | Net Amount |
| | | | Financial Instruments | | Cash Collateral Received (1) | |
| December 31, 2020: | | | | | | | | | | | | |
| Derivative Assets: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Foreign exchange forwards | | 215,275 | | | 0 | | | 215,275 | | | (75,983) | | | (20,550) | | | 118,742 | |
| Foreign currency options | | 1,702 | | | 0 | | | 1,702 | | | (1,045) | | | (3) | | | 654 | |
| Client interest rate derivatives | | 67,854 | | | 0 | | | 67,854 | | | (67,854) | | | 0 | | | 0 | |
| Total derivative assets: | | 284,831 | | | 0 | | | 284,831 | | | (144,882) | | | (20,553) | | | 119,396 | |
| Reverse repurchase, securities borrowing, and similar arrangements | | 226,847 | | | 0 | | | 226,847 | | | (226,847) | | | 0 | | | 0 | |
| Total | | $ | 511,678 | | | $ | 0 | | | $ | 511,678 | | | $ | (371,729) | | | $ | (20,553) | | | $ | 119,396 | |
| December 31, 2019: | | | | | | | | | | | | |
| Derivative Assets: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 22,676 | | | $ | 0 | | | $ | 22,676 | | | $ | (22,598) | | | $ | 0 | | | $ | 78 | |
| Foreign exchange forwards | | 114,546 | | | 0 | | | 114,546 | | | (36,855) | | | (17,095) | | | 60,596 | |
| Foreign currency options | | 1,308 | | | 0 | | | 1,308 | | | (848) | | | (335) | | | 125 | |
| Client interest rate derivatives | | 28,811 | | | 0 | | | 28,811 | | | (28,811) | | | 0 | | | 0 | |
| Total derivative assets: | | 167,341 | | | 0 | | | 167,341 | | | (89,112) | | | (17,430) | | | 60,799 | |
| Reverse repurchase, securities borrowing, and similar arrangements | | 289,340 | | | 0 | | | 289,340 | | | (289,340) | | | 0 | | | 0 | |
| Total | | $ | 456,681 | | | $ | 0 | | | $ | 456,681 | | | $ | (378,452) | | | $ | (17,430) | | | $ | 60,799 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Gross Amounts of Recognized Assets | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements | | Net Amount |
| | | | | Financial Instruments | | Cash Collateral Received | |
| December 31, 2017: | | | | | | | | | | | | |
| Derivative Assets: | | | | | | | | | | | | |
| Interest rate swaps | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Foreign exchange forwards | | 95,449 |
| | — |
| | 95,449 |
| | (14,456 | ) | | (3,730 | ) | | 77,263 |
|
| Foreign currency options | | 1,187 |
| | — |
| | 1,187 |
| | (557 | ) | | — |
| | 630 |
|
| Client interest rate derivatives | | 11,753 |
| | — |
| | 11,753 |
| | (11,741 | ) | | — |
| | 12 |
|
| Total derivative assets: | | 108,389 |
| | — |
| | 108,389 |
| | (26,754 | ) | | (3,730 | ) | | 77,905 |
|
| Reverse repurchase, securities borrowing, and similar arrangements | | 247,876 |
| | — |
| | 247,876 |
| | (247,876 | ) | | — |
| | — |
|
| Total | | $ | 356,265 |
| | $ | — |
| | $ | 356,265 |
| | $ | (274,630 | ) | | $ | (3,730 | ) | | $ | 77,905 |
|
| December 31, 2016: | | | | | | | | | | | | |
| Derivative Assets: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 810 |
| | $ | — |
| | $ | 810 |
| | $ | (721 | ) | | $ | (89 | ) | | $ | — |
|
| Foreign exchange forwards | | 57,644 |
| | — |
| | 57,644 |
| | (22,738 | ) | | (12,579 | ) | | 22,327 |
|
| Foreign currency options | | 10,383 |
| | — |
| | 10,383 |
| | (8,806 | ) | | — |
| | 1,577 |
|
| Client interest rate derivatives | | 10,110 |
| | — |
| | 10,110 |
| | (10,091 | ) | | — |
| | 19 |
|
| Total derivative assets: | | 78,947 |
| | — |
| | 78,947 |
| | (42,356 | ) | | (12,668 | ) | | 23,923 |
|
| Reverse repurchase, securities borrowing, and similar arrangements | | 64,028 |
| | — |
| | 64,028 |
| | (64,028 | ) | | — |
| | — |
|
| Total | | $ | 142,975 |
| | $ | — |
| | $ | 142,975 |
| | $ | (106,384 | ) | | $ | (12,668 | ) | | $ | 23,923 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(1)Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets.
The following table summarizes our liabilities subject to enforceable master netting arrangements as of December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Gross Amounts of Recognized Liabilities | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements | | Net Amount |
| | | | Financial Instruments | | Cash Collateral Pledged (1) | |
| December 31, 2020: | | | | | | | | | | | | |
| Derivative Liabilities: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Foreign exchange forwards | | 209,131 | | | 0 | | | 209,131 | | | (84,547) | | | (45,367) | | | 79,217 | |
| Foreign currency options | | 1,702 | | | 0 | | | 1,702 | | | (645) | | | (8) | | | 1,049 | |
| Client interest rate derivatives | | 26,646 | | | 0 | | | 26,646 | | | 0 | | | (26,100) | | | 546 | |
| Total derivative liabilities: | | 237,479 | | | 0 | | | 237,479 | | | (85,192) | | | (71,475) | | | 80,812 | |
| Repurchase, securities lending, and similar arrangements | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 237,479 | | | $ | 0 | | | $ | 237,479 | | | $ | (85,192) | | | $ | (71,475) | | | $ | 80,812 | |
| December 31, 2019: | | | | | | | | | | | | |
| Derivative Liabilities: | | | | | | | | | | | | |
| Interest rate swaps | | $ | 25,623 | | | $ | 0 | | | $ | 25,623 | | | $ | (22,676) | | | $ | (2,947) | | | $ | 0 | |
| Foreign exchange forwards | | 96,899 | | | 0 | | | 96,899 | | | (33,314) | | | (22,030) | | | 41,555 | |
| Foreign currency options | | 1,308 | | | 0 | | | 1,308 | | | (531) | | | 0 | | | 777 | |
| Client interest rate derivatives | | 14,154 | | | 0 | | | 14,154 | | | 0 | | | (13,936) | | | 218 | |
| Total derivative liabilities: | | 137,984 | | | 0 | | | 137,984 | | | (56,521) | | | (38,913) | | | 42,550 | |
| Repurchase, securities lending, and similar arrangements | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total | | $ | 137,984 | | | $ | 0 | | | $ | 137,984 | | | $ | (56,521) | | | $ | (38,913) | | | $ | 42,550 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Gross Amounts of Recognized Liabilities | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements | | Net Amount |
| | | | | Financial Instruments | | Cash Collateral Pledged | |
| December 31, 2017: | | | | | | | | | | | | |
| Derivative Liabilities: | | | | | | | | | | | | |
| Foreign exchange forwards | | $ | 95,454 |
| | $ | — |
| | $ | 95,454 |
| | $ | (80,107 | ) | | $ | — |
| | $ | 15,347 |
|
| Foreign currency options | | 1,187 |
| | — |
| | 1,187 |
| | (631 | ) | | — |
| | 556 |
|
| Client interest rate derivatives | | 11,940 |
| | — |
| | 11,940 |
| | (11,924 | ) | | — |
| | 16 |
|
| Total derivative liabilities: | | 108,581 |
| | — |
| | 108,581 |
| | (92,662 | ) | | — |
| | 15,919 |
|
| Repurchase, securities lending, and similar arrangements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 108,581 |
| | $ | — |
| | $ | 108,581 |
| | $ | (92,662 | ) | | $ | — |
| | $ | 15,919 |
|
| December 31, 2016: | | | | | | | | | | | | |
| Derivative Liabilities: | | | | | | | | | | | | |
| Foreign exchange forwards | | $ | 44,285 |
| | $ | — |
| | $ | 44,285 |
| | $ | (17,964 | ) | | $ | — |
| | $ | 26,321 |
|
| Foreign currency options | | 10,383 |
| | — |
| | 10,383 |
| | (1,585 | ) | | — |
| | 8,798 |
|
| Client interest rate derivatives | | 9,770 |
| | — |
| | 9,770 |
| | (9,770 | ) | | — |
| | — |
|
| Total derivative liabilities: | | 64,438 |
| | — |
| | 64,438 |
| | (29,319 | ) | | — |
| | 35,119 |
|
| Repurchase, securities lending, and similar arrangements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 64,438 |
| | $ | — |
| | $ | 64,438 |
| | $ | (29,319 | ) | | $ | — |
| | $ | 35,119 |
|
For(1)Cash collateral pledged to our counterparties in relation to market value exposures of derivative contracts in a liability position and repurchase agreements are recorded as a component of “cash and cash equivalents" on our consolidated balance sheets.
16. Noninterest Income
All of the yearCompany's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. Included below is a summary of noninterest income for the years ended December 31, 2017, noninterest income was $557.2 million, compared to $456.6 million2020, 2019 and $472.8 million, for the comparable 2016 and 2015 periods.2018:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Noninterest income: | | | | | | |
| Gains on investment securities, net | | $ | 420,752 | | | $ | 134,670 | | | $ | 88,094 | |
| Gains on equity warrant assets, net | | 237,428 | | | 138,078 | | | 89,142 | |
| Client investment fees | | 132,200 | | | 182,068 | | | 130,360 | |
| Foreign exchange fees | | 178,733 | | | 159,262 | | | 138,812 | |
| Credit card fees | | 97,737 | | | 118,719 | | | 94,072 | |
| Deposit service charges | | 90,336 | | | 89,200 | | | 76,097 | |
| Lending related fees | | 57,533 | | | 49,920 | | | 41,949 | |
| Letters of credit and standby letters of credit fees | | 46,659 | | | 42,669 | | | 34,600 | |
| Investment banking revenue | | 413,985 | | | 195,177 | | | 0 | |
| Commissions | | 66,640 | | | 56,346 | | | 0 | |
| Other | | 98,145 | | | 55,370 | | | 51,858 | |
| Total noninterest income | | $ | 1,840,148 | | | $ | 1,221,479 | | | $ | 744,984 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Noninterest income: | | | | | | |
| Gains on investment securities, net | | $ | 64,603 |
| | $ | 51,740 |
| | $ | 89,445 |
|
| Gains on equity warrant assets, net | | 54,555 |
| | 37,892 |
| | 70,963 |
|
| Foreign exchange fees | | 115,760 |
| | 104,183 |
| | 87,007 |
|
| Credit card fees | | 76,543 |
| | 68,205 |
| | 56,657 |
|
| Deposit service charges | | 58,715 |
| | 52,524 |
| | 46,683 |
|
| Client investment fees | | 56,136 |
| | 32,219 |
| | 21,610 |
|
| Lending related fees | | 43,265 |
| | 33,395 |
| | 32,536 |
|
| Letters of credit and standby letters of credit fees | | 28,544 |
| | 25,644 |
| | 20,889 |
|
| Other | | 59,110 |
| | 50,750 |
| | 47,004 |
|
| Total noninterest income | | $ | 557,231 |
| | $ | 456,552 |
| | $ | 472,794 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Gains on investment securities, net
Net gains on investment securities include both gains and losses from our non-marketable and other equity securities, which include public equity securities as well asa result of exercised equity warrant assets, gains and losses from sales of our AFS debt securities portfolio, when applicable.applicable, and carried interest.
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, our joint venture bank in China Joint Venture, debt funds, private and public portfolio companies, which include public equity securities held as a result of exercised equity warrant assets and investments in qualified affordable housing projects. We experience variability in the performance of our non-marketable and other equity securities from period to period, which results in net gains or losses on investment securities (both realized and unrealized). This variability is due to a number of factors, including unrealized changes in the values of our investments, changes in the amount of realized gains from distributions, changes in liquidity events and general economic and market conditions. Unrealized gains from non-marketable and other equity securities for any single period are typically driven by valuation changes.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of certain sales restrictions to which these equity securities may be subject to (e.g., lock-up agreements), changes in prevailing market prices, market conditions, the actual sales or distributions of securities, and the timing of such actual sales or distributions, which, to the extent such securities are managed by our managed funds, are subject to our funds' separate discretionary sales/distributions and governance processes.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
preferential allocations of profits recognizable when the return on assets of our individual managed fund of funds and direct venture funds exceeds certain performance targets and is payable to us, as the general partners of the managed funds. The carried interest we earn is often shared with employees, who are also members of the general partner entities. We record carried interest on a quarterly basis by measuring fund performance to date versus the performance target. For our unconsolidated managed funds, carried interest is recorded as gains on investment securities, net. For our consolidated managed funds, it is recorded as a component of net income attributable to noncontrolling interests. Carried interest allocated to others is recorded as a component of net income attributable to noncontrolling interests. Any carried interest paid to us (or our employees) may be subject to reversal to the extent fund performance declines to a level where inception to date carried interest is lower than actual payments made by the funds. The limited partnership agreements for our funds provide that carried interest is generally not paid to the general partners until the funds have provided a full return of contributed capital to the limited partners. Accrued, but unpaid carried interest may be subject to reversal to the extent that the fund performance declines to a level where inception-to-date carried interest is less than prior amounts recognized. Carried interest income is accounted for under an ownership model based on ASC 323 — Equity Method of Accounting and ASC 810 — Consolidation.
Our AFS securities portfolio is primarily a fixed income investment portfolio that is managed with the objective of earning an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. SalesThough infrequent, sales of equitydebt securities held as a result ofin our exercised warrants,AFS securities portfolio may result in net gains or losses and are conducted pursuant to the guidelines of our investment policy related to the management of our liquidity position and interest rate risk.
Gains on investment securities.
securities are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our investment-related activities. A summary of gains and losses on investment securities for 2017, 20162020, 2019 and 20152018 is as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Gains on non-marketable and other securities, net | | $ | 69,792 |
| | $ | 39,545 |
| | $ | 88,244 |
|
| (Losses) gains on sales of available-for-sale securities, net | | (5,189 | ) | | 12,195 |
| | 1,201 |
|
| Gains on investment securities, net | | $ | 64,603 |
| | $ | 51,740 |
| | $ | 89,445 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Gains on non-marketable and other equity securities, net | | $ | 359,587 | | | $ | 138,575 | | | $ | 88,834 | |
| Gains (losses) on sales of available-for-sale debt securities, net | | 61,165 | | | (3,905) | | | (740) | |
| Total gains on investment securities, net | | $ | 420,752 | | | $ | 134,670 | | | $ | 88,094 | |
Gains on equity warrant assets, net
In connection with negotiating credit facilities and certain other services, we often obtain rights to acquire stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science/healthcare industries. Any changes in fair value from the grant date fair value of equity warrant assets will be recognized as increases or decreases to other assets on our balance sheet and as net gains or losses on equity warrant assets, in noninterest income, a component of consolidated net income.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Gains on equity warrant assets are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities. A summary of net gains on equity warrant assets net, for 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Equity warrant assets: | | | | | | |
| Gains on exercises, net | | $ | 179,648 | | | $ | 107,168 | | | $ | 58,186 | |
| Terminations | | (1,948) | | | (3,502) | | | (5,964) | |
| Changes in fair value, net | | 59,728 | | | 34,412 | | | 36,920 | |
| Total net gains on equity warrant assets | | $ | 237,428 | | | $ | 138,078 | | | $ | 89,142 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Equity warrant assets: | | | | | | |
| Gains on exercises, net | | $ | 48,275 |
| | $ | 31,197 |
| | $ | 41,455 |
|
| Cancellations and expirations | | (4,422 | ) | | (3,015 | ) | | (1,040 | ) |
| Changes in fair value, net | | 10,702 |
| | 9,710 |
| | 30,548 |
|
| Net gains on equity warrant assets | | $ | 54,555 |
| | $ | 37,892 |
| | $ | 70,963 |
|
Client investment fees include fees earned from discretionary investment management services for substantially all clients, managing clients’ portfolios based on their investment policies, strategies and objectives and investment advisory fees. Revenue is recognized on a monthly basis upon completion of our performance obligation and consideration is typically received in the subsequent month. Included in our sweep money market fees are Rule 12(b)-1 fees, revenue sharing and customer transactional-based fees. Rule 12(b)-1 fees and revenue sharing are recognized as earned based on client funds that are invested in the period, typically monthly. Transactional based fees are earned and recognized on fixed income securities when the transaction is executed on the clients' behalf. Amounts paid to third-party service providers are predominantly expensed, such that client investment fees are recorded gross of payments made to third parties. A summary of client investment fees by instrument type for 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Client investment fees by type: | | | | | | |
| Sweep money market fees | | $ | 74,176 | | | $ | 104,236 | | | $ | 75,654 | |
| Asset management fees (1) | | 42,768 | | | 28,665 | | | 23,882 | |
| Repurchase agreement fees | | 15,256 | | | 49,167 | | | 30,824 | |
| Total client investment fees (2) | | $ | 132,200 | | | $ | 182,068 | | | $ | 130,360 | |
(1)Represents fees earned from investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)Represents fees earned on client investment funds which are maintained at third-party financial institutions and are not recorded on our balance sheet.
Foreign exchange fees
Foreign exchange fees represent the income differential between purchases and sales of foreign currency on behalf of our clients.clients, primarily from spot contracts. Foreign exchange spot contract fees are recognized basedupon the completion of the single performance obligation, the execution of a spot trade in exchange for a fee. In line with customary business practice, the legal right transfers to the client upon execution of a foreign exchange contract on the trade date, and as such, we currently recognize our fees based on the trade date and the transactions are typically settled within two business days.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Forward contract and option premium fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities. A summary of foreign exchange fee income by instrument type for 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Foreign exchange fees by instrument type: | | | | | | | Foreign exchange fees by instrument type: | | | | | | |
| Spot contract commissions | | $ | 104,344 |
| | $ | 89,354 |
| | $ | 80,564 |
| Spot contract commissions | | $ | 157,852 | | | $ | 145,915 | | | $ | 127,459 | |
| Forward contract commissions | | 10,934 |
| | 14,004 |
| | 6,414 |
| Forward contract commissions | | 19,849 | | | 13,068 | | | 10,940 | |
| Option premium fees | | 482 |
| | 825 |
| | 29 |
| Option premium fees | | 1,032 | | | 279 | | | 413 | |
| Total foreign exchange fees | | $ | 115,760 |
| | $ | 104,183 |
| | $ | 87,007 |
| Total foreign exchange fees | | $ | 178,733 | | | $ | 159,262 | | | $ | 138,812 | |
Credit card fees
Credit card fees include interchange income from credit and debit cards and fees earned from processing transactions for merchants. Credit card fees areInterchange income is earned daily upon completionafter satisfying our performance obligation of transactionproviding nightly settlement services.services to a payment network. Costs related to rewards programs are recorded when the rewards are earned by the customer and presented as a reduction to interchange fee income. Rewards programs continue to be accounted for under ASC 310 - Receivables. Our performance obligations for merchant service fees are to transmit data and funds between the merchant and the payment network. Credit card interchange and merchant service fees are earned daily upon completion of transaction settlement services.
Annual card service fees and direct loan origination costs are deferred and recognized on a straight-line basis over a 12-month period.period and continue to be accounted for under ASC 310 - Receivables. A summary of credit card fees by instrument type for 2017, 20162020, 2019 and 20152018 is as follows:
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Credit card fees by instrument type: | | | | | | | Credit card fees by instrument type: | | | | | | |
| Card interchange fees, net | | $ | 60,224 |
| | $ | 51,513 |
| | $ | 46,185 |
| Card interchange fees, net | | $ | 75,562 | | | $ | 93,553 | | | $ | 74,381 | |
| Merchant service fees | | 11,584 |
| | 12,783 |
| | 7,346 |
| Merchant service fees | | 17,732 | | | 18,355 | | | 14,420 | |
| Card service fees | | 4,735 |
| | 3,909 |
| | 3,126 |
| Card service fees | | 4,443 | | | 6,811 | | | 5,271 | |
| Total credit card fees | | $ | 76,543 |
| | $ | 68,205 |
| | $ | 56,657 |
| Total credit card fees | | $ | 97,737 | | | $ | 118,719 | | | $ | 94,072 | |
Deposit service charges
Deposit service charges include fees earned from performing cash management activities and other deposit account services. Deposit services include, but are not limited to, the following: receivables services, which include merchant services, remote capture, lockbox, electronic deposit capture, and fraud control services. Payment and cash management products and services include wire transfer and automated clearing house payment services to enable clients to transfer funds more quickly, as well as business bill pay, business credit and debit cards, account analysis, and disbursement services. Deposit service charges are recognized over the period in which the related serviceperformance obligation is provided, generally on a monthly basis.
Client investment fees
Client investment fees include fees earned from Rule 12(b)-1 fees, revenue sharingbasis, and from customer transactional based fees. Rule 12(b)-1 fees and revenue sharing are recognized as earned based on client funds that are investedpresented in the period. Transactional based fees are earned and recognized on fixed income securities when the transaction is executed on the clients' behalf. Amounts paid to third-party service providers are predominantly expensed, such that client investment fees are recorded gross"Disaggregation of payments made to third parties. A summary of client investment fees by instrument type for 2017, 2016 and 2015 is as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Client investment fees by type: | | | | | | |
| Sweep money market fees | | $ | 28,485 |
| | $ | 15,147 |
| | $ | 9,347 |
|
| Asset management fees | | 16,831 |
| | 15,389 |
| | 12,263 |
|
| Client directed investment fees | | 10,820 |
| | 1,683 |
| | — |
|
| Total client investment fees | | $ | 56,136 |
| | $ | 32,219 |
| | $ | 21,610 |
|
Lending related fees
Unused commitment fees, minimum finance fees and unused line fees are recognized as earned on a monthly basis. Fees that qualify for syndication treatment are recognized at the completion of the syndicated loan deal for which the fees were received.
