| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31, 20172021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to .
Commission File Number: 000-15637
001-39154
SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)
| Delaware | 91-1962278 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
3003 Tasman Drive, Santa Clara, California 95054-1191
(Address of principal executive offices) (Zip Code)
(408) 654-7400
(Registrant’s telephone number, including area code: (408) 654-7400code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.001 per share | 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 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.
| Large accelerated filer | x | Accelerated filer | |||||||||||||||||||||
| Non-accelerated filer | ¨ | ||||||||||||||||||||||
| 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, 2017,2021, 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.$30,340,662,815.
At January 31, 2018, 52,874,1882022, 58,802,627 shares of the registrant’s common stock ($0.001 par value) were outstanding.
| Documents Incorporated by Reference | Parts of Form 10-K Into Which Incorporated | ||||
| Definitive proxy statement for the Company's | Part III | ||||
TABLE OF CONTENTS
| Page | |||||||||||
| PART I. | Item 1. | ||||||||||
| Item 1A. | |||||||||||
| Item 1B. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II. | Item 5. | ||||||||||
| Item 6. | |||||||||||
| Item 7. | |||||||||||
| Item 7A. | |||||||||||
| Item 8. | |||||||||||
| Item 9. | |||||||||||
| Item 9A. | |||||||||||
| Item 9B. | |||||||||||
| Item 9C. | |||||||||||
| PART III. | Item 10. | ||||||||||
| Item 11. | |||||||||||
| Item 12. | |||||||||||
| Item 13. | |||||||||||
| Item 14. | |||||||||||
| PART IV. | Item 15. | ||||||||||
| Item 16. | |||||||||||
2
Glossary of Frequently-used Acronymsacronyms and abbreviations that may be used in this Report
| ACL — Allowance for Credit Losses | GCB — Global Commercial Bank | ||||
| AFS — Available-for-Sale | HTM — Held-to-Maturity | ||||
| AICPA— American Institute of Certified Public Accountants | IASB — International Accounting Standards Board | ||||
| AIR — Accrued Interest Receivable | ICP — Incentive Compensation Plan | ||||
| ALCO — Asset Liability Management Committee | IFRS— International Financial Reporting Standards | ||||
| AOCI — Accumulated Other Comprehensive Income | IOSCO — International Organization of Securities Commissions | ||||
| ARRC — Alternative Reference Rates Committee | IPO — Initial Public Offering | ||||
| ASC — Accounting Standards Codification | IRS — Internal Revenue Service | ||||
| ASU — Accounting Standards Update | ISDA — International Swaps and Derivatives Association, Inc. | ||||
| AUM — Assets Under Management | IT — Information Technology | ||||
| Boston Private or BPFH — Boston Private Financial Holdings, Inc. | LCR — Liquidity Coverage Ratio | ||||
| BPS — Basis Points | LGD — Loss Given Default | ||||
| C&I — Commercial and Industrial | LIBOR — London Interbank Offered Rate | ||||
| CECL — Current Expected Credit Losses | M&A — Merger and Acquisition | ||||
| CET1 — Common Equity Tier 1 | MBS — Mortgage-Backed Securities | ||||
| CMBS — Commercial Mortgage-Backed Securities | NFSR — Net Stable Funding Ratio | ||||
| CMO — Collateralized Mortgage Obligations | NII — Net Interest Income | ||||
| COSO — Committee of Sponsoring Organizations of the Treadway | NM — Not meaningful | ||||
| Commission | OREO — Other Real Estate Owned | ||||
| CRA — Community Reinvestment Act | PCD — Purchased Credit-Deteriorated | ||||
| CRE — Commercial Real Estate | PD — Probability of Default | ||||
| DFPI— California Department of Financial Protection and Innovation | PPP — Paycheck Protection Program | ||||
| EAD — Exposure at Default | PPPLF — Paycheck Protection Program Lending Facility | ||||
| ECL— Expected Credit Losses | ROU — Right of Use | ||||
| EHOP — Employee Home Ownership Program of the Company | RP — Retention Program | ||||
| EPS — Earnings Per Share | SBA — U.S. Small Business Association | ||||
| ESOP — Employee Stock Ownership Plan of the Company | SEC — Securities and Exchange Commission | ||||
| ESPP — 1999 Employee Stock Purchase Plan of the Company | SLBO — Sponsor-Led Buy-Out | ||||
| EVE — Economic Value of Equity | SOFR — Secured Overnight Financing Rate | ||||
| FASB — Financial Accounting Standards Board | SPAC — Special Purpose Acquisition Company | ||||
| FDIC — Federal Deposit Insurance Corporation | SPD-SVB — SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture | ||||
| FHLB — Federal Home Loan Bank | bank in China) | ||||
| FINRA— Financial Industry Regulatory Authority | SVB Securities — SVB Securities Holdings LLC (formerly known as | ||||
| FRB — Federal Reserve Bank | SVB Leerink Holdings LLC) | ||||
| FTE — Full-Time Equivalent Employee | TDR — Troubled Debt Restructuring | ||||
| FTP — Funds Transfer Pricing | U.K. — United Kingdom | ||||
| GAAP — U.S. generally accepted accounting principles | VIE — Variable Interest Entity | ||||
3
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,NII, noninterest income, earnings per share,EPS, 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;
•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 these 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 the(including inflation trends, interest rate environment,volatility, the general condition of the capital and equity markets, and IPO, secondary offering, SPAC fundraising, 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);
•Disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events;
•The credit profileCOVID-19 pandemic and its effects on the economic and business environments in which we operate, and its effect on our operations;