Lending related fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our lending-related activities. A summary of lending related fees by instrument type for 2017, 20162020, 2019 and 20152018 is as follows:
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Lending related fees by instrument type: | | | | | | | Lending related fees by instrument type: | | | | | | |
| Unused commitment fees | | $ | 34,110 |
| | $ | 25,654 |
| | $ | 24,025 |
| Unused commitment fees | | $ | 42,399 | | | $ | 34,829 | | | $ | 32,452 | |
| Other | | 9,155 |
| | 7,741 |
| | 8,511 |
| Other | | 15,134 | | | 15,091 | | | 9,497 | |
| Total lending related fees | | $ | 43,265 |
| | $ | 33,395 |
| | $ | 32,536 |
| Total lending related fees | | $ | 57,533 | | | $ | 49,920 | | | $ | 41,949 | |
Letters of credit and standby letters of credit fees
Commercial and standby letters of credit represent conditional commitments issued by us on behalf of a client to guarantee the performance of the client to a third party when certain specified future events have occurred. Fees generated from letters of credit and standby letters of credit are deferred as a component of other liabilities and recognized in noninterest income over
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the commitment period using the straight-line method, based on the likelihood that the commitment being drawn down will be remote. Letters of credit and standby letters of credit fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our lending related activities.
Investment banking revenue
We earn investment banking revenue from clients for providing services related to securities underwriting, private placements and advisory services on strategic matters such as mergers and acquisitions. Underwriting fees are attributable to public and private offerings of equity and debt securities and are recognized at the point in time when the offering has been deemed to be completed by the lead manager of the underwriting group. Once the offering is completed, the performance obligation has been satisfied; we recognize the applicable management fee as well as the underwriting fee, net of consideration payable to customers. Private placement fees are recognized at the point in time when the private placement is completed, which is generally when the client accepts capital from the fund raise. Advisory fees from mergers and acquisitions engagements are generally recognized at the point in time when the related transaction is completed. Expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other deal-related expenses are expensed as incurred. We have determined that we act as principal in the majority of these transactions and therefore present expenses gross within other operating expenses.
A summary of investment banking revenue by instrument type for 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Investment banking revenue: | | | | | | |
| Underwriting fees | | $ | 352,951 | | | $ | 153,306 | | | $ | 0 | |
| Advisory fees | | 40,006 | | | 37,846 | | | 0 | |
| Private placements and other | | 21,028 | | | 4,025 | | | 0 | |
| Total investment banking revenue | | $ | 413,985 | | | $ | 195,177 | | | $ | 0 | |
Commissions
Commissions include commissions received from clients for the execution of agency-based brokerage transactions in listed and over-the-counter equities. The execution of each trade order represents a distinct performance obligation and the transaction price is fixed at the point in time or trade order execution. Trade execution is satisfied at the point in time that the customer has control of the asset and as such, fees are recorded on a trade date basis. Commissions are presented in the "Disaggregation of revenue from contracts with customers"table below.
Other noninterest income
Other noninterest income primarily includes income from fund management fees, valuation service-based fee incomegains from conversion of convertible debt options and other service revenue. Fund management fees are comprised of fees charged directly to our managed funds of funds and direct venture funds. Fund management fees are based upon the contractual terms of the limited partnership agreements and are generally recognized as earned over the specified contract period, which is generally equal to the life of the individual fund. Fund management fees are calculated as a percentage of committed capital and collected in advance and are received quarterly. Fund management fees for certain of our limited partnership agreements are calculated as a percentage of distributions made by the funds and revenue is recorded only at the time of a distribution event. As distribution
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
events are not predetermined for these certain funds, management fees are considered variable and constrained under ASC 606.
Gains from conversion of convertible debt options represent unrealized valuation gains on loan conversion derivative assets, and realized gains from the conversion of debt instruments, convertible into a third party’s common stock upon a triggering event such as an IPO. Gains from conversion of convertible debt options are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities.
Other service revenue primarily includes revenue from dividendsconsists of dividend income on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest and other fee income. We recognize revenue when our performance obligations are met and record revenues on a daily/monthly, quarterly, semi-annual or annual basis. For event driven revenue sources, we recognize revenue when: (i) persuasive evidence of an arrangement exists, (ii) we have performed the service, provided we have no other remaining obligations to the customer, (iii) the fee is fixed or determinable and (iv) collectability is probable.
A summary of other noninterest income by instrument type for 2017, 20162020, 2019 and 20152018 is as follows:
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Fund management fees | | $ | 21,214 |
| | $ | 19,195 |
| | $ | 15,941 |
|
| Valuation fee income | | 3,860 |
| | 7,962 |
| | 8,767 |
|
| Gains on revaluation of client foreign currency instruments, net (1) | | 10,882 |
| | 4,215 |
| | 115 |
|
| (Losses) gains on client foreign exchange forward contracts, net (1) | | (9,969 | ) | | (5,674 | ) | | 694 |
|
| Gains (losses) on revaluation of internal foreign currency instruments, net (2) | | 33,161 |
| | (16,676 | ) | | (12,735 | ) |
| (Losses) gains on internal foreign exchange forward contracts, net (2) | | (32,286 | ) | | 16,136 |
| | 12,377 |
|
| Other service revenue | | 32,248 |
| | 25,592 |
| | 21,845 |
|
| Total other noninterest income | | $ | 59,110 |
| | $ | 50,750 |
| | $ | 47,004 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Other noninterest income by instrument type: | | | | | | |
| Fund management fees | | $ | 38,960 | | | $ | 32,522 | | | $ | 23,016 | |
| Net (losses) gains on revaluation of foreign currency instruments, net of foreign exchange forward contracts (1) | | (926) | | | 345 | | | 666 | |
| Losses on extinguishment of debt | | 0 | | | (8,960) | | | 0 | |
| Gains from conversion of convertible debt options | | 30,018 | | | 0 | | | 0 | |
| Other service revenue | | 30,093 | | | 31,463 | | | 28,176 | |
| Total other noninterest income | | $ | 98,145 | | | $ | 55,370 | | | $ | 51,858 | |
(1)Represents the net revaluation of client and internal foreign currency denominated financial instruments. We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client and internal foreign currency denominated financial instruments.
Disaggregation of Revenue from Contracts with Customers
The following tables present our revenues from contracts with customers disaggregated by revenue source and segment for the years ended December 31, 2020, 2019, and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 | | Global
Commercial
Bank (2) | | SVB Private
Bank | | SVB Capital (2) | | SVB Leerink (2) | | Other Items | | Total |
(Dollars in thousands) | | | | | | |
| Revenue from contracts with customers: | | | | | | | | | | | | |
| Client investment fees | | $ | 129,378 | | | $ | 2,822 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 132,200 | |
| Spot contract commissions | | 156,725 | | | 544 | | | 0 | | | 0 | | | 583 | | | 157,852 | |
| Card interchange fees, gross | | 128,239 | | | 23 | | | 0 | | | 0 | | | 1,545 | | | 129,807 | |
| Merchant service fees | | 17,732 | | | 0 | | | 0 | | | 0 | | | 0 | | | 17,732 | |
| Deposit service charges | | 89,565 | | | 81 | | | 0 | | | 0 | | | 690 | | | 90,336 | |
| Investment banking revenue | | 0 | | | 0 | | | 0 | | | 413,985 | | | 0 | | | 413,985 | |
| Commissions | | 0 | | | 0 | | | 0 | | | 66,640 | | | 0 | | | 66,640 | |
| Fund management fees | | 0 | | | 0 | | | 32,233 | | | 6,727 | | | 0 | | | 38,960 | |
| Performance fees | | 0 | | | 0 | | | 3,601 | | | 0 | | | 0 | | | 3,601 | |
| Correspondent bank rebates | | 5,729 | | | 0 | | | 0 | | | 0 | | | 0 | | | 5,729 | |
| Total revenue from contracts with customers | | $ | 527,368 | | | $ | 3,470 | | | $ | 35,834 | | | $ | 487,352 | | | $ | 2,818 | | | $ | 1,056,842 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Revenues outside the scope of ASC 606 (1) | | 78,365 | | | 66 | | | 190,120 | | | 8,624 | | | 506,131 | | | 783,306 | |
| Total noninterest income | | $ | 605,733 | | | $ | 3,536 | | | $ | 225,954 | | | $ | 495,976 | | | $ | 508,949 | | | $ | 1,840,148 | |
| |
(1) | Represents the net revaluation of client foreign currency denominated financial instruments. We enter into client foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client foreign currency denominated financial instruments. |
| |
(2) | Represents the net revaluation of foreign currency denominated financial instruments issued and held by us, primarily loans, deposits and cash. We enter into internal foreign exchange forward contracts to economically reduce our foreign exchange exposure related to these foreign currency denominated financial instruments issued and held by us. |
15.Other Noninterest Expense(1)Amounts are accounted for under separate guidance than ASC 606.
A summary(2)Global Commercial Bank’s, SVB Capital’s and SVB Leerink's components of other noninterest expense for 2017, 2016 and 2015income are shown net of noncontrolling interests. Noncontrolling interest is as follows:included within “Other Items."
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Lending and other client related processing costs | | $ | 23,768 |
| | $ | 19,867 |
| | $ | 15,944 |
|
| Telephone | | 10,647 |
| | 9,793 |
| | 9,398 |
|
| Data processing services | | 10,251 |
| | 9,014 |
| | 7,316 |
|
| Dues and publications | | 3,263 |
| | 2,828 |
| | 2,476 |
|
| Postage and supplies | | 2,797 |
| | 2,851 |
| | 3,154 |
|
| Other | | 21,419 |
| | 17,890 |
| | 19,999 |
|
| Total other noninterest expense | | $ | 72,145 |
| | $ | 62,243 |
| | $ | 58,287 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 | | Global
Commercial
Bank (2) | | SVB Private
Bank | | SVB Capital (2) | | SVB Leerink (2) | | Other Items | | Total |
(Dollars in thousands) | | | | | | |
| Revenue from contracts with customers: | | | | | | | | | | | | |
| Client investment fees | | $ | 180,152 | | | $ | 1,916 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 182,068 | |
| Spot contract commissions | | 144,930 | | | 510 | | | 0 | | | 0 | | | 475 | | | 145,915 | |
| Card interchange fees, gross | | 154,197 | | | 0 | | | 0 | | | 0 | | | 756 | | | 154,953 | |
| Merchant service fees | | 18,355 | | | 0 | | | 0 | | | 0 | | | 0 | | | 18,355 | |
| Deposit service charges | | 88,136 | | | 137 | | | 0 | | | 0 | | | 927 | | | 89,200 | |
| Investment banking revenue | | 0 | | | 0 | | | 0 | | | 195,177 | | | 0 | | | 195,177 | |
| Commissions | | 0 | | | 0 | | | 0 | | | 56,346 | | | 0 | | | 56,346 | |
| Fund management fees | | 0 | | | 0 | | | 26,850 | | | 5,672 | | | 0 | | | 32,522 | |
| Correspondent bank rebates | | 6,415 | | | 0 | | | 0 | | | 0 | | | 0 | | | 6,415 | |
| Total revenue from contracts with customers | | $ | 592,185 | | | $ | 2,563 | | | $ | 26,850 | | | $ | 257,195 | | | $ | 2,158 | | | $ | 880,951 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Revenues outside the scope of ASC 606 (1) | | 45,737 | | | 803 | | | 95,544 | | | 7,321 | | | 191,123 | | | 340,528 | |
| Total noninterest income | | $ | 637,922 | | | $ | 3,366 | | | $ | 122,394 | | | $ | 264,516 | | | $ | 193,281 | | | $ | 1,221,479 | |
We(1)Amounts are subjectaccounted for under separate guidance than ASC 606.
(2)Global Commercial Bank’s, SVB Capital’s and SVB Leerink's components of noninterest income are shown net of noncontrolling interests. Noncontrolling interest is included within “Other Items."
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 | | Global
Commercial
Bank (2) | | SVB Private
Bank | | SVB Capital (2) | | | | Other Items | | Total |
(Dollars in thousands) | | | | | | | |
| Revenue from contracts with customers: | | | | | | | | | | | | |
| Client investment fees (3) | | $ | 128,834 | | | $ | 1,526 | | | $ | 0 | | | | | $ | 0 | | | $ | 130,360 | |
| Spot contract commissions | | 126,445 | | | 691 | | | 0 | | | | | 323 | | | 127,459 | |
| Card interchange fees, gross | | 134,074 | | | 0 | | | 0 | | | | | 428 | | | 134,502 | |
| Merchant service fees | | 14,415 | | | 4 | | | 0 | | | | | 1 | | | 14,420 | |
| Deposit service charges | | 74,348 | | | 108 | | | 0 | | | | | 1,641 | | | 76,097 | |
| Fund management fees | | 0 | | | 0 | | | 23,016 | | | | | 0 | | | 23,016 | |
| Correspondent bank rebates | | 5,802 | | | 0 | | | 0 | | | | | 0 | | | 5,802 | |
| Total revenue from contracts with customers | | $ | 483,918 | | | $ | 2,329 | | | $ | 23,016 | | | | | $ | 2,393 | | | $ | 511,656 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Revenues outside the scope of ASC 606 (1) | | 36,384 | | | (48) | | | 78,165 | | | | | 118,827 | | | 233,328 | |
| Total noninterest income | | $ | 520,302 | | | $ | 2,281 | | | $ | 101,181 | | | | | $ | 121,220 | | | $ | 744,984 | |
(1)Amounts are accounted for under separate guidance than ASC 606.
(2)Global Commercial Bank’s and SVB Capital’s components of noninterest income are shown net of noncontrolling interests. Noncontrolling interest is included within “Other Items."
(3)For the year ended December 31, 2018, the amount of client investment fees previously reported as "Other Items" has been correctly allocated to income tax in the U.S. federal jurisdictionreportable segment "Global Commercial Bank" to properly reflect the source of such revenue. The correction of this immaterial error had no impact on the "Total" amount of client investment fees.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Other Noninterest Expense
A summary of other noninterest expense for 2020, 2019 and various state and foreign jurisdictions and have identified our federal and California tax returns2018 is as major tax filings. Our U.S. federal tax returns for 2014 and subsequent years remain open to full examination. Our California tax returns for 2012 and subsequent tax years remain open to full examination.follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Lending and other client related processing costs | | $ | 29,783 | | | $ | 28,491 | | | $ | 24,237 | |
| Correspondent bank fees | | 15,065 | | | 14,503 | | | 13,713 | |
| Investment banking activities | | 20,591 | | | 13,733 | | | 0 | |
| Trade order execution costs | | 11,144 | | | 10,813 | | | 0 | |
| Data processing services | | 14,910 | | | 12,536 | | | 10,811 | |
| Telephone | | 8,591 | | | 9,861 | | | 9,404 | |
| Dues and publications | | 4,251 | | | 4,603 | | | 4,605 | |
| Postage and supplies | | 2,545 | | | 3,198 | | | 2,799 | |
| Other | | 83,295 | | | 54,841 | | | 21,682 | |
| Total other noninterest expense | | $ | 190,175 | | | $ | 152,579 | | | $ | 87,251 | |
18.Income Taxes
The components of our provision for income taxes for 2017, 20162020, 2019 and 20152018 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Current provision: | | | | | | |
| Federal | | $ | 299,882 | | | $ | 296,400 | | | $ | 249,358 | |
| State | | 140,794 | | | 132,357 | | | 123,264 | |
| Deferred expense (benefit): | | | | | | |
| Federal | | 5,296 | | | (1,530) | | | (11,777) | |
| State | | 1,615 | | | (1,542) | | | (9,284) | |
| Income tax expense | | $ | 447,587 | | | $ | 425,685 | | | $ | 351,561 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Current provision: | | | | | | |
| Federal | | $ | 263,231 |
| | $ | 195,249 |
| | $ | 191,194 |
|
| State | | 67,046 |
| | 59,319 |
| | 50,815 |
|
| Deferred expense (benefit): | | | | | | |
| Federal | | 24,654 |
| | (3,560 | ) | | (11,270 | ) |
| State | | 532 |
| | (675 | ) | | (1,985 | ) |
| Income tax expense | | $ | 355,463 |
| | $ | 250,333 |
| | $ | 228,754 |
|
Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests. The reconciliation between the federal statutory income tax rate and our effective income tax rate for 2017, 20162020, 2019 and 2015,2018, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of the federal tax effect | | 6.8 | | | 7.0 | | | 7.2 | |
| Meals and entertainment | | 0.1 | | | 0.4 | | | 0.3 | |
| Disallowed officers' compensation | | 0.2 | | | 0.2 | | | 0.2 | |
| FDIC premiums | | 0.3 | | | 0.2 | | | 0.5 | |
| Share-based compensation expense on incentive stock options and ESPP | | (0.3) | | | (0.6) | | | (1.4) | |
| Qualified affordable housing project tax credits | | (0.5) | | | (0.3) | | | (0.3) | |
| Tax-exempt interest income | | (0.8) | | | (0.6) | | | (0.6) | |
| | | | | | |
| Other, net | | 0.2 | | | (0.1) | | | (0.4) | |
| Effective income tax rate | | 27.0 | % | | 27.2 | % | | 26.5 | % |
|
| | | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Federal statutory income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of the federal tax effect | | 5.8 |
| | 5.9 |
| | 5.7 |
|
| Net deferred tax assets revaluation (TCJ Act) | | 4.3 |
| | — |
| | — |
|
| Meals and entertainment | | 0.3 |
| | 0.4 |
| | 0.3 |
|
| Disallowed officer's compensation | | 0.1 |
| | 0.1 |
| | 0.3 |
|
| Share-based compensation expense on incentive stock options and ESPP | | (2.1 | ) | | — |
| | — |
|
| Qualified affordable housing project tax credits | | (0.4 | ) | | (0.5 | ) | | (0.5 | ) |
| Tax-exempt interest income | | (0.3 | ) | | (0.2 | ) | | (0.2 | ) |
| Valuation allowance benefit | | — |
| | (0.3 | ) | | (0.4 | ) |
| Other, net | | (0.7 | ) | | (0.9 | ) | | (0.3 | ) |
| Effective income tax rate | | 42.0 | % | | 39.5 | % | | 39.9 | % |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Deferred tax assets and liabilities at December 31, 20172020 and 2016,2019, consisted of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Deferred tax assets: | | | | |
| Allowance for credit losses | | $ | 158,161 | | | $ | 103,267 | |
| | | | |
| Share-based compensation expense | | 15,531 | | | 14,233 | |
| State income taxes | | 16,640 | | | 16,097 | |
| Accrued compensation | | 44,112 | | | 22,578 | |
| | | | |
| Lease liability | | 69,714 | | | 60,635 | |
| Other accruals | | 10,018 | | | 12,383 | |
| Net operating loss | | 7,501 | | | 6,386 | |
| | | | |
| Goodwill and intangibles | | 3,165 | | | 3,141 | |
| Foreign tax credit carryforward | | 9,028 | | | 0 | |
| SBA loan fees | | 6,115 | | | 0 | |
| Other | | 8,110 | | | 7,923 | |
| Deferred tax assets | | 348,095 | | | 246,643 | |
| Valuation allowance | | (7,094) | | | (5,919) | |
| Net deferred tax assets after valuation allowance | | 341,001 | | | 240,724 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Derivative equity warrant assets | | (71,019) | | | (45,533) | |
| | | | |
| | | | |
| Net unrealized gains on cash flow hedge derivatives | | (49,772) | | | 0 | |
| Net unrealized gains on AFS debt securities | | (185,634) | | | (33,480) | |
| Non-marketable and other equity securities | | (118,712) | | | (54,239) | |
| Premises and equipment and other intangibles | | (23,721) | | | (16,459) | |
| Right-of-use asset and deferred rent assets | | (52,057) | | | (50,493) | |
| Other | | (12,340) | | | (12,087) | |
| Deferred tax liabilities | | (513,255) | | | (212,291) | |
| Net deferred tax (liabilities) assets | | $ | (172,254) | | | $ | 28,433 | |
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Allowance for loan losses | | $ | 84,812 |
| | $ | 110,248 |
|
| Net unrealized losses on AFS debt securities | | 12,404 |
| | — |
|
| Share-based compensation expense | | 9,418 |
| | 15,498 |
|
| State income taxes | | 9,186 |
| | 12,682 |
|
| Accrued compensation | | 8,336 |
| | 6,799 |
|
| Deferred rent | | 8,169 |
| | 10,050 |
|
| Other accruals | | 7,165 |
| | 20,502 |
|
| Net operating loss | | 2,300 |
| | 4,116 |
|
| Loan fee income and costs | | 1,189 |
| | 8,266 |
|
| Other | | 3,639 |
| | 2,168 |
|
| Deferred tax assets | | 146,618 |
| | 190,329 |
|
| Valuation allowance | | (2,624 | ) | | (4,440 | ) |
| Net deferred tax assets after valuation allowance | | 143,994 |
| | 185,889 |
|
| | | | | |
| Deferred tax liabilities: | | | | |
| Derivative equity warrant assets | | (29,127 | ) | | (36,406 | ) |
| Change in accounting method (section 481(a)) | | (15,953 | ) | | (35,262 | ) |
| Net unrealized gains on AFS equity securities | | (11,145 | ) | | — |
|
| Non-marketable and other securities | | (10,724 | ) | | (6,075 | ) |
| Premises and equipment and other intangibles | | (9,223 | ) | | (11,956 | ) |
| Net unrealized gains on AFS debt securities | | — |
| | (17,970 | ) |
| Other | | (3,977 | ) | | (6,380 | ) |
| Deferred tax liabilities | | (80,149 | ) | | (114,049 | ) |
| Net deferred tax assets | | $ | 63,845 |
| | $ | 71,840 |
|
At December 31, 2017 we revalued our net deferred tax assets based on the lower corporate tax rate associated with the TCJ Act enacted into law on December 22, 2017. The TCJ Act resulted in increases to income tax expense of $33.8 million related to the revaluation of our deferred tax assets, incorporating the new federal tax rate related to the TCJ Act.
At December 31, 2017 and 2016,U.S. federal net operating loss carryforwards totaled $3$1.9 million and $4$2.2 million respectively.for December 31, 2020 and 2019. Our foreign net operating loss carryforwards totaled $11$25.3 millionand $16$20.8 million at December 31, 20172020 and 2016,2019, respectively. These net operating loss carryforwards expire at various dates beginning in 2022.
Currently, we believe that it is more likely than not that the benefit from thesethe foreign net operating loss carryforwards, which are associated with our former eProsper business unit, part of SVB Analytics,Germany and our UKCanada operations, will not be realized in the near term due to uncertainties in the timing of future profitability in those businesses.the course of business. In recognition of this, our valuation allowance is $3$7.1 million on the deferred tax assets related to theseour German and Canadian net operating loss carryforwards and research and development credits atas of December 31, 2017. 2020.We believe it is more likely than not that the remaining deferred tax assets will be realized through recovery of taxes previously paid and/or future taxable income. Therefore, no valuation allowance was provided for the remaining deferred tax assets.
We are subject to income tax and non-income based taxes by the U.S. federal tax authorities as well as various state and foreign tax authorities. We have identified the U.S. federal and California state jurisdictions as major tax filings. Our U.S. federal tax returns remain open to full examination for 2017 and subsequent tax years. Our California tax returns remain open to full examination for 2016 and subsequent tax years.
At December 31, 2017,2020, our unrecognized tax benefit was $12$16.5 million,the recognition of which would reduce our income tax expense by $9$13.1 million. We do not expect that our unrecognized tax benefit will materially change in the next 12 months.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We recognize interest and penalties related to income tax matters as part of income before income taxes. Interest and penalties were not material for the years ended December 31, 2017, 20162020, 2019 and 2015.2018.
A summary of changes in our unrecognized tax benefit (including interest and penalties) for December 31, 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Reconciliation of Unrecognized Tax Benefit | | Interest and Penalties | | Total |
| Balance at December 31, 2017 | | $ | 11,505 | | | $ | 1,178 | | | $ | 12,683 | |
| Additions for tax positions for current year | | 4,171 | | | 0 | | | 4,171 | |
| Additions for tax positions for prior years | | 631 | | | 823 | | | 1,454 | |
| Reduction for tax positions for prior years | | (1,865) | | | (243) | | | (2,108) | |
| Lapse of the applicable statute of limitations | | (435) | | | (86) | | | (521) | |
| Reduction as a result of settlement | | (1,318) | | | (222) | | | (1,540) | |
| Balance at December 31, 2018 | | $ | 12,689 | | | $ | 1,450 | | | $ | 14,139 | |
| Additions for tax positions for current year | | 3,712 | | | 0 | | | 3,712 | |
| Additions for tax positions for prior years | | 63 | | | 826 | | | 889 | |
| Reduction for tax positions for prior years | | (884) | | | (524) | | | (1,408) | |
| Lapse of the applicable statute of limitations | | (1,826) | | | (569) | | | (2,395) | |
| Reduction as a result of settlement | | (1,142) | | | (17) | | | (1,159) | |
| Balance at December 31, 2019 | | $ | 12,612 | | | $ | 1,166 | | | $ | 13,778 | |
| Additions for tax positions for current year | | 5,051 | | | 0 | | | 5,051 | |
| Additions for tax positions for prior years | | 1,765 | | | 1,224 | | | 2,989 | |
| Reduction for tax positions for prior years | | (730) | | | (69) | | | (799) | |
| Lapse of the applicable statute of limitations | | (1,100) | | | (323) | | | (1,423) | |
| Reduction as a result of settlement | | (1,108) | | | (219) | | | (1,327) | |
| Balance at December 31, 2020 | | $ | 16,490 | | | $ | 1,779 | | | $ | 18,269 | |
19. Employee Compensation and Benefit Plans
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | Reconciliation of Unrecognized Tax Benefit | | Interest & Penalties | | Total |
| Balance at December 31, 2014 | | $ | 3,397 |
| | $ | 100 |
| | $ | 3,497 |
|
| Additions for tax positions for current year | | 1,208 |
| | — |
| | 1,208 |
|
| Additions for tax positions for prior years | | — |
| | 228 |
| | 228 |
|
| Reduction for tax positions for prior years | | (1,228 | ) | | (22 | ) | | (1,250 | ) |
| Lapse of the applicable statute of limitations | | (20 | ) | | (5 | ) | | (25 | ) |
| Balance at December 31, 2015 | | $ | 3,357 |
| | $ | 301 |
| | $ | 3,658 |
|
| Additions for tax positions for current year | | 793 |
| | — |
| | 793 |
|
| Additions for tax positions for prior years | | 1,427 |
| | 166 |
| | 1,593 |
|
| Reduction for tax positions for prior years | | (271 | ) | | (16 | ) | | (287 | ) |
| Lapse of the applicable statute of limitations | | (37 | ) | | (9 | ) | | (46 | ) |
| Balance at December 31, 2016 | | $ | 5,269 |
| | $ | 442 |
| | $ | 5,711 |
|
| Additions for tax positions for current year | | 3,141 |
| | — |
| | 3,141 |
|
| Additions for tax positions for prior years | | 3,378 |
| | 754 |
| | 4,132 |
|
| Reduction for tax positions for prior years | | (223 | ) | | (1 | ) | | (224 | ) |
| Lapse of the applicable statute of limitations | | (60 | ) | | (17 | ) | | (77 | ) |
| Balance at December 31, 2017 | | $ | 11,505 |
| | $ | 1,178 |
| | $ | 12,683 |
|
| |
17.
| Employee Compensation and Benefit Plans
|
Our employee compensation and benefit plans include: (i) Incentive Compensation Plan; (ii) Direct Drive Incentive Compensation Plan; (iii) Retention Program; (iv) Warrant Incentive Plan; (v) Deferred Compensation Plan; (vi) 401(k) and ESOP; (vii) SVB Leerink Incentive Compensation Plan; (viii) SVB Leerink Retention Award; (ix) EHOP; (viii)(x) 2006 Incentive Plan; and (ix)(xi) ESPP. The 2006 Incentive Plan and the ESPP are described in Note 4—“Share-Based Compensation” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
Compensation.”
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of expenses incurred under certain employee compensation and benefit plans for 2017, 20162020, 2019 and 20152018 is as follows:
| | | | | Year ended December 31, | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Incentive Compensation Plan | | $ | 125,584 |
| | $ | 96,892 |
| | $ | 97,565 |
| Incentive Compensation Plan | | $ | 193,004 | | | $ | 143,888 | | | $ | 160,293 | |
| Direct Drive Incentive Compensation Plan | | 18,721 |
| | 21,174 |
| | 21,930 |
| Direct Drive Incentive Compensation Plan | | 37,681 | | | 37,315 | | | 40,578 | |
| Retention Program | | 1,317 |
| | 1,475 |
| | 1,996 |
| Retention Program | | 0 | | | 2,438 | | | 1,438 | |
| Warrant Incentive Plan | | 15,386 |
| | 4,954 |
| | 9,110 |
| Warrant Incentive Plan | | 33,921 | | | 14,881 | | | 9,112 | |
| Deferred Compensation Plan | | 203 |
| | 1,318 |
| | 2,404 |
| |
| SVBFG 401(k) Plan | | 17,860 |
| | 16,078 |
| | 13,809 |
| SVBFG 401(k) Plan | | 29,939 | | | 25,687 | | | 21,323 | |
| SVBFG ESOP | | 4,719 |
| | 3,159 |
| | 8,585 |
| SVBFG ESOP | | 5,807 | | | 4,197 | | | 6,435 | |
| SVB Leerink Incentive Compensation Plan | | SVB Leerink Incentive Compensation Plan | | 233,145 | | | 106,871 | | | 0 | |
| SVB Leerink Retention Award | | SVB Leerink Retention Award | | 12,991 | | | 12,015 | | | 0 | |
Incentive Compensation Plan
Our Incentive Compensation Plan (“ICP”) is an annual cash incentive plan that rewards performance based on our financial results and other performance criteria. Awards are made based on company performance, the employee's target bonus level and management's assessment of individual employee performance.
Direct Drive Incentive Compensation Plan
The Direct Drive Incentive Compensation Plan (“Direct Drive”) is an annual sales cash incentive program. Awards are based on sales teams' performance as to predetermined financial targets and other company/individual performance criteria. Actual awards for each sales team member under Direct Drive are based on: (i) the actual results and financial performance with respect to the incentive gross profit targets; (ii) the sales team payout targets; and (iii) the sales team member's sales position and team payout allocation.
Retention Program
The Retention Program (“RP”) is a long-term incentive plan that allows designated employees to share directly in our investment success. Plan participants were granted an interest in the distributions of gains from certain designated investments made by us during the applicable year. Specifically, participants share in: (i) returns from designated investments made by us, including investments in certain venture capital and private equity funds, debt funds and direct equity investments in companies; (ii) net income realized from the exercise of, and the subsequent sale of shares obtained through the exercise of, warrants held by us; and (iii) other designated amounts as determined by us. Since 2009, no new participants have been added and no new investments have been designated to the plan. The final distributions under this program were made during 2020 and we did not incur any expenses for the year ended December 31, 2020.
Warrant Incentive Plan
The Warrant Incentive Plan provides individual and team awards to those employees who negotiate warrants on our behalf. Designated participants, as determined by the Company, share in the cash proceeds received by the Company from the exercise of equity warrant assets.
Deferred Compensation Plan
Under the Deferred Compensation Plan (the “DC Plan”), eligible employees may elect to defer up to 50 percent of their base salary and/or up to 100 percent of any eligible bonus payment to which they are entitled, for a period of 12 consecutive months, beginning January 1st and ending December 31st.earned during the plan year. Any amounts deferred under the DC Plan will be invested and administered by us (or such person we designate). We generally do not match employee deferrals to the DC Plan. From time to time, we may also offer deferred special retention incentives and employer contributions under this plan to key plan participants. The deferred incentives and employer contributions are eligible for investment in the DC Plan during the retention qualifying period or vesting period.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Voluntary deferrals under the DC Plan were $5.8 million $6.9 million and $5.5 million $4.4 millionin 2020, 2019 and $3.7 million in 2017, 2016 and 2015,2018, respectively. The DC Plan overall, had investment gains of $4.7$8.5 million, and $2.4gains of $6.9 million in 2017 and 2016, respectively, and losses of $0.1$1.7 million in 2015.2020, 2019 and 2018, respectively.
401(k) and ESOP
The 401(k) Plan and ESOP, collectively referred to as the “Plan”, is a combined 401(k) tax-deferred savings plan and employee stock ownership plan in which all regular U.S. employees are eligible to participate.
Employees participating in the 401(k) Plan are allowed to contribute up to 75 percent of their pre-tax pay as defined in the Plan, up to the maximum annual amount allowable under federal income tax regulations of $18,000$19,500 for the years 2017, 20162020, $19,000 for 2019, and 2015.$18,500 for 2018. We match the employee's contributions dollar-for-dollar, up to five5 percent of the employee's pre-tax pay as defined in the Plan. Our matching contributions vest immediately. The amount of salary deferred, up to the allowed maximum, is not subject to federal or state income taxes at the time of deferral.
Discretionary ESOP contributions, based on our company performance, are made by us to all eligible individuals employed by us on the last day of the fiscal year. We may elect to contribute cash or our common stock (or a combination of cash and stock), in an amount not exceeding ten10 percent of the employee's eligible pay earned in the fiscal year. The ESOP contributions vest in equal annual increments over a participant's first five years of service (thereafter, all subsequent ESOP contributions are fully vested).
SVB Leerink Incentive Compensation Plan
Our SVB Leerink Incentive Compensation Plan is an annual cash incentive plan that rewards performance of SVB Leerink employees based on SVB Leerink's financial results. This plan requires employees who exceed certain compensation levels to defer a portion of their compensation, of which, 25% will be settled in the form of restricted stock units and 75% will be settled in the form of cash. The deferred compensation vests over a period of up to five years.
SVB Leerink Retention Award
The SVB Leerink Retention Award is an incentive award that granted designated SVB Leerink employees restricted stock awards and cash after the close of the acquisition of SVB Leerink in January 2019. The aggregate amount of the awards was $60 million, of which 50% will be settled in the form of cash and 50% in the form of restricted stock awards. The awards vest in equal annual increments over five years.
EHOP Program
The EHOP is a benefit plan that provides for the issuance of mortgage loans at favorable interest rates to eligible employees. Eligible employees may apply for either an adjustable rate mortgage (ARM) or a fixed-rate mortgagefixed rate loan for their primary residence,residence. The ARM is a 30 year loan and has an initial fixed interest rate for five, seven or ten years after which a floating rate will be set annually. The fixed rate loan program offers a 15 or 30 years loan and the interest rate is due and payable in either five or seven years and is based on amortization over a 30 year period.fixed for the life of the loan. Applicants must qualify for a loan through the normal mortgage review and approval process, which is typical of industry standards. The maximum loan amount generally cannot be greater than 8085 percent of the lesser of the purchase price or the appraised value. The interest rate on the fixed-rate loan is written at SVB Private Bank client mortgage rates and determined at SVB's discretion. Floating rates applied at the then market rate for five year (5/1) or seven year (7/1) mortgage loans as determined by us. However, provided that the applicant continues to meet all the eligibility requirements, including employment, the actual rate charged to the borrower shall be up to two percent below the market rate. The loan rate shall not be less than the greater of either the jumbo conforming market rate (corresponding to the maturityend of the loan) or the monthly Applicable Federal Rate for medium-term loans as published by the Internal Revenue Service. The loan ratefixed-rate period will be fixedreset annually at the time of approval12 month LIBOR plus two and locked in for 30 days.one quarter percent. For additional details, see Note 9—“Loans Allowance for Loan Losses and Allowance for Credit Losses: Loans and Unfunded Credit Commitments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.Commitments.''
We have no material related party transactions requiring disclosure. In the ordinary course of business, the Bank may extend credit to related parties, including executive officers, directors, principal shareholders and their related interests. Additionally, we also provide real estate secured loans to eligible employees through our EHOP. For additional details, see Note 17—19—“Employee Compensation and Benefit Plans”Plans.”
21.Off-Balance Sheet Arrangements, Guarantees and Other Commitments
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
contract.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
19.
| Off-Balance Sheet Arrangements, Guarantees and Other Commitments
|
Operating Leases
We are obligated under a number of noncancelable operating leases for premises and equipment that expire at various dates, through 2030, and in most instances, include options to renew or extend at market rates and terms. Such leases may provide for periodic adjustments of rentals during the term of the lease based on changes in various economic indicators. The following table presents minimum future payments under noncancelable operating leases as of December 31, 2017:
|
| | | | |
Year ended December 31, (Dollars in thousands) | | Amount |
| 2018 | | $ | 35,627 |
|
| 2019 | | 35,545 |
|
| 2020 | | 32,117 |
|
| 2021 | | 31,451 |
|
| 2022 | | 27,501 |
|
| 2023 and thereafter | | 64,234 |
|
| Net minimum operating lease payments | | $ | 226,475 |
|
Rent expense for premises and equipment leased under operating leases totaled $31.3 million, $24.8 million and $21.9 million in 2017, 2016 and 2015, respectively.
Commitments to Extend Credit
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established in the agreement. Such commitments generally have fixed expiration dates, or other termination clauses, and usually require a fee paid by the client upon us issuing the commitment. The following table summarizes information related to our commitments to extend credit at December 31, 20172020 and 2016,2019, respectively:
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Loan commitments available for funding: (1) | | | | |
| Fixed interest rate commitments | | $ | 1,478,157 |
| | $ | 1,475,179 |
|
| Variable interest rate commitments | | 14,034,169 |
| | 13,572,161 |
|
| Total loan commitments available for funding | | 15,512,326 |
| | 15,047,340 |
|
| Commercial and standby letters of credit (2) | | 1,950,211 |
| | 1,695,856 |
|
| Total unfunded credit commitments | | $ | 17,462,537 |
| | $ | 16,743,196 |
|
| Commitments unavailable for funding (3) | | $ | 2,117,057 |
| | $ | 1,719,524 |
|
| Allowance for unfunded credit commitments (4) | | 51,770 |
| | 45,265 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Loan commitments (1) | | $ | 28,975,133 | | | $ | 21,743,359 | |
| Commercial and standby letters of credit (2) | | 3,007,118 | | | 2,778,561 | |
| Total unfunded credit commitments | | $ | 31,982,251 | | | $ | 24,521,920 | |
| Allowance for unfunded credit commitments (3) | | 120,796 | | | 67,656 | |
| |
(1) | Represents commitments which are available for funding, due to clients meeting all collateral, compliance and financial covenants required under loan commitment agreements. |
| |
(2) | See below for additional information on our commercial and standby letters of credit. |
| |
(3) | Represents commitments which are currently unavailable for funding due to clients failing to meet all collateral, compliance and financial covenants under loan commitment agreements. |
| |
(4) | Our allowance for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit. |
(1)Represents commitments which are available for funding, due to clients meeting all collateral, compliance and financial covenants required under loan commitment agreements.
(2)See below for additional information on our commercial and standby letters of credit.
(3)Our allowance for credit losses for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit.
Our potential exposure to credit loss for commitments to extend credit, in the event of nonperformance by the other party to the financial instrument, is the contractual amount of the available unused loan commitment. We use the same credit approval and monitoring process in extending credit commitments as we do in making loans. The actual liquidity needs and the credit risk that we have experienced have historically been lower than the contractual amount of commitments to extend credit because
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
a significant portion of these commitments expire without being drawn upon. We evaluate each potential borrower and the necessary collateral on an individual basis. The type of collateral varies, but may include real property, intellectual property, bank deposits or business and personal assets. The credit risk associated with these commitments is considered in the allowance for unfunded credit commitments.
Commercial and Standby Letters of Credit
Commercial and standby letters of credit represent conditional commitments issued by us on behalf of a client to guarantee the performance of the client to a third party when certain specified future events have occurred. Commercial letters of credit are issued primarily for inventory purchases by a client and are typically short-term in nature. We provide two types of standby letters of credit: performance and financial standby letters of credit. Performance standby letters of credit are issued to guarantee the performance of a client to a third party when certain specified future events have occurred and are primarily used to support performance instruments such as bid bonds, performance bonds, lease obligations, repayment of loans and past due notices. Financial standby letters of credit are conditional commitments issued by us to guarantee the payment by a client to a third party (beneficiary) and are primarily used to support many types of domestic and international payments. These standby letters of credit have fixed expiration dates and generally require a fee to be paid by the client at the time we issue the commitment.
The credit risk involved in issuing letters of credit is essentially the same as that involved with extending credit commitments to clients, and accordingly, we use a credit evaluation process and collateral requirements similar to those for credit commitments. Our standby letters of credit often are cash secured by our clients. The actual liquidity needs and the credit risk that we have experienced historically have been lower than the contractual amount of letters of credit issued because a significant portion of these conditional commitments expire without being drawn upon.
The table below summarizes our commercial and standby letters of credit at December 31, 2017.2020. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Expires In One Year or Less | | Expires After One Year | | Total Amount Outstanding | | Maximum Amount of Future Payments |
| Financial standby letters of credit | | $ | 2,807,942 | | | $ | 66,641 | | | $ | 2,874,583 | | | $ | 2,874,583 | |
| Performance standby letters of credit | | 108,681 | | | 19,488 | | | 128,169 | | | 128,169 | |
| Commercial letters of credit | | 4,366 | | | 0 | | | 4,366 | | | 4,366 | |
| Total | | $ | 2,920,989 | | | $ | 86,129 | | | $ | 3,007,118 | | | $ | 3,007,118 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Expires In One Year or Less | | Expires After One Year | | Total Amount Outstanding | | Maximum Amount of Future Payments |
| Financial standby letters of credit | | $ | 1,765,857 |
| | $ | 60,819 |
| | $ | 1,826,676 |
| | $ | 1,826,676 |
|
| Performance standby letters of credit | | 94,519 |
| | 11,105 |
| | 105,624 |
| | 105,624 |
|
| Commercial letters of credit | | 17,911 |
| | — |
| | 17,911 |
| | 17,911 |
|
| Total | | $ | 1,878,287 |
| | $ | 71,924 |
| | $ | 1,950,211 |
| | $ | 1,950,211 |
|
Deferred fees related to financial and performance standby letters of credit were $12 million at December 31, 2017 and $10$16.9 million at December 31, 2016.2020 and $17.2 million at December 31, 2019. At December 31, 2017,2020, collateral in the form of cash of $961 million$1.7 billion was available to us to reimburse losses, if any, under financial and performance standby letters of credit.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Commitments to Invest in Venture Capital and Private Equity Funds
We make commitments to invest in venture capital and private equity funds, which generally makes investments in privately-held companies. Commitments to invest in these funds are generally made for a 10-year10-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to call most of the capital commitments over 5 to 7 years, and in certain cases, the funds may not call 100% of committed capital. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total capital commitments, unfunded capital commitments, and our ownership percentage in each fund at December 31, 2017:2020:
|
| | | | | | | | | | | |
(Dollars in thousands) | | SVBFG Capital Commitments | | SVBFG Unfunded Commitments | | SVBFG Ownership of each Fund (3) |
| CP I, LP | | $ | 6,000 |
| | $ | 270 |
| | 10.7 | % |
| CP II, LP (1) | | 1,200 |
| | 162 |
| | 5.1 |
|
| Shanghai Yangpu Venture Capital Fund (LP) | | 891 |
| | — |
| | 6.8 |
|
| Strategic Investors Fund, LP | | 15,300 |
| | 688 |
| | 12.6 |
|
| Strategic Investors Fund II, LP | | 15,000 |
| | 1,050 |
| | 8.6 |
|
| Strategic Investors Fund III, LP | | 15,000 |
| | 1,275 |
| | 5.9 |
|
| Strategic Investors Fund IV, LP | | 12,239 |
| | 2,325 |
| | 5.0 |
|
| Strategic Investors Fund V funds | | 515 |
| | 131 |
| | Various |
|
| Capital Preferred Return Fund, LP | | 12,688 |
| | — |
| | 20.0 |
|
| Growth Partners, LP | | 24,670 |
| | 1,340 |
| | 33.0 |
|
| Debt funds (equity method accounting) | | 58,493 |
| | — |
| | Various |
|
| Other fund investments (2) | | 302,659 |
| | 8,901 |
| | Various |
|
| Total | | $ | 464,655 |
| | $ | 16,142 |
| | |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | SVBFG Capital Commitments | | SVBFG Unfunded
Commitments | | SVBFG Ownership
of each Fund |
| | | | | | |
| CP II, LP (1) | | $ | 1,200 | | | $ | 162 | | | 5.1 | % |
| Capital Preferred Return Fund, LP | | 12,688 | | | 0 | | | 20.0 | |
| Growth Partners, LP | | 24,670 | | | 1,340 | | | 33.0 | |
| Strategic Investors Fund, LP | | 15,300 | | | 688 | | | 12.6 | |
| Strategic Investors Fund II, LP | | 15,000 | | | 1,050 | | | 8.6 | |
| Strategic Investors Fund III, LP | | 15,000 | | | 1,275 | | | 5.9 | |
| Strategic Investors Fund IV, LP | | 12,239 | | | 2,325 | | | 5.0 | |
| Strategic Investors Fund V funds | | 515 | | | 131 | | | Various |
| Other venture capital and private equity fund investments (equity method accounting) | | 25,232 | | | 5,566 | | | Various |
| Debt funds (equity method accounting) | | 58,733 | | | 211 | | | Various |
| Other fund investments (2) | | 277,301 | | | 9,335 | | | Various |
| Total | | $ | 457,878 | | | $ | 22,083 | | | |
| |
(1) | Our ownership includes direct ownership of 1.3 percent and indirect ownership of 3.8 percent through our investment in Strategic Investors Fund II, LP.
|
| |
(2) | Represents commitments to 241 funds (primarily venture capital funds) where our ownership interest is generally less than five percent of the voting interests of each such fund.
|
| |
(3) | We are subject to the Volcker Rule which restricts or limits us from sponsoring or having ownership interests in “covered” funds including venture capital and private equity funds. See “Business - Supervision and Regulation” under Part I, Item 1 of this report. |
(1)Our ownership includes direct ownership of 1.3 percent and indirect ownership of 3.8 percent through our investment in Strategic Investors Fund II, LP.