•The impact of changes from the Biden-Harris Administration and the U.S. Congress on the economic environment, capital markets and regulatory landscape, including monetary, tax and other trade policies, as well as changes in personnel at the bank regulatory agencies;
•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 loan lossesACL and the need to make provisions for loancredit losses for any period;
•The sufficiency of our capital and liquidity positions;provisions;
•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;
•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;
4
•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;
•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;
•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 and expansion of our private banking business and the growth and expansion of SVB Securities, including entry into the technology investment banking sector;
•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 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, potential variants of the virus (including the emergence of the Omicron variant), vaccination rates, the need for vaccine booster shots, 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.
5
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 35nearly 40 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, 2017,2021, on a consolidated basis, we had total assets of $51.2$211.5 billion,, total investment securities of $24.4$128.0 billion,, total loans, netamortized cost, of unearned income, of $23.1$66.3 billion,, total deposits of $44.3$189.2 billion and total SVB Financial stockholders' equity of $4.2 billion.$16.2 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,GCB, SVB Private Bank, SVB Capital and SVB Capital.Securities.
Global Commercial Bank
Our Global Commercial BankGCB segment is comprised of results primarily from our Commercial Bank, our Private EquityGlobal Fund Banking Division and 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.
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
6
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.
SVB Wine. SVB Wine provides banking products and services to our premium wine industry clients, including vineyard development loans.
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. Our clients are primarily private equity/venture capital professionals and executive leaders of the innovation companieseconomy they support. We offersupport as well as high net worth clients acquired from Boston Private. SVB Private Bank, which includes SVB Wealth Advisory, a registered investment advisor and broker-dealer subsidiary of the Bank, 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
On July 1, 2021, SVBFG completed the acquisition of Boston Private which was merged 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 also includes SVB Wealth Advisory, an investment advisory subsidiary of& Trust Company, merged with and into the Bank, whichwith Silicon Valley Bank continuing as the surviving entity in the bank merger. Boston Private provides a full spectrum of wealth, trust and private wealth managementbanking services dedicated to individual clients.helping clients simplify and strengthen their financial positions. The acquisition was accounted for as a business combination and accordingly, the results of Boston Private's operations have been included in our consolidated financial statements for the year ended December 31, 2021, from the date of acquisition.
SVB Capital
SVB Capital is the venture capital and credit investment arm of SVB Financial Group, which focuses primarily on funds management. SVB Capital manages over $3.0$7.3 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 pooled investment vehicles such as direct venture funds that invest in companies and funds of funds that invest in other venture capital funds.funds, as well as 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 Securities
SVB Securities is an investment bank focused on the innovation economy and operates as a wholly-owned subsidiary of SVB Financial Group. SVB Securities provides investment banking services across all major sub-sectors of Healthcare and Technology. Healthcare sub-sectors include Biopharma, Digital Health and HealthTech, Healthcare Services, Medical Devices and Tools and Diagnostics. SVB Securities launched Technology investment banking in 2021 and serves numerous Technology sub-sectors including Consumer Internet, Commerce Enablement and Marketing Software, Digital Infrastructure and Tech-Enabled Services, Education Technology, Enterprise Software, Industrial Technology and FinTech. SVB also expanded equity research coverage to include Technology companies with the acquisition of MoffettNathanson LLC in 2021. SVB Securities focuses on four main product and service offerings: Capital Raising, M&A Advisory, Equity Research and Sales and Trading.
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 incomeNII and noninterest income. Net interest income on a fully taxable equivalent basis and noninterest income for the year ended December 31, 20172021 were $1.4$3.2 billion and $557 million,$2.7 billion, respectively.
7
NII 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, wealth management and trust 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 Securities, we offer investment banking, M&A advisory services and equity research capabilities as mentioned above. We generally refer to our core fee income plus revenues generated by these investment banking services and commissions from sales and trading activities as “core fee income plus SVB Securities 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,AFS, HTM, 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, 20162021, 2020 and 2015.2019.