(2)Represents commitments to 168 funds (primarily venture capital funds) where our ownership interest is generally less than 5 of the voting interests of each such fund.
The following table details the amounts of remaining unfunded commitments to venture capital and private equity funds by our consolidated managed funds of funds (including our interest and the noncontrolling interests) at December 31, 2017:2020:
| | | | | | | | |
(Dollars in thousands) | | Unfunded Commitments |
| Strategic Investors Fund, LP | | $ | 196 | |
| Capital Preferred Return Fund, LP | | 1,516 | |
| Growth Partners, LP | | 2,549 | |
| Total | | $ | 4,261 | |
|
| | | | |
(Dollars in thousands) | | Unfunded Commitments |
| Strategic Investors Fund, LP | | $ | 1,338 |
|
| Capital Preferred Return Fund, LP | | 1,952 |
|
| Growth Partners, LP | | 2,552 |
|
| Total | | $ | 5,842 |
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
22.Fair Value of Financial Instruments
| |
20.
| Fair Value of Financial Instruments
|
Fair Value Measurements
Our available-for-sale securities, derivative instruments and certain non-marketable and other equity securities are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements. We disclose our method and approach for fair value measurements of assets and liabilities in Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | |
Level 1 | |
Level 2 | |
Level 3 | | Balance at December 31, 2020 |
| Assets | | | | | | | | |
| Available-for-sale securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 4,469,728 | | | $ | 0 | | | $ | 0 | | | $ | 4,469,728 | |
| U.S. agency debentures | | 0 | | | 237,307 | | | 0 | | | 237,307 | |
| Foreign government debt securities | | 24,492 | | | 0 | | | 0 | | | 24,492 | |
| Residential mortgage-backed securities: | | | | | | | | |
| Agency-issued mortgage-backed securities | | 0 | | | 13,503,681 | | | 0 | | | 13,503,681 | |
Agency-issued collateralized mortgage obligations—fixed rate | | 0 | | | 8,106,564 | | | 0 | | | 8,106,564 | |
| | | | | | | | |
| Agency-issued commercial mortgage-backed securities | | 0 | | | 4,570,666 | | | 0 | | | 4,570,666 | |
| Total available-for-sale securities | | 4,494,220 | | | 26,418,218 | | | 0 | | | 30,912,438 | |
| Non-marketable and other equity securities (fair value accounting): | | | | | | | | |
| Non-marketable securities: | | | | | | | | |
| Venture capital and private equity fund investments measured at net asset value | | — | | | — | | | — | | | 273,823 | |
| | | | | | | | |
| Other equity securities in public companies | | 43,344 | | | 237,460 | | | 0 | | | 280,804 | |
Total non-marketable and other equity securities (fair value
accounting) | | 43,344 | | | 237,460 | | | 0 | | | 554,627 | |
| Other assets: | | | | | | | | |
| | | | | | | | |
| Foreign exchange forward and option contracts | | 0 | | | 216,977 | | | 0 | | | 216,977 | |
| Equity warrant assets | | 0 | | | 11,221 | | | 192,217 | | | 203,438 | |
| | | | | | | | |
| Client interest rate derivatives | | 0 | | | 67,854 | | | 0 | | | 67,854 | |
| Total assets | | $ | 4,537,564 | | | $ | 26,951,730 | | | $ | 192,217 | | | $ | 31,955,334 | |
| Liabilities | | | | | | | | |
| Foreign exchange forward and option contracts | | $ | 0 | | | $ | 210,833 | | | $ | 0 | | | $ | 210,833 | |
| | | | | | | | |
| Client interest rate derivatives | | 0 | | | 26,646 | | | 0 | | | 26,646 | |
| Total liabilities | | $ | 0 | | | $ | 237,479 | | | $ | 0 | | | $ | 237,479 | |
|
| | | | | | | | | | | | | | | | |
| (Dollars in thousands) | |
Level 1 | |
Level 2 | |
Level 3 | | Balance at December 31, 2017 |
| Assets | | | | | | | | |
| Available-for-sale securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 6,840,502 |
| | $ | — |
| | $ | — |
| | $ | 6,840,502 |
|
| U.S. agency debentures | | — |
| | 1,567,128 |
| | — |
| | 1,567,128 |
|
| Residential mortgage-backed securities: | | | | | | | | |
Agency-issued collateralized mortgage obligations - fixed rate | | — |
| | 2,267,035 |
| | — |
| | 2,267,035 |
|
Agency-issued collateralized mortgage obligations - variable rate | | — |
| | 373,730 |
| | — |
| | 373,730 |
|
| Equity securities | | 158 |
| | 72,111 |
| | — |
| | 72,269 |
|
| Total available-for-sale securities | | 6,840,660 |
| | 4,280,004 |
| | — |
| | 11,120,664 |
|
| Non-marketable and other securities (fair value accounting): | | | | | | | | |
| Non-marketable securities: | | | | | | | | |
Venture capital and private equity fund investments measured at net asset value | | — |
| | — |
| | — |
| | 127,192 |
|
| Other venture capital investments (1) | | — |
| | — |
| | 919 |
| | 919 |
|
| Other securities (1) | | 310 |
| | — |
| | — |
| | 310 |
|
Total non-marketable and other securities (fair value accounting) | | 310 |
| | — |
| | 919 |
| | 128,421 |
|
| Other assets: | | | | | | | | |
| Foreign exchange forward and option contracts | | — |
| | 96,636 |
| | — |
| | 96,636 |
|
| Equity warrant assets | | — |
| | 2,432 |
| | 121,331 |
| | 123,763 |
|
| Client interest rate derivatives | | — |
| | 11,753 |
| | — |
| | 11,753 |
|
| Total assets | | $ | 6,840,970 |
| | $ | 4,390,825 |
| | $ | 122,250 |
| | $ | 11,481,237 |
|
| Liabilities | | | | | | | | |
| Foreign exchange forward and option contracts | | $ | — |
| | $ | 96,641 |
| | $ | — |
| | $ | 96,641 |
|
| Client interest rate derivatives | | — |
| | 11,940 |
| | — |
| | 11,940 |
|
| Total liabilities | | $ | — |
| | $ | 108,581 |
| | $ | — |
| | $ | 108,581 |
|
| |
(1) | Included in Level 1 and Level 3 assets are $0.2 million and $0.8 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.
|
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2016 |
| Assets | | | | | | | | |
| Available-for-sale securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 8,909,491 |
| | $ | — |
| | $ | — |
| | $ | 8,909,491 |
|
| U.S. agency debentures | | — |
| | 2,078,375 |
| | — |
| | 2,078,375 |
|
| Residential mortgage-backed securities: | | | | | | | |
|
Agency-issued collateralized mortgage obligations - fixed rate | | — |
| | 1,152,665 |
| | — |
| | 1,152,665 |
|
Agency-issued collateralized mortgage obligations - variable rate | | — |
| | 474,283 |
| | — |
| | 474,283 |
|
| Equity securities | | 175 |
| | 5,422 |
| | — |
| | 5,597 |
|
| Total available-for-sale securities | | 8,909,666 |
| | 3,710,745 |
| | — |
| | 12,620,411 |
|
| Non-marketable and other securities (fair value accounting): | | | | | | | | |
| Non-marketable securities: | | | | | | | | |
Venture capital and private equity fund investments measured at net asset value | | — |
| | — |
| | — |
| | 141,649 |
|
| Other venture capital investments (1) | | — |
| | — |
| | 2,040 |
| | 2,040 |
|
| Other securities (1) | | 753 |
| | — |
| | — |
| | 753 |
|
Total non-marketable and other securities (fair value accounting) | | 753 |
| | — |
| | 2,040 |
| | 144,442 |
|
| Other assets: | | | | | | | | |
| Interest rate swaps | | — |
| | 810 |
| | — |
| | 810 |
|
| Foreign exchange forward and option contracts | | — |
| | 68,027 |
| | — |
| | 68,027 |
|
| Equity warrant assets | | — |
| | 2,310 |
| | 128,813 |
| | 131,123 |
|
| Client interest rate derivatives | | — |
| | 10,110 |
| | — |
| | 10,110 |
|
| Total assets | | $ | 8,910,419 |
| | $ | 3,792,002 |
| | $ | 130,853 |
|
| $ | 12,974,923 |
|
| Liabilities | | | | | | | | |
| Foreign exchange forward and option contracts | | $ | — |
| | $ | 54,668 |
| | $ | — |
| | $ | 54,668 |
|
| Client interest rate derivatives | | — |
| | 9,770 |
| | — |
| | 9,770 |
|
| Total liabilities | | $ | — |
| | $ | 64,438 |
| | $ | — |
| | $ | 64,438 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2019 |
| Assets | | | | | | | | |
| Available-for-sale securities: | | | | | | | | |
| U.S. Treasury securities | | $ | 6,894,010 | | | $ | 0 | | | $ | 0 | | | $ | 6,894,010 | |
| U.S. agency debentures | | 0 | | | 99,547 | | | 0 | | | 99,547 | |
| Foreign government debt securities | | 9,038 | | | 0 | | | 0 | | | 9,038 | |
| Residential mortgage-backed securities: | | | | | | | | |
| Agency-issued mortgage-backed securities | | 0 | | | 4,148,791 | | | 0 | | | 4,148,791 | |
| Agency-issued collateralized mortgage obligations—fixed rate | | 0 | | | 1,538,343 | | | 0 | | | 1,538,343 | |
| | | | | | | | |
| Agency-issued commercial mortgage-backed securities | | 0 | | | 1,325,190 | | | 0 | | | 1,325,190 | |
| | | | | | | | |
| Total available-for-sale securities | | 6,903,048 | | | 7,111,871 | | | 0 | | | 14,014,919 | |
| Non-marketable and other equity securities (fair value accounting): | | | | | | | | |
| Non-marketable securities: | | | | | | | | |
| Venture capital and private equity fund investments measured at net asset value | | — | | | — | | | — | | | 265,263 | |
| Venture capital and private equity fund investments not measured at net asset value (1) | | 0 | | | 0 | | | 134 | | | 134 | |
| Other equity securities in public companies | | 17,290 | | | 41,910 | | | 0 | | | 59,200 | |
Total non-marketable and other equity securities (fair value
accounting) | | 17,290 | | | 41,910 | | | 134 | | | 324,597 | |
| Other assets: | | | | | | | | |
| Foreign exchange forward and option contracts | | 0 | | | 115,854 | | | 0 | | | 115,854 | |
| Equity warrant assets | | 0 | | | 4,435 | | | 161,038 | | | 165,473 | |
| Interest rate swaps | | 0 | | | 22,676 | | | 0 | | | 22,676 | |
| Client interest rate derivatives | | 0 | | | 28,811 | | | 0 | | | 28,811 | |
| Total assets | | $ | 6,920,338 | | | $ | 7,325,557 | | | $ | 161,172 | | | $ | 14,672,330 | |
| Liabilities | | | | | | | | |
| Foreign exchange forward and option contracts | | $ | 0 | | | $ | 98,207 | | | $ | 0 | | | $ | 98,207 | |
| Interest rate swaps | | 0 | | | 25,623 | | | 0 | | | 25,623 | |
| Client interest rate derivatives | | 0 | | | 14,154 | | | 0 | | | 14,154 | |
| Total liabilities | | $ | 0 | | | $ | 137,984 | | | $ | 0 | | | $ | 137,984 | |
| |
(1) | Included in Level 1 and Level 3 assets are $0.6 million and $1.8 million, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.
|
(1)Included in Level 3 assets is $120 thousand attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for 2017, 20162020, 2019 and 2015,2018, respectively:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Beginning Balance | | Total Realized and Unrealized Gains (Losses), net Included in Income | | Sales | | Issuances | | Distributions and Other Settlements | | Transfers Out of Level 3 | | Ending Balance |
| Year ended December 31, 2017: | | | | | | | | | | | | | | |
| Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | |
| Other venture capital investments (1) | | $ | 2,040 |
| | $ | 971 |
| | $ | (2,092 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 919 |
|
| Other assets: | | | | | | | | | | | | | | |
| Equity warrant assets (2) | | 128,813 |
| | 54,263 |
| | (74,769 | ) | | 14,537 |
| | — |
| | (1,513 | ) | | 121,331 |
|
| Total assets | | $ | 130,853 |
|
| $ | 55,234 |
|
| $ | (76,861 | ) |
| $ | 14,537 |
|
| $ | — |
|
| $ | (1,513 | ) |
| $ | 122,250 |
|
| Year ended December 31, 2016: | | | | | | | | | | | | | | |
| Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | |
| Other venture capital investments (1) | | $ | 2,040 |
| | $ | (21 | ) | | $ | (4 | ) | | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 2,040 |
|
| Other assets: | | | | | | | | | | | | | | |
| Equity warrant assets (2) | | 135,168 |
| | 38,091 |
| | (56,643 | ) | | 13,405 |
| | — |
| | (1,208 | ) | | 128,813 |
|
| Total assets | | $ | 137,208 |
|
| $ | 38,070 |
|
| $ | (56,647 | ) |
| $ | 13,405 |
|
| $ | 25 |
|
| $ | (1,208 | ) |
| $ | 130,853 |
|
| Year ended December 31, 2015: | | | | | | | | | | | | | | |
| Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | |
| Other venture capital investments | | $ | 3,291 |
| | $ | 1,192 |
| | $ | (2,356 | ) | | $ | — |
| | $ | (87 | ) | | $ | — |
| | $ | 2,040 |
|
| Other assets: | | | | | | | | | | | | | | |
| Equity warrant assets (2) | | 114,698 |
| | 71,402 |
| | (61,044 | ) | | 12,534 |
| | — |
| | (2,422 | ) | | 135,168 |
|
| Total assets | | $ | 117,989 |
| | $ | 72,594 |
| | $ | (63,400 | ) | | $ | 12,534 |
| | $ | (87 | ) | | $ | (2,422 | ) | | $ | 137,208 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Beginning
Balance | | Total Net Gains (Losses) Included in Net Income | | Purchases | | Sales/Exits | | Issuances | | Distributions and Other Settlements | | Transfers Out of Level 3 | | Ending
Balance |
| Year ended December 31, 2020: | | | | | | | | | | | | | | | | |
| Non-marketable and other equity securities (fair value accounting): | | | | | | | | | | | | | | | | |
| Venture capital and private equity fund investments not measured at net asset value (1) | | $ | 134 | | | $ | (30) | | | $ | 0 | | | $ | (104) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Other assets: | | | | | | | | | | | | | | | | |
| Equity warrant assets (2) | | 161,038 | | | 228,944 | | | 0 | | | (214,933) | | | 19,014 | | | 0 | | | (1,846) | | | 192,217 | |
| Total assets | | $ | 161,172 | | | $ | 228,914 | | | $ | 0 | | | $ | (215,037) | | | $ | 19,014 | | | $ | 0 | | | $ | (1,846) | | | $ | 192,217 | |
| Year ended December 31, 2019: | | | | | | | | | | | | | | | | |
| Non-marketable and other equity securities (fair value accounting): | | | | | | | | | | | | | | | | |
| Venture capital and private equity fund investments not measured at net asset value (1) | | $ | 1,079 | | | $ | 12 | | | $ | 0 | | | $ | (960) | | | $ | 0 | | | $ | 3 | | | $ | 0 | | | $ | 134 | |
| Other assets: | | | | | | | | | | | | | | | | |
| Equity warrant assets (2) | | 145,199 | | | 133,910 | | | 575 | | | (130,392) | | | 16,453 | | | 0 | | | (4,707) | | | 161,038 | |
| Total assets | | $ | 146,278 | | | $ | 133,922 | | | $ | 575 | | | $ | (131,352) | | | $ | 16,453 | | | $ | 3 | | | $ | (4,707) | | | $ | 161,172 | |
| Year ended December 31, 2018: | | | | | | | | | | | | | | | | |
| Non-marketable and other equity securities (fair value accounting): | | | | | | | | | | | | | | | | |
| Venture capital and private equity fund investments not measured at net asset value (1) | | $ | 919 | | | $ | 457 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (297) | | | $ | 0 | | | $ | 1,079 | |
| Other assets: | | | | | | | | | | | | | | | | |
| Equity warrant assets (2) | | 121,331 | | | 87,982 | | | 0 | | | (78,752) | | | 17,941 | | | 0 | | | (3,303) | | | 145,199 | |
| Total assets | | $ | 122,250 | | | $ | 88,439 | | | $ | 0 | | | $ | (78,752) | | | $ | 17,941 | | | $ | (297) | | | $ | (3,303) | | | $ | 146,278 | |
| |
(1) | Realized and unrealized gains (losses) are recorded in the line item “Gains on investment securities, net”, a component of noninterest income. |
| |
(2) | Realized and unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net”, a component of noninterest income. |
(1)Realized and unrealized gains (losses) are recorded in the line item “Gains on investment securities, net,” a component of noninterest income.
(2)Realized and unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net,” a component of noninterest income.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table presents the amount of unrealized gains (losses) included in earnings (which is inclusive of noncontrolling interest) attributable to Level 3 assets still held at December 31, 20172020 and 2016,2019, respectively:
|
| | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Non-marketable and other securities (fair value accounting): | | | | |
| Other venture capital investments (1) | | $ | (444 | ) | | $ | 1,739 |
|
| Other assets: | | | | |
| Equity warrant assets (2) | | 11,174 |
| | 14,502 |
|
| Total unrealized gains, net | | $ | 10,730 |
| | $ | 16,241 |
|
| Unrealized (losses) gains attributable to noncontrolling interests | | $ | (397 | ) | | $ | 1,553 |
|
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Non-marketable and other equity securities (fair value accounting): | | | | |
| Venture capital and private equity fund investments not measured at net asset value (1) | | $ | 0 | | | $ | (222) | |
| | | | |
| | | | |
| Other assets: | | | | |
| Equity warrant assets (2) | | 54,417 | | | 34,691 | |
| Total unrealized gains, net | | $ | 54,417 | | | $ | 34,469 | |
| Unrealized losses attributable to noncontrolling interests (1) | | $ | 0 | | | $ | (199) | |
| |
(1) | Unrealized gains are recorded on the line item “gains on investment securities, net”, a component of noninterest income. |
| |
(2) | Unrealized gains are recorded on the line item “gains on equity warrant assets, net”, a component of noninterest income. |
(1)Unrealized gains are recorded in the line item “Gains on investment securities, net,” a component of noninterest income.
(2)Unrealized gains are recorded in the line item “Gains on equity warrant assets, net,” a component of noninterest income.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of current sales restrictions to which these securities are subject, the actual sales of securities and the timing of such actual sales.
The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at December 31, 20172020 and 2016.2019. We have not included in this table our venture capital and private equity fund investments (fair value accounting) as we use net asset value per share (as obtained from the general partners of the investments) as a practical expedient to determine fair value.
|
| | | | | | | | | | | |
| (Dollars in thousands) | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Weighted Average |
| December 31, 2017: | | | | | | | | |
Other venture capital investments (fair value accounting) | | $ | 919 |
| | Private company equity pricing | | (1) | | (1) |
Equity warrant assets (public portfolio) | | 1,936 |
| | Black-Scholes option pricing model | | Volatility | | 47.9 | % |
| Risk-Free interest rate | 2.1 |
|
| Sales restrictions discount (2) | 15.5 |
|
Equity warrant assets (private portfolio) | | 119,395 |
| | Black-Scholes option pricing model | | Volatility | | 36.7 |
|
| Risk-Free interest rate | 1.8 |
|
| Marketability discount (3) | 16.4 |
|
| Remaining life assumption (4) | 45.0 |
|
| December 31, 2016: | | | | | | | | |
Other venture capital investments (fair value accounting) | | $ | 2,040 |
| | Private company equity pricing | | (1) | | (1) |
Equity warrant assets (public portfolio) | | 764 |
| | Black-Scholes option pricing model | | Volatility | | 46.6 | % |
| Risk-Free interest rate | 2.1 |
|
| Sales restrictions discount (2) | 17.7 |
|
Equity warrant assets (private portfolio) | | 128,049 |
| | Black-Scholes option pricing model | | Volatility | | 36.9 |
|
| Risk-Free interest rate | 1.3 |
|
| Marketability discount (3) | 17.1 |
|
| Remaining life assumption (4) | 45.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Input Rage | | Weighted Average |
| December 31, 2020: | | | | | | | | | | |
| | | | | | | | | | |
| Equity warrant assets (public portfolio) | | $ | 1,036 | | | Black-Scholes option pricing model | | Volatility | | 46.0% - 56.8% | | 49.1 | % |
| Risk-Free interest rate | | 0.3 - 0.9 | 0.6 | |
| Sales restrictions discount (2) | | 10.0- 20.0 | 10.2 | |
| Equity warrant assets (private portfolio) | | 191,181 | | | Black-Scholes option pricing model | | Volatility | | 24.4 - 56.8 | | 43.2 | |
| Risk-Free interest rate | | 0.01 - 0.5 | 0.1 | |
| Marketability discount (3) | | 20.6 | 20.6 | |
| Remaining life assumption (4) | | 40.0 | 40.0 | |
| December 31, 2019: | | | | | | | | | | |
| Venture capital and private equity fund investments (fair value accounting) | | $ | 134 | | | Private company equity pricing | | (1) | | (1) | | (1) | |
| Equity warrant assets (public portfolio) | | 346 | | | Black-Scholes option pricing model | | Volatility | | 39.2% - 54.8% | | 50.7 | % |
| Risk-Free interest rate | | 1.9 | 1.9 | |
| Sales restrictions discount (2) | | 10.0 - 20.0 | 13.6 | |
| Equity warrant assets (private portfolio) | | 160,692 | | | Black-Scholes option pricing model | | Volatility | | 23.6- 54.8 | | 38.2 | |
| Risk-Free interest rate | | 0.5 - 1.9 | 1.6 | |
| Marketability discount (3) | | 17.5 | 17.5 | |
| Remaining life assumption (4) | | 45.0 | 45.0 | |
| |
(1) | (1)In determining the fair value of our other venture capital investment portfolio, we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Additionally, we have ongoing communication with the portfolio companies and venture capital fund managers, to determine whether there is a material change in fair value. We |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
our venture capital and private equity fund investment portfolio (not measured at net asset value), we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Additionally, we have ongoing communication with the portfolio companies and venture capital fund managers, to determine whether there is a material change in fair value. We use company provided valuation reports, if available, to support our valuation assumptions. These factors are specific to each portfolio company and a weighted average or range of values of the unobservable inputs is not meaningful.
| |
(2) | We adjust quoted market prices of public companies which are subject to certain sales restrictions. Sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sales restrictions which typically range from three to six months.
SVB FINANCIAL GROUP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (2)We adjust quoted market prices of public companies, which are subject to certain sales restrictions. Sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sales restrictions which typically range from three to six months. (3)Our marketability discount is applied to all private company warrants to account for a general lack of liquidity due to the private nature of the associated underlying company. The quantitative measure used is based upon various option-pricing models. On a quarterly basis, a sensitivity analysis is performed on our marketability discount. (4)We adjust the contractual remaining term of private company warrants based on our estimate of the actual remaining life, which we determine by utilizing historical data on terminations and exercises. At December 31, 2020, the weighted average contractual remaining term was 6.0 years, compared to our estimated remaining life of 2.4 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption. |
| |
(3) | Our marketability discount is applied to all private company warrants to account for a general lack of liquidity due to the private nature of the associated underlying company. The quantitative measure used is based on long-run averages and is influenced over time by various factors, including market conditions. On a quarterly basis, a sensitivity analysis is performed on our marketability discount. |
| |
(4) | We adjust the contractual remaining term of private company warrants based on our best estimate of the actual remaining life, which we determine by utilizing historical data on cancellations and exercises. At December 31, 2017, the weighted average contractual remaining term was 6.0 years, compared to our estimated remaining life of 2.7 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption.
|
During 2017, 20162020, 2019 and 2015 there were no2018, we did not have any transfers between Level 23 and Level 1. During 2017, 2016 and 2015, there were no transfers in our other venture capital investments from Level 3 to Level 2.
All other transfers from Level 3 to Level 2 during 2017, 20162020, 2019 and 20152018 were due to the transfer of equity warrant assets from our private portfolio to our public portfolio (see our Level 3 reconciliation above). All amounts reported as transfers represent the fair value as
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Financial Instruments not Carried at Fair Value
FASB guidance over financial instruments requires that we disclose estimated fair values for our financial instruments not carried at fair value. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with these requirements.
Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. As broadly traded markets do not exist for many of our financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. The aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.
The following describes the methods and assumptions used in estimating the fair values of financial instruments for which carrying value approximates fair value and assets and liabilities measured at fair value on a nonrecurring basis and excludes financial instruments and assets and liabilities already recorded at fair value as described above.
Financial Instruments for which Carrying Value Approximates Fair Value
Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and cash equivalents; FHLB and FRB stock; accrued interest receivable; short-term borrowings; short-term time deposits; and accrued interest payable. In addition, U.S. GAAP requires that the fair value of deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not permitted.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value on a Recurring Basis
Held-to-Maturity Securities
Held-to-maturity securities include similar investments held in our AFS securities portfolio and are valued using the same methodologies. All securities included in our HTM securities portfolio are valued using Level 2 inputs. Refer to Level 2 fair value measurements in Note 2—“Summary of Significant Accounting Policies” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for significant inputs used in the valuation of our HTM securities.
Non-Marketable (Cost and Equity Method Accounting)
Non-marketable securities includes other investments (equity method accounting), venture capital and private equity fund investments (cost method accounting) and other venture capital investments (cost method accounting). Other investments
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(equity method accounting) includes our investment in SPD-SVB, our joint venture bank in China. At this time, the carrying value of our investment in SPD-SVB is a reasonable estimate of fair value. The fair value of the remaining other investments (equity method accounting) and the fair value of venture capital and private equity fund investments (cost method accounting) and other venture capital investments (cost method accounting) is based on financial information obtained from the fund investments’ or debt fund investments’ respective general partners. For private company investments, estimated fair value is based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, and financing transactions subsequent to the acquisition of the investment. For our fund investments, we utilize the net asset value per share as obtained from the general partners of the investments. We adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
Loans
The fair value of fixed and variable rate loans is estimated by discounting contractual cash flows using rates that reflect current pricing for similar loans and the projected forward yield curve. This method is not based on the exit price concept of fair value required under ASC 820, Fair Value Measurements and Disclosures.
Long-Term Deposits
The fair value of long-term time deposits is estimated by discounting the cash flows using our cost of borrowings and the projected forward yield curve over their remaining contractual term.
Long-Term Debt
The fair value of long-term debt is generally based on quoted market prices, when available, or is estimated based on calculations utilizing third party pricing services and current market spread, price indications from reputable dealers or observable market prices of the underlying instrument(s), whichever is deemed more reliable.
Off-Balance Sheet Financial Instruments
The fair value of net available commitments to extend credit is estimated based on the average amount we would receive or pay to execute a new agreement with identical terms and pricing, while taking into account the counterparties’ credit standings.
Letters of credit are carried at their fair value, which is equivalent to the residual premium or fee at December 31, 2017 and 2016. Commitments to extend credit and letters of credit typically result in loans with a market interest rate if funded.
The following fair value hierarchy table presents the estimated fair values of our financial instruments that are not carried at fair value at December 31, 20172020 and 2016:2019:
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value |
| (Dollars in thousands) | | Carrying Amount | | Total | |
Level 1 | |
Level 2 | |
Level 3 |
| December 31, 2017: | | | | | | | | | | |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,923,075 |
| | $ | 2,923,075 |
| | $ | 2,923,075 |
| | $ | — |
| | $ | — |
|
| Held-to-maturity securities | | 12,663,455 |
| | 12,548,280 |
| | — |
| | 12,548,280 |
| | — |
|
| Non-marketable securities (cost and equity method accounting) not measured at net asset value | | 120,019 |
| | 126,345 |
| | — |
| | — |
| | 126,345 |
|
| Non-marketable securities (cost and equity method accounting) measured at net asset value (1) | | 228,399 |
| | 331,496 |
| | — |
| | — |
| | — |
|
| Net commercial loans | | 20,238,247 |
| | 20,520,623 |
| | — |
| | — |
| | 20,520,623 |
|
| Net consumer loans | | 2,613,045 |
| | 2,593,538 |
| | — |
| | — |
| | 2,593,538 |
|
| FHLB and FRB stock | | 60,020 |
| | 60,020 |
| | — |
| | — |
| | 60,020 |
|
| Accrued interest receivable | | 141,773 |
| | 141,773 |
| | — |
| | 141,773 |
| | — |
|
| Financial liabilities: | | | |
|
| | | | | | |
| Short-term FHLB advances | | 700,000 |
| | 700,000 |
| | 700,000 |
| | — |
| | — |
|
| Federal funds purchased | | 330,000 |
| | 330,000 |
| | 330,000 |
| | — |
| | — |
|
| Other short-term borrowings | | 3,730 |
| | 3,730 |
| | 3,730 |
| | — |
| | — |
|
| Non-maturity deposits (2) | | 44,206,929 |
| | 44,206,929 |
| | 44,206,929 |
| | — |
| | — |
|
| Time deposits | | 47,146 |
| | 46,885 |
| | — |
| | 46,885 |
| | — |
|
| 3.50% Senior Notes | | 347,303 |
| | 352,058 |
| | — |
| | 352,058 |
| | — |
|
| 5.375% Senior Notes | | 348,189 |
| | 374,483 |
| | — |
| | 374,483 |
| | — |
|
| Accrued interest payable | | 11,192 |
| | 11,192 |
| | — |
| | 11,192 |
| | — |
|
| Off-balance sheet financial assets: | | | | | | | | | | |
| Commitments to extend credit | | — |
| | 22,208 |
| | — |
| | — |
| | 22,208 |
|
| December 31, 2016: | | | | | | | | | | |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,545,750 |
| | $ | 2,545,750 |
| | $ | 2,545,750 |
| | $ | — |
| | $ | — |
|
| Held-to-maturity securities | | 8,426,998 |
| | 8,376,138 |
| | — |
| | 8,376,138 |
| | — |
|
| Non-marketable securities (cost and equity method accounting) not measured at net asset value | | 120,037 |
| | 127,343 |
| | — |
| | — |
| | 127,343 |
|
| Non-marketable securities (cost and equity method accounting) measured at net asset value (1) | | 245,626 |
| | 353,870 |
| | — |
| | — |
| | — |
|
| Net commercial loans | | 17,518,430 |
| | 17,811,356 |
| | — |
| | — |
| | 17,811,356 |
|
| Net consumer loans | | 2,156,148 |
| | 2,199,501 |
| | — |
| | — |
| | 2,199,501 |
|
| FHLB and FRB stock | | 57,592 |
| | 57,592 |
| | — |
| | — |
| | 57,592 |
|
| Accrued interest receivable | | 111,222 |
| | 111,222 |
| | — |
| | 111,222 |
| | — |
|
| Financial liabilities: | | | | | | | | | | |
| Short-term FHLB advances | | 500,000 |
| | 500,000 |
| | 500,000 |
| | — |
| | — |
|
| Other short-term borrowings | | 12,668 |
| | 12,668 |
| | 12,668 |
| | — |
| | — |
|
| Non-maturity deposits (2) | | 38,923,750 |
| | 38,923,750 |
| | 38,923,750 |
| | — |
| | — |
|
| Time deposits | | 56,118 |
| | 55,949 |
| | — |
| | 55,949 |
| | — |
|
| 3.50% Senior Notes | | 346,979 |
| | 337,600 |
| | — |
| | 337,600 |
| | — |
|
| 5.375% Senior Notes | | 347,586 |
| | 378,777 |
| | — |
| | 378,777 |
| | — |
|
| 6.05% Subordinated Notes (3) | | 46,646 |
| | 47,489 |
| | — |
| | 47,489 |
| | — |
|
| 7.0% Junior Subordinated Debentures | | 54,493 |
| | 53,140 |
| | — |
| | 53,140 |
| | — |
|
| Accrued interest payable | | 12,013 |
| | 12,013 |
| | — |
| | 12,013 |
| | — |
|
| Off-balance sheet financial assets: | | | | | | | | | | |
| Commitments to extend credit | | — |
| | 22,074 |
| | — |
| | — |
| | 22,074 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value |
| (Dollars in thousands) | | Carrying Amount | | Total | |
Level 1 | |
Level 2 | |
Level 3 |
| December 31, 2020: | | | | | | | | | | |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 17,674,763 | | | $ | 17,674,763 | | | $ | 17,674,763 | | | $ | 0 | | | $ | 0 | |
| Held-to-maturity securities | | 16,592,153 | | | 17,216,871 | | | 0 | | | 17,216,871 | | | 0 | |
| Non-marketable securities not measured at net asset value | | 240,761 | | | 240,761 | | | 0 | | | 0 | | | 240,761 | |
| Non-marketable securities measured at net asset value | | 390,658 | | | 390,658 | | | — | | | — | | | — | |
| Net commercial loans | | 39,886,296 | | | 40,412,490 | | | 0 | | | 0 | | | 40,412,490 | |
| Net consumer loans | | 4,847,427 | | | 4,911,451 | | | 0 | | | 0 | | | 4,911,451 | |
| FHLB and Federal Reserve Bank stock | | 61,232 | | | 61,232 | | | 0 | | | 0 | | | 61,232 | |
| Financial liabilities: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Short-term borrowings | | 20,553 | | | 20,553 | | | 0 | | | 20,553 | | | 0 | |
| Non-maturity deposits (1) | | 101,293,346 | | | 101,293,346 | | | 101,293,346 | | | 0 | | | 0 | |
| Time deposits | | 688,461 | | | 501,853 | | | 0 | | | 501,853 | | | 0 | |
| 3.50% Senior Notes | | 348,348 | | | 382,855 | | | 0 | | | 382,855 | | | 0 | |
| 3.125% Senior Notes | | 495,280 | | | 563,840 | | | 0 | | | 563,840 | | | 0 | |
| Off-balance sheet financial assets: | | | | | | | | | | |
| Commitments to extend credit | | 0 | | | 36,672 | | | 0 | | | 0 | | | 36,672 | |
| December 31, 2019: | | | | | | | | | | |
| Financial assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 6,781,783 | | | $ | 6,781,783 | | | $ | 6,781,783 | | | $ | 0 | | | $ | 0 | |
| Held-to-maturity securities | | 13,842,946 | | | 14,115,272 | | | 0 | | | 14,115,272 | | | 0 | |
| Non-marketable securities not measured at net asset value | | 195,405 | | | 195,405 | | | 0 | | | 0 | | | 195,405 | |
| Non-marketable securities measured at net asset value | | 235,351 | | | 235,351 | | | — | | | — | | | — | |
| Net commercial loans | | 29,104,532 | | | 29,615,176 | | | 0 | | | 0 | | | 29,615,176 | |
| Net consumer loans | | 3,755,180 | | | 3,820,804 | | | 0 | | | 0 | | | 3,820,804 | |
| FHLB and Federal Reserve Bank stock | | 60,258 | | | 60,258 | | | 0 | | | 0 | | | 60,258 | |
| Financial liabilities: | | | | | | | | | | |
| | | | | | | | | | |
| Short-term borrowings | | 17,430 | | | 17,430 | | | 0 | | | 17,430 | | | 0 | |
| Non-maturity deposits (1) | | 61,569,714 | | | 61,569,714 | | | 61,569,714 | | | 0 | | | 0 | |
| Time deposits | | 188,093 | | | 187,980 | | | 0 | | | 187,980 | | | 0 | |
| 3.50% Senior Notes | | 347,987 | | | 366,856 | | | 0 | | | 366,856 | | | 0 | |
| Off-balance sheet financial assets: | | | | | | | | | | |
| Commitments to extend credit | | 0 | | | 27,197 | | | 0 | | | 0 | | | 27,197 | |
(1)Includes noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
(1) | In accordance with the accounting standard (ASU 2015-07, Fair Value Measurement (Topic 820)), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. |
| |
(2) | Includes noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits. |
| |
(3) | At December 31, 2016, included in the carrying value and estimated fair value of our 6.05% Subordinated Notes was $0.8 million related to hedge accounting associated with the notes.
|
Investments in Entities that Calculate Net Asset Value Per Share
FASB guidance over certain fund investments requires that we disclose the fair value of funds, significant investment strategies of the investees, redemption features of the investees, restrictions on the ability to sell investments, estimate of the period of time over which the underlying assets are expected to be liquidated by the investee, and unfunded commitments related to the investments.
Our investments in debt funds and venture capital and private equity fund investments generally cannot be redeemed. Alternatively, we expect distributions, if any, to be received primarily through IPOs and M&A activity of the
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
underlying assets of the fund. Subject to applicable requirements under the Volcker Rule, we do not have any plans to sell any of these fund investments. If we decide to sell these investments in the future, the investee fund���sfund’s management must approve of the buyer before the sale of the investments can be completed. The fair values of the fund investments have been estimated using the net asset value per share of the investments, adjusted for any differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
The following table is a summary of the estimated fair values of these investments and remaining unfunded commitments for each major category of these investments as of December 31, 2017:2020:
|
| | | | | | | | | | | | |
| (Dollars in thousands) | | Carrying Amount | | Fair Value | | Unfunded Commitments |
| Non-marketable securities (fair value accounting): | | | | | | |
| Venture capital and private equity fund investments (1) | | $ | 127,192 |
| | $ | 127,192 |
| | $ | 5,842 |
|
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments (2) | | 89,809 |
| | 89,809 |
| | 4,943 |
|
| Debt funds (2) | | 21,183 |
| | 21,183 |
| | — |
|
| Other investments (2) | | 18,859 |
| | 18,859 |
| | 886 |
|
| Non-marketable securities (cost method accounting): | | | | | | |
| Venture capital and private equity fund investments (2) | | 98,548 |
| | 201,645 |
| | 8,015 |
|
| Total | | $ | 355,591 |
| | $ | 458,688 |
| | $ | 19,686 |
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Carrying Amount | | Fair Value | | Unfunded Commitments |
| Non-marketable securities (fair value accounting): | | | | | | |
| Venture capital and private equity fund investments (1) | | $ | 273,823 | | | $ | 273,823 | | | $ | 12,709 | |
| Non-marketable securities (equity method accounting): | | | | | | |
| Venture capital and private equity fund investments (2) | | 362,192 | | | 362,192 | | | 10,509 | |
| Debt funds (2) | | 5,444 | | | 5,444 | | | 211 | |
| Other investments (2) | | 23,023 | | | 23,023 | | | 886 | |
| Total | | $ | 664,482 | | | $ | 664,482 | | | $ | 24,315 | |
| |
(1) | Venture capital and private equity fund investments within non-marketable securities (fair value accounting) include investments made by our managed funds of funds and one of our direct venture funds. These investments represent investments in venture capital and private equity funds that invest primarily in U.S. and global technology and life science/healthcare companies. Included in the fair value and unfunded commitments of fund investments under fair value accounting are $94.2 million and $4.4 million, respectively, attributable to noncontrolling interests. It is estimated that we will receive distributions from the fund investments over the next 10 to 13 years, depending on the age of the funds and any potential extensions of terms of the funds.
|
| |
(2) | Venture capital and private equity fund investments, debt funds, and other fund investments within non-marketable securities (equity and cost method accounting) include funds that invest in or lend money to primarily U.S. and global technology and life science/healthcare companies. It is estimated that we will receive distributions from the funds over the next 10 to 13 years, depending on the age of the funds and any potential extensions of the terms of the funds.
|
(1)Venture capital and private equity fund investments within non-marketable securities (fair value accounting) include investments made by our managed funds of funds and one of our direct venture funds (consolidated VIEs) and investments in venture capital and private equity fund investments (unconsolidated VIEs). Collectively, these investments in venture capital and private equity funds are primarily in U.S. and global technology and life science/healthcare companies. Included in the fair value and unfunded commitments of fund investments under fair value accounting are $66.2 million and $3.1 million, respectively, attributable to noncontrolling interests. It is estimated that we will receive distributions from the fund investments over the next 10 to 13 years, depending on the age of the funds and any potential extensions of terms of the funds.
(2)Venture capital and private equity fund investments, debt funds and other fund investments within non-marketable securities (equity method accounting) include funds that invest in or lend money to primarily U.S. and global technology and life science/healthcare companies. It is estimated that we will receive distributions from the funds over the next 5 to 8 years, depending on the age of the funds and any potential extensions of the terms of the funds.
SVB FINANCIAL GROUP AND SUBSIDIARIES23. Regulatory Matters
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
SVB Financial and the Bank are subject to various regulatory capital adequacy requirements administered by the Federal Reserve Board and the California Department of Business Oversight - Division of Financial Institutions.DFPI. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) required that the federal regulatory agencies adopt regulations defining five capital categories for banks: well capitalized,well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements.
Quantitative measures, established byIn July 2013, the regulators to ensure capital adequacy, require that SVB FinancialFederal Reserve, the FDIC and the Bank maintain minimum ratios (set forth inOffice of the table below)Comptroller of the Currency published final rules establishing a comprehensive capital to risk-weighted assets. Effective January 1, 2015, SVB Financial Group andframework for U.S. banking organizations (the “Capital Rules”), which implement the Bank became subject to a regulatory capital measure called "Common Equity Tier 1" and a related regulatory capital ratio of CET 1 to risk-weighted assets implemented under "Basel III"Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to the internationally agreed regulatory capital framework adopted by the Basel Committee.