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 energyclimate technology 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.sustainability. Our life science/healthcare clients primarily tend to be in the industries of biotechnology,biopharma, healthtech, medical devices, healthcare information technologyservices and healthcare services.diagnostics and tools. 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
8
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.
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.
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, 2017,2021, we employed 2,438 full-time equivalent employees.6,567 FTEs. Approximately 80 percent of our employees are in the United states and approximately 20 percent are in international locations, including the U.K., Denmark, Germany, Ireland, Israel, China, Hong Kong, India and Canada. Our overall employee count increased by approximately 47 percent in 2021, including growth from acquisitions, increases in our investment banking business, as well as additions across all three lines of defense.
During 2021, we continued to focus on the response to the ongoing and evolving COVID-19 pandemic. As described further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Management’s Overview of 2021 Financial Performance – Recent Developments – COVID-19”, we continued to focus on the safety, well-being and stability of our people, and providing support for our employees, including expanded 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. We encourage you to visit our website under “About US – Living Our Values,” for more detailed
9
information regarding our environmental, social and governance related programs and initiatives, as well as additional details regarding our human capital management. 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.
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 EHOP that offers mortgages on primary homes, paid time off, life insurance, disability insurance, wellness programs (including webinars as well as individual wellness counseling) 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 multi-pronged approach to promoting a diverse and inclusive workplace includes employee awareness programs and Employee Resource Groups, internal DEI-focused “town hall” meetings, regular training and educational opportunities, fair pay analysis, leadership development, hiring outreach programs and strategic partnerships to advance diversity objectives.
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. During 2021, we focused on providing employee support to address work, life, financial and health-related issues. This included new programs and benefits to ease work-from-home challenges and address the medical and other support needs of those directly impacted by COVID-19. 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 also invest in affordable housing projects in the communities in which we live and work as well as provide financial support to low- and moderate-income communities in California and Massachusetts. In addition, we have a university scholarship program that funds certain scholarships and internships.
Company Values.Our Company values guide our actions and empower our employees to be successful. Our core values are: start with empathy for others; take responsibility; embrace diverse perspectives; speak and act with integrity; 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,U.K., Germany, Israel, China, 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
10
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. Actions by the U.S. Congress and the Biden-Harris 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 relevant to our activities and the effect of suchgovernment 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
In order to retain FHC status, a financial holding company and all of its depository institution subsidiaries must be well-capitalized and well-managed, pursuant to the requirement imposed by the Dodd‑Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") thatFederal Reserve’s Regulation Y. Otherwise, SVB Financial must obtain prior Federal Reserve approval (subjectcould face material restrictions on its activities and its ability to enter into certain exceptions) in ordertransactions. In addition, if the Bank has not received at least a satisfactory rating on its most recent examination under the CRA, we would not be able to commence any new financial activities or acquire a nonbanking company engagedthat engages in financialsuch 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 at least satisfactory compliance with more than $10 billionthe CRA and in consolidated assets.2021 it received its first "outstanding" rating on its CRA strategic plan.
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 GLBA, in ordermany so-called “closely related to electbanking” or “non-banking” activities commonly conducted by national banks. In addition, the Bank may conduct, through a subsidiary, certain “financial” activities that would be impermissible for the Bank itself to conduct, provided the Bank remains “well-capitalized,” “well-managed” and retain financial holding company status, all depository institution subsidiaries of a bank holding company must be well-capitalized, well-managed, and, except in limited circumstances, in satisfactory compliance with the Community Reinvestment Act (“CRA”). In addition, pursuant to the Dodd-Frank Act, a financialCRA.
Bank holding company,companies and no longer just bank subsidiaries thereof, is required to be well-capitalized and well-managed. Failure to maintain compliance with these requirements or correct any non-compliance within a specified time could lead to divestiture of subsidiaryinsured 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.
Enhanced Prudential Standards
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 certain other risk-based indicators. 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. As of June 30, 2021, SVB Financial passed the threshold to be considered a Category IV institution, and accordingly, is subject to requirements applicable to Category IV institutions.
If a Category IV organization exceeds either (i) $250 billion in average total consolidated assets or (ii) $100 billion or more in average total consolidated assets areand at least $75 billion in nonbank assets, weighted short-term wholesale funding (as defined by the Federal Reserve) (“WSTWF”) or off-balance sheet exposures, it will become a Category III organization, and will, subject to more stringent prudential requirements, including requirements for risk-based 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 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. Certain requirements, including the single counterparty credit exposure limits and separate early remediation standards, have not yet been finalized and implemented.