There are three categories of capital under the new Basel III standards; CET 1, additional Tier 1 and Tier 2. CET 1 includes common stock plus related surplus and retained earnings, less certain deductions. Additional Tier 1 capital includes qualifying preferred stock and trust preferred securities, less certain deductions. Additional Tier 1, together with CET 1, equal total Tier 1 capital. Tier 2 capital includes primarily certain qualifying unsecured subordinated debt and qualifying allowances for loan and lease losses. Tier 1 capital together with Tier 2 capital equal total capital.
As of December 31, 2017, bothUnder the Capital Rules, the minimum capital ratios applicable to SVB Financial and the Bank were considered “well-capitalized”are as follows: 4.5% CET1 capital, 6.0% Tier 1 capital, 8.0% Total capital and 4.0% Tier 1 leverage. In addition, banking organizations must meet a 2.5% CET1 risk-based capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for regulatory purposes under existing capital guidelines. There are no conditions or events since that date that management believes would have a material impact on that capital category.
executive officers. The severity of the constraints
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
would depend on the amount of the shortfall and the banking organization’s “eligible retained income” (that is, four-quarter trailing net income, net of distributions and tax effects not reflected in net income).
As of December 31, 2020, both SVB Financial and the Bank exceed the required ratios under the Capital Rules and were considered “well-capitalized” for regulatory purposes under existing capital guidelines as well. The following table presents the capital ratios for the Company and the Bank under federal regulatory guidelines, compared to the minimum regulatory capital requirements, for an adequately capitalized and a well-capitalized depository institution, as of December 31, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Capital Ratios | | Capital Amounts |
| (Dollars in thousands) | | Actual | | Required Minimum (1) | | Well Capitalized Minimum | | | | Actual | | Required Minimum (1) | | Well Capitalized Minimum | | |
| December 31, 2020: | | | | | | | | | | | | | | | | |
| CET 1 risk-based capital: | | | | | | | | | | | | | | | | |
| SVB Financial | | 11.04 | % | | 7.0 | % | | N/A | | | | $ | 7,138,006 | | | $ | 4,527,647 | | | N/A | | |
| Bank | | 10.70 | | | 7.0 | | | 6.5 | | | | | 6,530,167 | | | 4,271,642 | | | $ | 3,966,525 | | | |
| Tier 1 risk-based capital: | | | | | | | | | | | | | | | | |
| SVB Financial | | 11.89 | | | 8.5 | | | 6.0 | | | | | 7,691,936 | | | 5,497,857 | | | 3,880,840 | | | |
| Bank | | 10.70 | | | 8.5 | | | 8.0 | | | | | 6,530,167 | | | 5,186,994 | | | 4,881,877 | | | |
| Total risk-based capital: | | | | | | | | | | | | | | | | |
| SVB Financial | | 12.64 | | | 10.5 | | | 10.0 | | | | | 8,175,430 | | | 6,791,470 | | | 6,468,066 | | | |
| Bank | | 11.49 | | | 10.5 | | | 10.0 | | | | | 7,013,630 | | | 6,407,463 | | | 6,102,346 | | | |
| Tier 1 leverage: | | | | | | | | | | | | | | | | |
| SVB Financial | | 7.45 | | | 4.0 | | | N/A | | | | 7,691,936 | | | 4,128,596 | | | N/A | | |
| Bank | | 6.43 | | | 4.0 | | | 5.0 | | | | | 6,530,167 | | | 4,060,180 | | | 5,075,225 | | | |
| December 31, 2019: | | | | | | | | | | | | | | | | |
| CET 1 risk-based capital: | | | | | | | | | | | | | | | | |
| SVB Financial | | 12.58 | % | | 7.0 | % | | N/A | | | | $ | 5,857,744 | | | $ | 3,260,424 | | | N/A | | |
| Bank | | 11.12 | | | 7.0 | | | 6.5 | | | | | 4,949,393 | | | 3,115,151 | | | $ | 2,892,640 | | | |
| Tier 1 risk-based capital: | | | | | | | | | | | | | | | | |
| SVB Financial | | 13.43 | | | 8.5 | | | 6.0 | | | | | 6,257,442 | | | 3,959,086 | | | 2,794,649 | | | |
| Bank | | 11.12 | | | 8.5 | | | 8.0 | | | | | 4,949,393 | | | 3,782,683 | | | 3,560,172 | | | |
| Total risk-based capital: | | | | | | | | | | | | | | | | |
| SVB Financial | | 14.23 | | | 10.5 | | | 10.0 | | | | | 6,630,022 | | | 4,890,636 | | | 4,657,748 | | | |
| Bank | | 11.96 | | | 10.5 | | | 10.0 | | | | | 5,321,850 | | | 4,672,726 | | | 4,450,215 | | | |
| Tier 1 leverage: | | | | | | | | | | | | | | | | |
| SVB Financial | | 9.06 | | | 4.0 | | | N/A | | | | 6,257,442 | | | 2,763,146 | | | N/A | | |
| Bank | | 7.30 | | | 4.0 | | | 5.0 | | | | | 4,949,393 | | | 2,713,367 | | | 3,391,709 | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | Capital Ratios | | Capital Amounts |
| (Dollars in thousands) | | Actual | | Well Capitalized Minimum | | Adequately Capitalized Minimum | | Actual | | Well Capitalized Minimum | | Adequately Capitalized Minimum |
| December 31, 2017: | | | | | | | | | | | | |
| CET 1 risk-based capital: | | | | | | | | | | | | |
| SVB Financial | | 12.78 | % | | 6.5 | % | | 4.5 | % | | $ | 4,182,315 |
| | $ | 2,127,902 |
| | $ | 1,473,163 |
|
| Bank | | 12.06 |
| | 6.5 |
| | 4.5 |
| | 3,787,988 |
| | 2,041,227 |
| | 1,413,157 |
|
| Tier 1 risk-based capital: | | | | | | | | | | | | |
| SVB Financial | | 12.97 |
| | 8.0 |
| | 6.0 |
| | 4,246,606 |
| | 2,618,957 |
| | 1,964,218 |
|
| Bank | | 12.06 |
| | 8.0 |
| | 6.0 |
| | 3,787,988 |
| | 2,512,279 |
| | 1,884,209 |
|
| Total risk-based capital: | | | | | | | | | | | | |
| SVB Financial | | 13.96 |
| | 10.0 |
| | 8.0 |
| | 4,571,542 |
| | 3,273,696 |
| | 2,618,957 |
|
| Bank | | 13.04 |
| | 10.0 |
| | 8.0 |
| | 4,094,782 |
| | 3,140,349 |
| | 2,512,279 |
|
| Tier 1 leverage: | | | | | | | | | | | | |
| SVB Financial | | 8.34 |
| | N/A |
| | 4.0 |
| | 4,246,606 |
| | N/A |
| | 2,036,138 |
|
| Bank | | 7.56 |
| | 5.0 |
| | 4.0 |
| | 3,787,988 |
| | 2,504,636 |
| | 2,003,709 |
|
| December 31, 2016: | | | | | | | | | | | | |
| CET 1 risk-based capital: | | | | | | | | | | | | |
| SVB Financial | | 12.80 | % | | 6.5 | % | | 4.5 | % | | $ | 3,616,404 |
| | $ | 1,836,169 |
| | $ | 1,271,194 |
|
| Bank | | 12.65 |
| | 6.5 |
| | 4.5 |
| | 3,397,232 |
| | 1,745,695 |
| | 1,208,558 |
|
| Tier 1 risk-based capital: | | | | | | | | | | | | |
| SVB Financial | | 13.26 |
| | 8.0 |
| | 6.0 |
| | 3,744,605 |
| | 2,259,900 |
| | 1,694,925 |
|
| Bank | | 12.65 |
| | 8.0 |
| | 6.0 |
| | 3,397,232 |
| | 2,148,548 |
| | 1,611,411 |
|
| Total risk-based capital: | | | | | | | | | | | | |
| SVB Financial | | 14.21 |
| | 10.0 |
| | 8.0 |
| | 4,015,236 |
| | 2,824,875 |
| | 2,259,900 |
|
| Bank | | 13.66 |
| | 10.0 |
| | 8.0 |
| | 3,667,709 |
| | 2,685,685 |
| | 2,148,548 |
|
| Tier 1 leverage: | | | | | | | | | | | | |
| SVB Financial | | 8.34 |
| | N/A |
| | 4.0 |
| | 3,744,605 |
| | N/A |
| | 1,796,387 |
|
| Bank | | 7.67 |
| | 5.0 |
| | 4.0 |
| | 3,397,232 |
| | 2,214,467 |
| | 1,771,574 |
|
N/A "Well-Capitalized Minimum" CET 1 risk-based capital and Tier 1 leverage ratios are not formally defined under applicable banking regulations for bank holding companies.
(1) The percentages represent the minimum capital ratios plus, the fully phased-in 2.5% CET1 capital conservation buffer under the Capital Rules.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
24.Segment Reporting
We have three4 reportable segments for management reporting purposes: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Capital.Leerink. The results of our operating segments are based on our internal management reporting process.
Our Global Commercial Bank and SVB Private Bank segments’segments primary source of revenue is from net interest income, which is primarily the difference between interest earned on loans, net of funds transfer pricing ("FTP") and interest paid on deposits, net of FTP. Accordingly, these segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised, and an earnings charge is made for funded loans. FTP is calculated at an instrument level based on account characteristics.
We also evaluate performance based on provision for credit losses, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. In calculating each operating segment’s noninterest expense, we consider the direct costs incurred by the operating segment as well as certain allocated direct costs. As part of this review,
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
we allocate certain corporate overhead costs to a corporate account. We do not allocate income taxestax expense or the provision for unfunded credit commitments (included in provision for credit losses) to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore, period-end asset balances are not presented for segment reporting purposes. Changes in an individual client’s primary relationship designation have resulted, and in the future may result, in the inclusion of certain clients in different segments in different periods.
Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, our internal management reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. Our management reporting process measures the performance of our operating segments based on our internal operating structure, which is subject to change from time to time, and is not necessarily comparable with similar information for other financial services companies.
For reporting purposes, SVB Financial Group has three4 operating segments for which we report our financial information (for further description of these reportable segments, refer to "Business–Business Overview" under Part I, Item 1 of this report):information:
•Global Commercial Bank is comprised of results from the following:
◦Our Commercial Bank products and services are provided by the Bank and its subsidiaries to commercial clients in key innovation markets. The Bank provides solutions to the financial needs of commercial clients through credit, treasury management, foreign exchange, trade finance and other services. In addition, the Bank and its subsidiaries offer a variety of investment services and solutions to its clients that enable them to effectively manage their assets.
| |
◦ | Our Commercial Bank products and services are provided by the Bank and its subsidiaries to commercial clients primarily in the technology, life science/healthcare, and private equity/venture capital industries. The Bank provides solutions to the financial needs of commercial clients through credit, treasury management, foreign exchange, trade finance, and other services. We broadly serve clients within the U.S., as well as non-U.S. clients in key international innovation markets. In addition, the Bank and its subsidiaries offer a variety of investment services and solutions to its clients that enable them to effectively manage their assets.
|
| |
◦ | Our Private Equity Division provides banking products and services primarily to our private equity and venture capital clients.
|
| |
◦ | SVBWine provides banking products and services to our premium wine industry clients, including vineyard development loans.
|
| |
◦ | SVB Analytics previously provided equity valuation services to companies and private equity/venture capital firms and currently provides research for investors and companies in the global innovation economy. In September 2017, SVB Analytics sold its equity valuation services business.
|
| |
◦ | Debt Fund Investments is comprised of our investments in certain debt funds in which we are a strategic investor.
|
◦Our Global Fund Banking (formerly Private Equity) Division provides banking products and services primarily to our private equity and venture capital clients.
◦SVBWine provides banking products and services to our premium wine industry clients, including vineyard development loans.
◦Debt Fund Investments is comprised of our investments in certain debt funds in which we are a strategic investor.
•SVB Private Bank is the private banking and wealth management division of the Bank whichand provides a rangebroad array of personal financial solutions for consumers. Ourits clients, which are primarily private equity/venture capital professionals and executive leaders ofand senior investment professionals in the innovation companies they support.economy. We offer a customized suite ofapproach to private wealth management and private banking services including mortgages, home equity lines of credit, restrictedresidential real property lending, stock purchasesecured loans capital call lines of credit and other secured and unsecured lending products as well asalongside a full suite of cash management and wealth management services.
deposit products and online/remote banking and service capabilities. In addition, we provide real estate secured loans to eligible employees through our EHOP.•SVB Capital is the funds management business of SVBFG,SVB Financial Group, which focuses primarily on venture capital investments. SVB Capital manages funds (primarily venture capital funds) on behalf of third partythird-party limited partners and, on a more limited basis, SVB Financial Group. 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. SVB Capital generates income for the Company primarily from investment returns (including carried interest allocations) and management fees.
•SVB Leerink is an investment bank specializing in the equity and convertible capital markets, mergers and acquisitions, equity research and sales and trading for growth and innovation-minded healthcare and life science companies and operates as a wholly-owned subsidiary of SVB Financial. SVB Leerink provides investment banking services across all subsectors of healthcare including biotechnology, pharmaceuticals, medical devices, diagnostic and life science tools, healthcare services and digital health. SVB Leerink focuses on two primary lines of business: (i) investment banking focused on providing companies with capital-raising services, financial advice
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
on mergers and acquisitions, sales and trading services and equity research, and (ii) sponsorship of private investment funds.
The summary financial results of our operating segments are presented along with a reconciliation to our consolidated results.
Our segment information for 2020, 2019 and 2018 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Global
Commercial
Bank (1) | | SVB Private
Bank | | SVB Capital
(1) | | SVB Leerink (1) | | Other Items
(2) | | Total |
| Year ended December 31, 2020 | | | | | | | | | | | | |
| Net interest income | | $ | 2,025,240 | | | $ | 77,490 | | | $ | 30 | | | $ | 578 | | | $ | 52,946 | | | $ | 2,156,284 | |
| Provision for credit losses | | (165,987) | | | (21,329) | | | 0 | | | 0 | | | (32,194) | | | (219,510) | |
| Noninterest income | | 605,733 | | | 3,536 | | | 225,954 | | | 495,976 | | | 508,949 | | | 1,840,148 | |
| Noninterest expense (3) | | (1,019,995) | | | (46,099) | | | (50,589) | | | (378,970) | | | (539,388) | | | (2,035,041) | |
| Income (loss) before income tax expense (4) | | $ | 1,444,991 | | | $ | 13,598 | | | $ | 175,395 | | | $ | 117,584 | | | $ | (9,687) | | | $ | 1,741,881 | |
| Total average loans, amortized cost | | $ | 31,218,037 | | | $ | 4,195,804 | | | $ | 0 | | | $ | 0 | | | $ | 1,852,135 | | | $ | 37,265,976 | |
| Total average assets (5) (6) | | 75,034,226 | | | 4,229,818 | | | 437,132 | | | 556,778 | | | 5,533,705 | | | 85,791,659 | |
| Total average deposits | | 72,127,148 | | | 2,171,556 | | | 0 | | | 0 | | | 716,726 | | | 75,015,430 | |
| Year ended December 31, 2019 | | | | | | | | | | | | |
| Net interest income | | $ | 1,850,391 | | | $ | 51,022 | | | $ | 38 | | | $ | 1,252 | | | $ | 193,898 | | | $ | 2,096,601 | |
| Provision for credit losses | | (91,814) | | | (2,369) | | | 0 | | | 0 | | | (12,233) | | | (106,416) | |
| Noninterest income | | 637,922 | | | 3,366 | | | 122,394 | | | 264,516 | | | 193,281 | | | 1,221,479 | |
| Noninterest expense (3) | | (874,854) | | | (40,151) | | | (30,798) | | | (252,678) | | | (402,781) | | | (1,601,262) | |
| Income (loss) before income tax expense (4) | | $ | 1,521,645 | | | $ | 11,868 | | | $ | 91,634 | | | $ | 13,090 | | | $ | (27,835) | | | $ | 1,610,402 | |
| Total average loans, amortized cost | | $ | 26,031,284 | | | $ | 3,341,188 | | | $ | 0 | | | $ | 0 | | | $ | 543,735 | | | $ | 29,916,207 | |
| Total average assets (5) (6) | | 56,043,321 | | | 3,371,052 | | | 405,152 | | | 397,650 | | | 2,994,455 | | | 63,211,630 | |
| Total average deposits | | 53,053,665 | | | 1,524,232 | | | 0 | | | 0 | | | 479,053 | | | 55,056,950 | |
| Year ended December 31, 2018 | | | | | | | | | | | | |
| Net interest income | | $ | 1,623,488 | | | $ | 64,902 | | | $ | 23 | | | $ | 0 | | | $ | 205,575 | | | $ | 1,893,988 | |
| Provision for credit losses | | (80,953) | | | (3,339) | | | 0 | | | 0 | | | (3,578) | | | (87,870) | |
| Noninterest income (7) | | 520,302 | | | 2,281 | | | 101,181 | | | 0 | | | 121,220 | | | 744,984 | |
| Noninterest expense (3) | | (793,159) | | | (25,064) | | | (22,792) | | | 0 | | | (347,178) | | | (1,188,193) | |
| Income (loss) before income tax expense (4) | | $ | 1,269,678 | | | $ | 38,780 | | | $ | 78,412 | | | $ | 0 | | | $ | (23,961) | | | $ | 1,362,909 | |
| Total average loans, amortized cost | | $ | 22,354,305 | | | $ | 2,850,271 | | | $ | 0 | | | $ | 0 | | | $ | 425,944 | | | $ | 25,630,520 | |
| Total average assets (5) (8) | | 48,854,416 | | | 2,871,743 | | | 380,543 | | | 0 | | | 3,122,358 | | | 55,229,060 | |
| Total average deposits | | 46,039,570 | | | 1,502,308 | | | 0 | | | 0 | | | 533,466 | | | 48,075,344 | |
(1)Global Commercial Bank’s, SVB Capital’s and SVB Leerink's components of net interest income, noninterest income, noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented. Noncontrolling interest is included within "Other Items."
(2)The "Other Items" column reflects the adjustments necessary to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP. Net interest income consists primarily of interest earned from our fixed income investment portfolio, net of FTP. Noninterest income consists primarily of gains or losses on equity warrant assets, gains or losses on the sale of AFS securities and gains or losses on equity securities from exercised warrant assets. Noninterest expense consists primarily of expenses associated with corporate support functions such as finance, human resources, marketing, legal and other expenses.
(3)The Global Commercial Bank segment includes direct depreciation and amortization of $25.3 million, $20.4 million and $21.8 million for 2020, 2019 and 2018, respectively.
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4)The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates.
(5)Total average assets equal the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for each segment to reconcile the results to the consolidated financial statements prepared in conformity with GAAP.
(6)Included in the total average assets for SVB Leerink is goodwill of $137.8 million for both the years ended December 31, 2020 and 2019.
Our(7)For the year ended December 31, 2018, amounts of client investment fees included in the line item "Noninterest Income" previously reported as "Other Items" have been correctly allocated to our reportable segment information"Global Commercial Bank" to properly reflect the source of such revenue. The correction of this immaterial error had no impact on the "Total" amount of noninterest income.
(8)For the year ended December 31, 2018, amounts for 2017, 2016average assets previously reported as "Other Items" have been correctly allocated to the reportable segments "Global Commercial Bank" and 2015 is as follows:“SVB Private Bank” to properly reflect the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for “Global Commercial Bank” and “SVB Private Bank.” The correction of this immaterial error had no impact on the "Total" amount of average assets.
|
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | Global Commercial Bank (1) | | SVB Private Bank | | SVB Capital (1) | | Other Items (2) | | Total |
| Year ended December 31, 2017 | | | | | | | | | | |
| Net interest income | | $ | 1,274,366 |
| | $ | 58,131 |
| | $ | 48 |
| | $ | 87,824 |
| | $ | 1,420,369 |
|
| Provision for credit losses | | (81,553 | ) | | (4,386 | ) | | — |
| | (6,365 | ) | | (92,304 | ) |
| Noninterest income | | 366,000 |
| | 2,175 |
| | 58,992 |
| | 130,064 |
| | 557,231 |
|
| Noninterest expense (3) | | (706,341 | ) | | (17,693 | ) | | (19,340 | ) | | (267,281 | ) | | (1,010,655 | ) |
| Income before income tax expense (4) | | $ | 852,472 |
| | $ | 38,227 |
| | $ | 39,700 |
| | $ | (55,758 | ) | | $ | 874,641 |
|
| Total average loans, net of unearned income | | $ | 18,479,793 |
| | $ | 2,423,078 |
| | $ | — |
| | $ | 256,523 |
| | $ | 21,159,394 |
|
| Total average assets (5) | | 46,303,582 |
| | 2,449,763 |
| | 325,939 |
| | (699,012 | ) | | 48,380,272 |
|
| Total average deposits | | 41,043,731 |
| | 1,303,542 |
| | — |
| | 397,875 |
| | 42,745,148 |
|
| Year ended December 31, 2016 | | | | | | | | | | |
| Net interest income (expense) | | $ | 1,040,712 |
| | $ | 53,582 |
| | $ | (49 | ) | | $ | 56,278 |
| | $ | 1,150,523 |
|
| Provision for credit losses | | (93,885 | ) | | (1,812 | ) | | — |
| | (10,982 | ) | | (106,679 | ) |
| Noninterest income | | 320,421 |
| | 2,713 |
| | 49,365 |
| | 84,053 |
| | 456,552 |
|
| Noninterest expense (3) | | (632,264 | ) | | (12,379 | ) | | (15,546 | ) | | (199,608 | ) | | (859,797 | ) |
| Income before income tax expense (4) | | $ | 634,984 |
| | $ | 42,104 |
| | $ | 33,770 |
| | $ | (70,259 | ) | | $ | 640,599 |
|
| Total average loans, net of unearned income | | $ | 16,047,545 |
| | $ | 2,025,381 |
| | $ | — |
| | $ | 210,665 |
| | $ | 18,283,591 |
|
| Total average assets (5) | | 41,494,321 |
| | 2,047,513 |
| | 338,848 |
| | 106,769 |
| | 43,987,451 |
|
| Total average deposits | | 37,301,483 |
| | 1,133,425 |
| | — |
| | 324,151 |
| | 38,759,059 |
|
| Year ended December 31, 2015 | | | | | | | | | | |
| Net interest income | | $ | 853,882 |
| | $ | 44,412 |
| | $ | 3 |
| | $ | 108,128 |
| | $ | 1,006,425 |
|
| (Provision for) reduction of credit losses | | (94,913 | ) | | (2,716 | ) | | — |
| | 1,946 |
| | (95,683 | ) |
| Noninterest income | | 272,862 |
| | 2,011 |
| | 70,857 |
| | 127,064 |
| | 472,794 |
|
| Noninterest expense (3) | | (578,888 | ) | | (12,185 | ) | | (14,699 | ) | | (174,190 | ) | | (779,962 | ) |
| Income before income tax expense (4) | | $ | 452,943 |
| | $ | 31,522 |
| | $ | 56,161 |
| | $ | 62,948 |
| | $ | 603,574 |
|
| Total average loans, net of unearned income | | $ | 12,984,646 |
| | $ | 1,592,065 |
| | $ | — |
| | $ | 186,230 |
| | $ | 14,762,941 |
|
| Total average assets (5) | | 38,438,858 |
| | 1,457,461 |
| | 337,884 |
| | 612,174 |
| | 40,846,377 |
|
| Total average deposits | | 34,996,194 |
| | 1,108,411 |
| | — |
| | 188,757 |
| | 36,293,362 |
|
| |
(1) | Global Commercial Bank’s and SVB Capital’s components of net interest income, noninterest income, noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented. Noncontrolling interest is included within "Other Items". |
| |
(2) | The "Other Items" column reflects the adjustments necessary to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP. Net interest income consists primarily of interest earned from our fixed income investment portfolio, net of FTP. Noninterest income consists primarily of gains on equity warrant assets, income from noncontrolling interests and gains or losses on the sale of fixed income securities. Noninterest expense consists primarily of expenses associated with corporate support functions such as finance, human resources, marketing, legal and other expenses. |
| |
(3) | The Global Commercial Bank segment includes direct depreciation and amortization of $24.9 million, $24.8 million and $20.3 million for 2017, 2016 and 2015, respectively.
|
| |
(4) | The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates. |
| |
(5) | Total average assets equal the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for each segment to reconcile the results to the consolidated financial statements prepared in conformity with GAAP. |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
23.
| Parent Company Only Condensed Financial Information
|
The condensed balance sheets of SVB Financial at December 31, 20172020 and 2016,2019, and the related condensed statements of income, comprehensive income and cash flows for 2017, 20162020, 2019 and 2015,2018, are presented below:
Condensed Balance Sheets
|
| | | | | | | | |
| | | December 31, |
| (Dollars in thousands) | | 2017 | | 2016 |
| Assets: | | | | |
| Cash and cash equivalents | | $ | 457,324 |
| | $ | 500,014 |
|
| Investment securities | | 485,220 |
| | 244,603 |
|
| Net loans | | — |
| | 13,337 |
|
| Other assets | | 196,974 |
| | 197,220 |
|
| Investment in subsidiaries: | | | | |
| Bank subsidiary | | 3,762,542 |
| | 3,423,427 |
|
| Nonbank subsidiaries | | 90,540 |
| | 113,928 |
|
| Total assets | | $ | 4,992,600 |
| | $ | 4,492,529 |
|
| | | | | |
| Liabilities and SVBFG stockholders’ equity: | | | | |
| 3.50% Senior Notes | | $ | 347,303 |
| | $ | 346,979 |
|
| 5.375% Senior Notes | | 348,189 |
| | 347,586 |
|
| 7.0% Junior Subordinated Debentures | | — |
| | 54,493 |
|
| Other liabilities | | 117,313 |
| | 100,917 |
|
| Total liabilities | | $ | 812,805 |
| | $ | 849,975 |
|
| SVBFG stockholders’ equity | | 4,179,795 |
| | 3,642,554 |
|
| Total liabilities and SVBFG stockholders’ equity | | $ | 4,992,600 |
| | $ | 4,492,529 |
|
Condensed Statements of Income |
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 |
| 2016 |
| 2015 |
| Interest income | | $ | 2,077 |
| | $ | 690 |
| | $ | 964 |
|
| Interest expense | | (34,932 | ) | | (35,316 | ) | | (34,169 | ) |
| Dividend income from bank subsidiary | | 90,000 |
| | 40,000 |
| | — |
|
| Gains on equity warrant assets, net (1) | | 54,555 |
| | 37,892 |
| | 70,963 |
|
| Gains on investment securities, net | | 37,132 |
| | 20,644 |
| | 39,447 |
|
| Fund management fees and other noninterest income (1) | | 24,613 |
| | 21,913 |
| | 2,286 |
|
| General and administrative expenses | | (63,077 | ) | | (55,139 | ) | | (54,822 | ) |
| Income tax benefit (expense) | | 10,367 |
| | 423 |
| | (14,448 | ) |
| Income before net income of subsidiaries | | 120,735 |
| | 31,107 |
| | 10,221 |
|
| Equity in undistributed net income of nonbank subsidiaries | | 13,002 |
| | 11,949 |
| | 26,819 |
|
| Equity in undistributed net income of bank subsidiary | | 356,769 |
| | 339,629 |
| | 306,864 |
|
| Net income available to common stockholders | | $ | 490,506 |
| | $ | 382,685 |
| | $ | 343,904 |
|
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in thousands) | | 2020 | | 2019 |
| Assets: | | | | |
| Cash and cash equivalents | | $ | 670,738 | | | $ | 800,926 | |
| Investment securities | | 666,860 | | | 474,842 | |
| Loans, amortized cost | | 682 | | | 15,245 | |
| Lease right-of-use assets | | 99,363 | | | 71,847 | |
| Other assets | | 260,331 | | | 214,167 | |
| Investment in subsidiaries: | | | | |
| Bank subsidiary | | 7,068,964 | | | 5,034,095 | |
| Nonbank subsidiaries | | 666,997 | | | 432,073 | |
| Total assets | | $ | 9,433,935 | | | $ | 7,043,195 | |
| | | | |
| Liabilities and SVBFG stockholders’ equity: | | | | |
| 3.125% Senior Notes | | $ | 495,280 | | | $ | 0 | |
| 3.50% Senior Notes | | 348,348 | | | 347,987 | |
| Lease liabilities | | 134,607 | | | 87,999 | |
| Other liabilities | | 236,000 | | | 136,903 | |
| Total liabilities | | $ | 1,214,235 | | | $ | 572,889 | |
| SVBFG stockholders’ equity | | 8,219,700 | | | 6,470,306 | |
| Total liabilities and SVBFG stockholders’ equity | | $ | 9,433,935 | | | $ | 7,043,195 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Statements of Income
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Interest income | | $ | 2,849 | | | $ | 4,473 | | | $ | 3,307 | |
| Interest expense | | (21,565) | | | (31,666) | | | (32,037) | |
| Dividend income from bank subsidiary | | 50,000 | | | 733,000 | | | 140,000 | |
| Gains on equity warrant assets, net | | 226,942 | | | 138,078 | | | 89,142 | |
| Gains on investment securities, net | | 157,594 | | | 45,345 | | | 13,546 | |
| Fund management fees and other noninterest income | | 62,046 | | | 21,567 | | | 26,388 | |
| General and administrative expenses | | (120,863) | | | (94,712) | | | (70,976) | |
| Income tax expense | | (145,790) | | | (40,218) | | | (14,383) | |
| Income before net income of subsidiaries | | 211,213 | | | 775,867 | | | 154,987 | |
| Equity in undistributed net income of bank subsidiary | | 776,243 | | | 303,618 | | | 793,641 | |
| Equity in undistributed net income of nonbank subsidiaries | | 220,912 | | | 57,371 | | | 25,212 | |
| Net income before preferred stock dividend | | $ | 1,208,368 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Net income available to common stockholders | | $ | 1,191,217 | | | $ | 1,136,856 | | | $ | 973,840 | |
| |
(1) | Our consolidated statements of income for the years ended December 31, 2016 and 2015 were modified from prior periods’ 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 net gains on derivative instruments. We removed the line item "gains on derivative instruments, net" and reclassified all other gains on derivative instruments, net to other noninterest income. |
Condensed Statements of Comprehensive Income
| | | | | Year ended December 31, | | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 | (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Net income available to common stockholders | | $ | 490,506 |
| | $ | 382,685 |
| | $ | 343,904 |
| |
| Other comprehensive (loss) income, net of tax: | | | | | | | |
| Net income before preferred stock dividend | | Net income before preferred stock dividend | | $ | 1,208,368 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | |
| Foreign currency translation gains (losses) | | 3,769 |
| | 3,071 |
| | (1,492 | ) | Foreign currency translation gains (losses) | | 11,846 | | | 2,319 | | | (4,107) | |
| Changes in unrealized holding gains and losses on AFS securities | | 22,285 |
| | 654 |
| | (2,041 | ) | Changes in unrealized holding gains and losses on AFS securities | | 70 | | | 2,310 | | | 120 | |
| Equity in other comprehensive (losses) income of subsidiaries | | (50,956 | ) | | 4,301 |
| | (23,767 | ) | |
| Other comprehensive (loss) income, net of tax | | (24,902 | ) | | 8,026 |
| | (27,300 | ) | |
| Changes in fair value on bank cash flow hedges, net of reclassification adjustments in bank net income | | Changes in fair value on bank cash flow hedges, net of reclassification adjustments in bank net income | | 131,403 | | | (2,130) | | | 0 | |
| Equity in other comprehensive income (loss) of bank and nonbank subsidiaries | | Equity in other comprehensive income (loss) of bank and nonbank subsidiaries | | 394,753 | | | 136,066 | | | (19,171) | |
| Reclassifications to retained earnings for the adoption of new accounting guidance | | Reclassifications to retained earnings for the adoption of new accounting guidance | | 0 | | | 0 | | | (29,490) | |
| Other comprehensive income (loss), net of tax | | Other comprehensive income (loss), net of tax | | 538,072 | | | 138,565 | | | (52,648) | |
| Total comprehensive income | | $ | 465,604 |
| | $ | 390,711 |
| | $ | 316,604 |
| Total comprehensive income | | $ | 1,746,440 | | | $ | 1,275,421 | | | $ | 921,192 | |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| (Dollars in thousands) | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income before preferred stock dividend | | $ | 1,208,368 | | | $ | 1,136,856 | | | $ | 973,840 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Gains on equity warrant assets, net | | (226,942) | | | (138,078) | | | (89,142) | |
| Gains on investment securities, net | | (157,594) | | | (45,345) | | | (13,546) | |
| Gains on derivatives, net | | (30,018) | | | 0 | | | 0 | |
| Distributions of earnings from investment securities | | 65,237 | | | 49,776 | | | 47,596 | |
| Net income of bank subsidiary | | (826,243) | | | (1,036,618) | | | (933,641) | |
| Net income on nonbank subsidiaries | | (220,912) | | | (57,371) | | | (25,212) | |
| Cash dividends from bank subsidiary | | 50,000 | | | 733,000 | | | 140,000 | |
| Amortization of share-based compensation | | 83,986 | | | 66,815 | | | 45,675 | |
| Decrease in other assets | | 17,189 | | | 27,205 | | | 51,169 | |
| Increase in other liabilities | | 98,209 | | | 21,391 | | | 21,619 | |
| Other, net | | 13,206 | | | 8,084 | | | (31,024) | |
| Net cash provided by operating activities | | 74,486 | | | 765,715 | | | 187,334 | |
| | | | | | |
| Cash flows from investing activities: | | | | | | |
| Net decrease in investment securities from purchases, sales and maturities | | 122,823 | | | 128,635 | | | 73,742 | |
| Net decrease (increase) in loans | | 14,563 | | | (15,245) | | | 0 | |
| Increase in investment in bank subsidiary | | (68,630) | | | (42,952) | | | (31,292) | |
| Capital infusion in bank subsidiary | | (700,000) | | | 0 | | | 0 | |
| Decrease (increase) in investment in nonbank subsidiaries | | 4,271 | | | 23,275 | | | (5,323) | |
| Business acquisitions | | (26,700) | | | (265,601) | | | 0 | |
| Net cash (used for) provided by investing activities | | (653,673) | | | (171,888) | | | 37,127 | |
| | | | | | |
| Cash flows from financing activities: | | | | | | |
| Principal payments of long-term debt | | 0 | | | (358,395) | | | 0 | |
| Proceeds from issuance of 3.125% Senior Notes | | 495,024 | | | 0 | | | 0 | |
| Proceeds from issuance of common stock, ESPP and ESOP | | 31,146 | | | 24,818 | | | 18,387 | |
| Net proceeds from the issuance of preferred stock | | 0 | | | 340,138 | | | 0 | |
| Payment of preferred stock dividends | | (17,151) | | | 0 | | | 0 | |
| Common stock repurchase | | (60,020) | | | (352,511) | | | (147,123) | |
| Net cash provided by (used for) financing activities | | 448,999 | | | (345,950) | | | (128,736) | |
| Net (decrease) increase in cash and cash equivalents | | (130,188) | | | 247,877 | | | 95,725 | |
| Cash and cash equivalents at beginning of period | | 800,926 | | | 553,049 | | | 457,324 | |
| Cash and cash equivalents at end of period | | $ | 670,738 | | | $ | 800,926 | | | $ | 553,049 | |
|
| | | | | | | | | | | | |
| | | Year ended December 31, |
| (Dollars in thousands) | | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | |
| Net income attributable to SVBFG | | $ | 490,506 |
| | $ | 382,685 |
| | $ | 343,904 |
|
| Adjustments to reconcile net income to net cash used for operating activities: | | | | | | |
| Gains on equity warrant assets, net | | (54,555 | ) | | (37,892 | ) | | (70,963 | ) |
| Gains on investment securities, net | | (37,132 | ) | | (20,644 | ) | | (39,447 | ) |
| Net income of bank subsidiary | | (446,769 | ) | | (379,629 | ) | | (306,864 | ) |
| Net income on nonbank subsidiaries | | (13,002 | ) | | (11,949 | ) | | (26,819 | ) |
| Cash dividends from bank subsidiary | | 90,000 |
| | 40,000 |
| | — |
|
| Amortization of share-based compensation | | 36,900 |
| | 35,494 |
| | 32,239 |
|
| Decrease (increase) in other assets | | 12,959 |
| | 35,699 |
| | (30,638 | ) |
| Increase in other liabilities | | 11,774 |
| | 15,293 |
| | 28,985 |
|
| Other, net | | 131 |
| | 2,992 |
| | 15,956 |
|
| Net cash provided by (used for) operating activities | | 90,812 |
| | 62,049 |
| | (53,647 | ) |
| | | | | | | |
| Cash flows from investing activities: | | | | | | |
| Net (increase) decrease in investment securities from purchases, sales and maturities | | (117,743 | ) | | 54,737 |
| | 31,380 |
|
| Net decrease (increase) in loans | | 13,337 |
| | (3,478 | ) | | 6,825 |
|
| Increase in investment in bank subsidiary | | (38,927 | ) | | (14,738 | ) | | (378,286 | ) |
| Decrease in investment in nonbank subsidiaries | | 34,374 |
| | 1,924 |
| | 71,062 |
|
| Net cash (used for) provided by investing activities | | (108,959 | ) | | 38,445 |
| | (269,019 | ) |
| | | | | | | |
| Cash flows from financing activities: | | | | | | |
| Principal payments of long-term debt | | (51,546 | ) | | — |
| | — |
|
| Proceeds from issuance of common stock, ESPP and ESOP | | 27,003 |
| | 26,147 |
| | 22,410 |
|
| Tax effect from stock exercises (1) | | — |
| | (3,640 | ) | | 16,602 |
|
| Net proceeds from issuance of long-term debt | | — |
| | — |
| | 346,431 |
|
| Net cash (used for) provided by financing activities | | (24,543 | ) | | 22,507 |
| | 385,443 |
|
| Net (decrease) increase in cash and cash equivalents | | (42,690 | ) | | 123,001 |
| | 62,777 |
|
| Cash and cash equivalents at beginning of period | | 500,014 |
| | 377,013 |
| | 314,236 |
|
| Cash and cash equivalents at end of period | | $ | 457,324 |
| | $ | 500,014 |
| | $ | 377,013 |
|
| |
(1) | In 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting on a prospective basis with no change to prior period amounts. See Note 2- "Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" under Part II, Item 8 of this report for additional details. |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
26. Unaudited Quarterly Financial Data
| |
24.
| Unaudited Quarterly Financial Data
|
Our supplemental consolidated financial information for each three month period in 20172020 and 20162019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
| (Dollars in thousands, except per share amounts) | | March 31, | | June 30, | | September 30, | | December 31, |
| 2020: | | | | | | | | |
| Interest income | | $ | 567,402 | | | $ | 523,523 | | | $ | 543,127 | | | $ | 607,558 | |
| Interest expense | | 43,265 | | | 10,596 | | | 15,387 | | | 16,078 | |
| Net interest income | | 524,137 | | | 512,927 | | | 527,740 | | | 591,480 | |
| Provision for (reduction) credit losses | | 243,480 | | | 66,481 | | | (52,018) | | | (38,433) | |
| Noninterest income | | 301,934 | | | 368,848 | | | 547,583 | | | 621,783 | |
| Noninterest expense | | 399,585 | | | 479,636 | | | 491,021 | | | 664,799 | |
| Income before income tax expense | | 183,006 | | | 335,658 | | | 636,320 | | | 586,897 | |
| Income tax expense | | 49,357 | | | 87,869 | | | 162,265 | | | 148,096 | |
| Net income before noncontrolling interests | | 133,649 | | | 247,789 | | | 474,055 | | | 438,801 | |
| Net loss (income) attributable to noncontrolling interests | | 1,973 | | | (14,260) | | | (27,748) | | | (45,891) | |
| Preferred stock dividends | | (3,369) | | | (4,594) | | | (4,594) | | | (4,594) | |
| Net income available to common stockholders | | $ | 132,253 | | | $ | 228,935 | | | $ | 441,713 | | | $ | 388,316 | |
| Earnings per common share—basic | | $ | 2.56 | | | $ | 4.44 | | | $ | 8.53 | | | $ | 7.49 | |
| Earnings per common share—diluted | | 2.55 | | | 4.42 | | | 8.47 | | | 7.40 | |
| 2019: | | | | | | | | |
| Interest income | | $ | 551,014 | | | $ | 585,767 | | | $ | 583,892 | | | $ | 588,735 | |
| Interest expense | | 38,128 | | | 56,364 | | | 63,248 | | | 55,067 | |
| Net interest income | | 512,886 | | | 529,403 | | | 520,644 | | | 533,668 | |
| Provision for credit losses | | 28,551 | | | 23,946 | | | 36,536 | | | 17,383 | |
| Noninterest income | | 280,376 | | | 333,750 | | | 294,009 | | | 313,344 | |
| Noninterest expense | | 365,664 | | | 383,522 | | | 391,324 | | | 460,752 | |
| Income before income tax expense | | 399,047 | | | 455,685 | | | 386,793 | | | 368,877 | |
| Income tax expense | | 107,435 | | | 119,114 | | | 105,075 | | | 94,061 | |
| Net income before noncontrolling interests | | 291,612 | | | 336,571 | | | 281,718 | | | 274,816 | |
| Net income attributable to noncontrolling interests | | (2,880) | | | (18,584) | | | (14,437) | | | (11,960) | |
| Net income available to common stockholders | | $ | 288,732 | | | $ | 317,987 | | | $ | 267,281 | | | $ | 262,856 | |
| Earnings per common share—basic | | $ | 5.49 | | | $ | 6.12 | | | $ | 5.19 | | | $ | 5.10 | |
| Earnings per common share—diluted | | 5.44 | | | 6.08 | | | 5.15 | | | 5.06 | |
27.Legal Matters
|
| | | | | | | | | | | | | | | | |
| | | Three months ended |
| (Dollars in thousands, except per share amounts) | | March 31, | | June 30, | | September 30, | | December 31, |
| 2017: | | | | | | | | |
| Interest income | | $ | 320,926 |
| | $ | 353,927 |
| | $ | 385,271 |
| | $ | 405,016 |
|
| Interest expense | | 10,933 |
| | 11,231 |
| | 11,297 |
| | 11,310 |
|
| Net interest income | | 309,993 |
| | 342,696 |
| | 373,974 |
| | 393,706 |
|
| Provision for credit losses | | 30,734 |
| | 15,806 |
| | 23,522 |
| | 22,242 |
|
| Noninterest income | | 117,659 |
| | 128,528 |
| | 158,778 |
| | 152,266 |
|
| Noninterest expense | | 237,633 |
| | 251,246 |
| | 257,761 |
| | 264,015 |
|
| Income before income tax expense | | 159,285 |
| | 204,172 |
| | 251,469 |
| | 259,715 |
|
| Income tax expense (1) | | 51,405 |
| | 71,656 |
| | 97,351 |
| | 135,051 |
|
| Net income before noncontrolling interests | | 107,880 |
| | 132,516 |
| | 154,118 |
| | 124,664 |
|
| Net income attributable to noncontrolling interests | | (6,397 | ) | | (9,323 | ) | | (5,498 | ) | | (7,454 | ) |
| Net income available to common stockholders (1) | | $ | 101,483 |
| | $ | 123,193 |
| | $ | 148,620 |
| | $ | 117,210 |
|
| Earnings per common share—basic (1) | | $ | 1.94 |
| | $ | 2.34 |
| | $ | 2.82 |
| | $ | 2.22 |
|
| Earnings per common share—diluted (1) | | 1.91 |
| | 2.32 |
| | 2.79 |
| | 2.19 |
|
| | | | | | | | | |
| 2016: | | | | | | | | |
| Interest income | | $ | 291,658 |
| | $ | 293,992 |
| | $ | 300,413 |
| | $ | 307,333 |
|
| Interest expense | | 10,237 |
| | 10,656 |
| | 11,252 |
| | 10,728 |
|
| Net interest income | | 281,421 |
| | 283,336 |
| | 289,161 |
| | 296,605 |
|
| Provision for credit losses (2) | | 33,475 |
| | 36,746 |
| | 20,004 |
| | 16,454 |
|
| Noninterest income | | 86,134 |
| | 112,776 |
| | 144,140 |
| | 113,502 |
|
| Noninterest expense (2) | | 203,899 |
| | 199,939 |
| | 220,773 |
| | 235,186 |
|
| Income before income tax expense | | 130,181 |
| | 159,427 |
| | 192,524 |
| | 158,467 |
|
| Income tax expense | | 53,584 |
| | 65,047 |
| | 76,877 |
| | 54,825 |
|
| Net income before noncontrolling interests | | 76,597 |
| | 94,380 |
| | 115,647 |
| | 103,642 |
|
| Net loss (income) attributable to noncontrolling interests | | 2,577 |
| | (1,416 | ) | | (4,566 | ) | | (4,176 | ) |
| Net income available to common stockholders | | $ | 79,174 |
| | $ | 92,964 |
| | $ | 111,081 |
| | $ | 99,466 |
|
| Earnings per common share—basic | | $ | 1.53 |
| | $ | 1.79 |
| | $ | 2.13 |
| | $ | 1.91 |
|
| Earnings per common share—diluted | | 1.52 |
| | 1.78 |
| | 2.12 |
| | 1.89 |
|
| |
(1) | Included in income tax expense, net income available to common stockholders, earnings per common share-basic and earnings for common share-diluted in 2017, are tax benefits recognized associated with the adoption of 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. |
| |
(2) | Our consolidated statements of income for the quarterly periods in 2016 were modified from prior periods’ 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 separately as a component of noninterest expense. |
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us and/or our affiliates, and we may from time to time be involved in other legal or regulatory proceedings. In accordance with applicable accounting guidance, we establish accruals for all such matters, including expected settlements, when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.
To the extent we believe any potential loss relating to such matters may have a material impact on our liquidity, consolidated financial position, results of operations and/or our business as a whole and is reasonably possible but not probable, we aim to disclose information relating to such potential loss. We also aim to disclose information relating to any
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
material potential loss that is probable but not reasonably estimable. In such cases, where reasonably practicable, we aim to provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.
Based upon information available to us, our review of lawsuits and claims filed or pending against us to date and consultation with our outside legal counsel, we have not recognized a material accrual liability for any such matters, nor do we currently expect that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations and/or our business as a whole, in the future.
28.Subsequent Events
Merger Agreement
On January 4, 2021, the Company entered into a merger agreement with Boston Private (NASDAQ: BPFH) for total consideration of approximately $900 million, based on SIVB's closing price as of December 31, 2020. The merger consideration consists of $2.10 in cash and 0.0228 shares of SIVB common stock for each share of Boston Private common stock. Due to the fixed exchange ratio, the value of the consideration will change based on SIVB's stock price. The merger is expected to close in mid-2021 and is subject to regulatory approval.
Series B Preferred Stock and Senior Notes Offerings
On February 2, 2021, the Company issued depositary shares representing a 1/100th ownership interest in 750,000 shares of Series B Preferred Stock with $0.001 par value and liquidation preferences of $100,000 per share, or $1,000 per depositary share. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.10 percent from the original issue date to, but excluding, February 15, 2031 and (ii) for the February 15, 2031 dividend date and during each subsequent ten year period, the ten-year treasury rate (calculated three business days prior to each reset date as the five day average of the yields on actively traded U.S. treasury securities adjusted to constant maturity, for ten-year maturities) plus 3.064 percent.
Concurrently with the offering of the Series B Preferred Stock, SVB Financial issued $500 million of 1.800% Senior Notes due February 2031, with interest payments starting August 2, 2021, and payable every February 2nd and August 2nd. The notes will be senior unsecured obligations of SVB Financial Group and will rank equally with all of our other unsecured and unsubordinated indebtedness.
For both the Series B Preferred Stock and Senior Notes, we intend to use the net proceeds for general corporate purposes, which may include working capital, capital investments and expenditures, supporting capital ratios at the Bank and capitalizing other operating subsidiaries allowing continued support for Bank clients.
Potential Fraudulent Client Activity
The Company recently became aware of potentially fraudulent activity conducted by a client of the Bank in connection with a loan transaction funded in early February 2021. We are currently investigating this incident to determine our potential credit exposure, which is currently estimated to be up to $70 million, net of tax, relating to a Global Fund Banking capital call line of credit. Additionally, we are working with the appropriate law enforcement authorities in connection with this matter and intend to pursue all available sources of recovery and other measures to mitigate the potential loss.
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
| |
ITEM 9A. | CONTROLS AND PROCEDURES |
| |
(a) | Disclosure Controls and Procedures |
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, among other things, processes, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017,2020, pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017.2020.
| |
(b) | Management's Report on Internal Control over Financial Reporting |
(b) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting at the Company. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and the Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with GAAP. A company's internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of the company's assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorization of management and the directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the Company's financial statements.
Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2017,2020, the Company carried out an assessment, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's internal control over financial reporting pursuant to Rule 13a-15(c), as adopted by the SEC under the Exchange Act. In evaluating the effectiveness of the Company's internal control over financial reporting, management used the framework established in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of December 31, 2017,2020, the Company's internal control over financial reporting was effective.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2020. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2020, is included in "Consolidated Financial Statements and Supplementary Data" under Part II, Item 8 of this report under the heading “Report of Independent Registered Public Accounting Firm.”
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management's evaluation during the fourth quarter of the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| |
ITEM 9B. | OTHER INFORMATION |
ITEM 9B. OTHER INFORMATION
None.
PART III.
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the sections titled “Proposal No. 1-Election of Directors,” “Information on Executive Officers,” “Board Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance and Board Matters” contained in the definitive proxy statement for SVB Financial's 20182021 Annual Meeting of Stockholders is incorporated herein by reference.
We have a Code of EthicsConduct for the Principal Executive Officer and Senior Financial Officers (the “Code of Ethics”) that applies to all of our CEO, Chief Financial Officer, Chief Accounting Officerdirectors, executive officers and other senior members of the Finance staff.financial officers as well as our U.S. employees. A copy of thisthe Code of EthicsConduct is available on our website at www.svb.com under “Corporate“About Us-Investor Relations-Corporate Governance,,” or can be obtained without charge by any person requesting it. To request a copy of our Code of Ethics,Conduct, please contact ourcontact: Corporate Secretary, at: SVB Financial Group, 3003 Tasman Drive, Santa Clara, California 95054, or by telephone (408) 654-7400.
We intend to disclose any waivers from orour Code of Conduct granted to our directors, executive officers and senior financial officers, and any material substantive changes to our Code of EthicsConduct by posting such information on our website. No such waivers or substantive changes were made during fiscal year 2017.2020.
| |
ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 11.EXECUTIVE COMPENSATION
The information set forth under the sections titled “Information on Executive Officers,” “Compensation Discussion and Analysis,” “Compensation for Named Executive Officers,” “Compensation for Directors,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” contained in the definitive proxy statement for SVB Financial's 20182021 Annual Meeting of Stockholders is incorporated herein by reference.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
The information set forth under the sections titled “Security Ownership of Directors and Executive Officers” and “Security Ownership of Principal Stockholders” contained in the definitive proxy statement for SVB Financial's 20182021 Annual Meeting of Stockholders is incorporated herein by reference.
Our stockholders have approved each of our active equity compensation plans. The following table provides certain information as of December 31, 20172020 with respect to our equity compensation plans:
|
| | | | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (2) |
| Equity compensation plans approved by stockholders | | 808,049 |
| | $ | 105.68 |
| | 3,705,463 |
|
| Equity compensation plans not approved by stockholders | | n/a |
| | n/a |
| | n/a |
|
| Total | | 808,049 |
| | $ | 105.68 |
| | 3,705,463 |
|
| | | | | | | | | | | | | | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (2) |
| Equity compensation plans approved by stockholders | | 559,001 | | | $ | 191.29 | | | 3,852,966 | |
| Equity compensation plans not approved by stockholders | | n/a | | n/a | | n/a |
| Total | | 559,001 | | | $ | 191.29 | | | 3,852,966 | |
| |
(1) | Represents options granted under our 2006 Equity Incentive Plan. This number does not include securities to be issued for unvested restricted stock units of 637,667 shares. |
| |
(2) | Includes shares available for issuance under our 2006 Equity Incentive Plan and 1,614,399 shares available for issuance under the 1999 Employee Stock Purchase Plan. This amount excludes securities already granted under our 2006 Equity Incentive Plan (as discussed above). |
(1) Represents options granted under our 2006 Equity Incentive Plan. This number does not include securities to be issued for unvested restricted stock units of 995,049 shares.
(2) Includes shares available for issuance under our 2006 Equity Incentive Plan and 1,170,472 shares available for issuance under the 1999 Employee Stock Purchase Plan. This amount excludes securities already granted under our 2006 Equity Incentive Plan (as discussed above).
For additional information concerning our equity compensation plans, refer to Note 4—“Share-Based Compensation” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information set forth under the sections titled “Certain Relationships and Related Transactions” and “Corporate Governance and Board Matters-Board Independence and Leadership” in the definitive proxy statement for SVB Financial's 20182021 Annual Meeting of Stockholders is incorporated herein by reference.
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ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the section titled “Principal Audit Fees and Services” contained in the definitive proxy statement for SVB Financial's 20182021 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV.
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ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
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(a) | Financial Statements and Exhibits: |
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Exhibits:
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| (1) | Financial Statements. The following consolidated financial statements of the registrant and its subsidiaries are included in Part II Item 8: | |
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| (2) | Financial Statement Schedule. The consolidated financial statements and supplementary data are contained in Part II Item 8. All schedules other than as set forth above are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or related notes in Part II Item 8. | |
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| (3) | Exhibits. | |
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| (1) | Financial Statements. The following consolidated financial statements of the registrant and its subsidiaries are included in Part II Item 8: | |
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| (2) | Financial Statement Schedule. The consolidated financial statements and supplementary data are contained in Part II Item 8. All schedules other than as set forth above are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or related notes in Part II Item 8. | |
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| (3) | Exhibits. | |
ITEM 16.FORM 10-K SUMMARY
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ITEM 16. | FORM 10-K SUMMARY |
None.
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| | | | | | | | | | | | |
Exhibit Number | | Exhibit Description | | Incorporated by Reference | | Filed Herewith |
| Form | | File No. | | Exhibit | | Filing Date | |
| | | | 8-K | | 000-15637 | | 3.1 | | May 31, 2005 | | |
| | | | 8-K | | 000-15637 | | 3.2 | | July 27, 2010 | | |
| | | | 8-K | | 000-15637 | | 3.3 | | December 8, 2008 | | |
| | | | 8-K | | 000-15637 | | 3.4 | | December 15, 2008 | | |
| | | | 8-K | | 000-15637 | | 4.12 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.13 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.14 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.15 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.16 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.17 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.18 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.19 | | November 19, 2003 | | |
| | | | 8-K | | 000-15637 | | 4.1 | | September 20, 2010 | | |
| | | | 8-K | | 000-15637 | | 4.2 | | September 20, 2010 | | |
| | | | 8-K | | 000-15637 | | 4.2 | | January 29, 2015 | | |
| | | | 8-K | | 000-15637 | | 4.3 | | January 29, 2015 | | |
| | | | 8-K | | 000-15637 | | 10.28 | | September 20, 2004 | | |
| | | | 10-K | | 000-15637 | | 10.2 | | February 27, 2014 | | |
| | | | 10-Q | | 000-15637 | | 10.4 | | August 7, 2008 | | |
| | | | 10-Q | | 000-15637 | | 10.1 | | August 8, 2016 | | |
| | | | 10-Q | | 000-15637 | | 10.7 | | November 6, 2009 | | |
| | | | 10-K | | 000-15637 | | 10.6 | | February 26, 2016 | | |
| | | | 10-Q | | 000-15637 | | 10.1 | | November 6, 2015 | | |
| | | | 8-K | | 000-15637 | | 10.14 | | March 15, 2012 | | |
| | | | 10-K | | 000-15637 | | 10.9 | | February 26, 2016 | | |
| | | | 10-Q | | 000-15637 | | 10.16 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.17 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.18 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.19 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.20 | | August 7, 2009 | | |
| | | | 8-K | | 000-15637 | | 10.31 | | April 17, 2007 | | |
| | | | 8-K/A | | 000-15637 | | 10.32 | | May 2, 2007 | | |
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Exhibit
Number | | Exhibit Description | | Incorporated by Reference | | Filed
Herewith |
| Form | | File No. | | Exhibit | | Filing Date | |
| 2.1 | | | | 8-K | | 000-39154 | | 2.1 | | January 8, 2021 | | |
| 3.1 | | | | 10-Q | | 000-15637 | | 3.1 | | May 9, 2019 | | |
| 3.2 | | | | 8-K | | 000-15637 | | 3.2 | | February 20, 2019 | | |
| 3.3 | |
| | 8-A | | 000-15637 | | 3.2 | | December 6, 2019 | | |
| 3.4 | | | | 8-K | | 000-39154 | | 3.1 | | February 2, 2021 | | |
| 4.1 | | | | 8-K | | 000-39154 | | 4.6 | | February 2, 2021 | | |
| 4.2 | | | | 8-K | | 000-39154 | | 4.2 | | June 5, 2020 | | |
| 4.3 | | | | 8-K | | 000-15637 | | 4.1 | | September 20, 2010 | | |
| 4.4 | | | | 8-K | | 000-15637 | | 4.2 | | January 29, 2015 | | |
| 4.5 | |
| | 8-K | | 000-15637 | | 4.2 | | December 9, 2019 | | |
| 4.6 | | | | 8-K | | 000-15637 | | 4.2 | | January 29, 2015 | | |
| 4.7 | | | | 10-K | | 000-15637 | | 4.4 | | February 28, 2020 | | |
| *10.1 | | | | 8-K | | 000-15637 | | 10.28 | | September 20, 2004 | | |
| *10.2 | | | | 10-K | | 000-15637 | | 10.2 | | February 27, 2014 | | |
| *10.3 | | | | 10-Q | | 000-15637 | | 10.1 | | August 8, 2016 | | |
| *10.4 | | | | 10-Q | | 000-15637 | | 10.7 | | November 6, 2009 | | |
| *10.5 | | | | 10-Q | | 000-15637 | | 10.1 | | August 7, 2018 | | |
| *10.6 | | | | 10-K | | 000-15637 | | 10.7 | | February 28, 2019 | | |
| *10.7 | | | | 8-K | | 000-15637 | | 10.14 | | March 15, 2012 | | |
| *10.8 | | | | | | | | | | | | X |
| *10.9 | | | | 8-K | | 000-15637 | | 10.31 | | April 17, 2007 | | |
| *10.10 | | | | 8-K/A | | 000-15637 | | 10.32 | | May 2, 2007 | | |
| *10.11 | | | | 8-K | | 000-15637 | | 10.31 | | May 14, 2009 | | |
| *10.12 | | | | 10-K | | 000-15637 | | 10.35 | | February 27, 2014 | | |
| *10.13 | | | | 10-Q | | 000-15637 | | 10.3 | | May 9, 2014 | | |
| *10.14 | | | | 10-Q | | 000-15637 | | 10.5 | | May 9, 2014 | | |
| *10.15 | | | | 8-K | | 000-15637 | | 10.3 | | January 9, 2015 | | |
| *10.16 | | | | 8-K | | 000-15637 | | 10.4 | | January 9, 2015 | | |
| *10.17 | | | | 8-K | | 000-15637 | | 10.5 | | January 9, 2015 | | |
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Exhibit
Number
| | Exhibit Description | | Incorporated by Reference | | Filed
Herewith
|
| Form | | File No. | | Exhibit | | Filing Date | |
| 10.18 | | | | 10-Q | | 000-15637 | | 10.23 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.24 | | November 10, 2008 | | |
| | | | 10-Q | | 000-15637 | | 10.27 | | November 10, 2008 | | |
| | | | 10-Q | | 000-15637 | | 10.26 | | August 7, 2008 | | |
| | | | 8-K | | 000-15637 | | 10.31 | | May 14, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.32 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.33 | | August 7, 2009 | | |
| | | | 10-Q | | 000-15637 | | 10.34 | | August 7, 2009 | | |
| | | | 10-K | | 000-15637 | | 10.33 | | February 27, 2014 | | |
| | | | 10-K | | 000-15637 | | 10.34 | | February 27, 2014 | | |
| | | | 10-K | | 000-15637 | | 10.35 | | February 27, 2014 | | |
| | | | 10-K | | 000-15637 | | 10.36 | | February 27, 2014 | | |
| | | | 10-K | | 000-15637 | | 10.37 | | February 27, 2014 | | |
| | | | 10-K | | 000-15637 | | 10.38 | | February 27, 2014 | | |
| | | | 10-Q | | 000-15637 | | 10.3 | | May 9, 2014 | | |
| | | | 10-Q | | 000-15637 | | 10.4 | | May 9, 2014 | | |
| | | | 10-Q | | 000-15637 | | 10.5 | | May 9, 2014 | | |
| | | | 8-K | | 000-15637 | | 10.2 | | January 9, 2015 | | X |
| 10.19 | | | | 8-K | | 000-15637 | | 10.3 | | January 9, 2015 | | X |
| 10.20 | | | | 8-K | | 000-15637 | | 10.4 | | January 9, 2015 | | X |
| *10.21 | | | | | | | | | | | | X |
| *10.22 | | | | | | | | | | | | X |
| *10.23 | | | | | | | | | | | | X |
| *10.24 | | | | | | | | | | | | X |
| *10.25 | | | | | | | | | | | | X |
| *10.26 | | | | | | | | | | | | X |
| *10.27 | | | | 8-K | | 000-15637 | | 10.5 | | January 9, 2015 | | X |
| 10.28 | | | | 8-K | | 000-15637 | | 10.6 | | January 9, 2015 | | X |
| 10.29 | | | | 8-K | | 000-15637 | | 10.7 | | January 9, 2015 | | X |
| 10.30 | | | | 8-K | | 000-15637 | | 10.8 | | January 9, 2015 | | |
| 10.31 | | | | 10-K | | 000-15637 | | 10.47 | | February 26, 2015 | | |
| 10.32 | | | | 8-K | | 000-15637 | | 10.1 | | May 12, 2017 | | |
| 10.33 | | | | 8-K | | 000-15637 | | 10.2 | | May 12, 2017 | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
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| | | | | | | | | | X |
| 32.1 | | | | |
Exhibit
Number
| | Exhibit Description | | Incorporated by Reference | | Filed
Herewith
| X |
Form101.INS | | File No. | | Exhibit | | Filing Date |
101.INS | | XBRL Instance Document | | | | | | | | | | X |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
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| * | Denotes management contract or any compensatory plan, contract or arrangement. |
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| + | |
+ | Forms applicable to grants made under the 2006 Equity Incentive Plan during 2013 and prior years. |
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++ | Forms applicable to grants made under the 2006 Equity Incentive Plan during 2014. |
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| ++ | |
+++ | Forms applicable to grants made under the 2006 Equity Incentive Plan beginning in 2015.2015 to 2020. |
| +++ | Forms applicable to grants made under the 2006 Equity Incentive Plan beginning in 2021. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| SVB Financial Group |
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SVB Financial Group |
|
| /s/ GREG W. BECKER |
| Greg W. Becker |
| President and Chief Executive Officer |
Dated: February 28, 2018March 1, 2021 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | | | | |
| Signature | Title | Date |
| | |
Signature | Title | Date |
| | |
| /s/ ROGER F. DUNBAR | Chairman of the Board of Directors and Director | February 28, 2018March 1, 2021 |
| Roger F. Dunbar | |
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| /s/ GREG W. BECKER | President, Chief Executive Officer and Director (Principal Executive Officer) | February 28, 2018March 1, 2021 |
| Greg W. Becker | |
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| /s/ DANIEL J. BECK | Chief Financial Officer (Principal
(Principal Financial Officer) | February 28, 2018March 1, 2021 |
| Daniel J. Beck | |
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/s/ KAMRAN F. HUSAINKAREN HON | Chief Accounting Officer (Principal
(Principal Accounting Officer) | February 28, 2018March 1, 2021 |
Kamran F. HusainKaren Hon | |
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| /s/ ERIC A. BENHAMOU | Director | February 28, 2018March 1, 2021 |
| Eric A. Benhamou | |
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/s/ DAVID M. CLAPPER | Director | February 28, 2018 |
David M. Clapper | |
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| /s/ JOHN S. CLENDENING | Director | February 28, 2018March 1, 2021 |
| John S. Clendening | |
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| /s/ RICHARD D. DANIELS | Director | March 1, 2021 |
| Richard D. Daniels | |
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| /s/ ALISON DAVIS | Director | March 1, 2021 |
| Alison Davis | |
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| /s/ JOEL P. FRIEDMAN | Director | February 28, 2018March 1, 2021 |
| Joel P. Friedman | |
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/s/ LATA KRISHNAN | Director | February 28, 2018 |
Lata Krishnan | |
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| /s/ JEFFREY N. MAGGIONCALDA | Director | February 28, 2018March 1, 2021 |
| Jeffrey N. Maggioncalda | |
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| /s/ BEVERLY KAY MATTHEWS | Director | March 1, 2021 |
| Beverly Kay Matthews | | |
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| /s/ MARY J. MILLER | Director | February 28, 2018March 1, 2021 |
| Mary J. Miller | |
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| /s/ KATE D. MITCHELL | Director | February 28, 2018March 1, 2021 |
| Kate D. Mitchell | |
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| /s/ JOHN F. ROBINSON | Director | February 28, 2018March 1, 2021 |
| John F. Robinson | |
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| /s/ GAREN K. STAGLIN | Director | February 28, 2018March 1, 2021 |
| Garen K. Staglin | |