Several of the enhanced prudential standards’ requirementsstandards for Category IV and the associated transition periods that apply once a bank holding company becomesCategory III firms are summarized below:
•Risk Management. Category IV and Category III organizations are subject to therisk committee and risk management requirements, as well as liquidity risk management, liquidity buffer and liquidity stress testing requirements.
11
•Comprehensive Capital Analysis and Review (“CCAR”). Category IV and Category III organizations are required to submit an annual capital plan to the Federal Reserve. The Federal Reserve’s capital plan rule provides firms subject to Category 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 companiesCategory IV organizations, like SVBFG, are subject to supervisory stress tests conducted by the Federal Reserve every other year. Category III organizations are subject to annual supervisory stress tests and must conduct company-run stress tests every other year (commonly referred to as Dodd-Frank Stress Tests or “DFAST”). These stress tests are used to determine whether the firms have sufficient capital on a consolidated basis necessary to absorb losses in baseline and severely adverse economic conditions.
•Resolution Planning. Category III firms, but not Category IV firms, 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 more than $10 billion inmaterial financial distress or failure. Separately, FDIC regulations require 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 June 2021, the FDIC issued a Statement of Resolution Plans for Insured Depository Institutions, which, among other things, provided further details surrounding streamlined content requirements for IDI plan submissions, and established a three-year filing cycle for banks with $100 billion or more in assets. In addition, bank holding companiesAs a result, the Bank will submit a resolution plan on a three-year cycle beginning in 2022. Prior to each IDI plan submission, the FDIC will send a written communication to the Bank specifying the timing of its submission, which will be required no earlier than 12 months after the date of the communication, and which the FDIC expects will be required by the first business day in December of an applicable year. The Bank expects to submit its resolution plan by December 2022.
•Liquidity Requirements. Category IV institutions with greater than $50 billion in WSTWF, as well as Category I-III organizations, 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 testingLCR and net stable funding ratio (“NSFR”) requirements in the year following the first year in which the bank holding company submits a capital plan.
•Single counterparty credit limit. In June 2018, the Federal Reserve issued a final rule regarding single-counterparty credit limits (“SCCL”) for large banking organizations, excluding Category IV firms, subjecting them to a limit of 25% of Tier 1 capital for aggregate net credit exposures (so-called “advanced approaches” banking organizations). The modified LCR rule, which we would expect to be the version of the rule most likely to apply toany other unaffiliated counterparty. Given 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 the LCR rule after meeting the relevant asset threshold according tois a transition schedule set out in the LCR rule, which varies based on the size of the institution.
Regulatory Capital
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 newCET1 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 “Common Equity Tier 1” (“CET1”) and a related regulatory capital ratio of CET 1 to risk-weighted assets; (iii) specify that Tier 1 capital consistsand total capital as well as a minimum "leverage ratio" 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, capital as compared to prior regulations. Further, under the Basel III capital adequacy framework as implemented in the United States, banking organizations with $250 billion or more in total consolidated average tangible 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(as defined for credit risk and advanced measurement approaches to calculate risk-based capital requirements for operational risk. As of December 31, 2017, we had
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”)
12
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, such as SVB Financial, 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.
If SVB Financial were to become a Category III firm, it would also be subject to (i) if deployed by the Federal Reserve, up to an additional 2.5% CET1 countercyclical capital buffer and (ii) a minimum supplementary leverage ratio of 3.0% that takes into account both on-balance sheet and certain off-balance sheet exposures.
The regulatory capital ratios of SVB Financial and the Bank currently exceed these levels, as shown in the following chart:
| December 31, 2021 | SVB Financial | Bank | Required Ratio (1) | |||||||||||||||||
| CET1 risk-based capital | 12.09% | 14.89% | 7.0% | |||||||||||||||||
| Tier 1 risk-based capital | 16.08 | 14.89 | 8.5 | |||||||||||||||||
| Total risk-based capital | 16.58 | 15.40 | 10.5 | |||||||||||||||||
| Tier 1 leverage | 7.93 | 7.24 | 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 the Capital Rules. 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%.
In December 2017, the Basel Committee published standards to 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.
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 provided 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 adopted CECL during the 2020 calendar year, such as SVB Financial and the Bank, meet allwere permitted to 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 thatelected 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 billion or more in average total consolidated assets
As a Category IV firm, we are additionally subjectrequired to submit an annual capital plan requirementsto the Federal Reserve. A BHC’s planned capital distributions in its annual capital plan submissions must be consistent with any effective distribution limitations that would apply under the enhanced prudential standards. See “-Enhanced Prudential Standards-Comprehensive Capital Analysisfirm’s own baseline projections, including its SCB. SVB Financial’s ability to make capital distributions would likely be impacted in the event that SVB Financial fails to maintain its SCB above its minimum CET1 risk-based, Tier-1 risk-based and Review” above.total risk-based capital requirements. In addition, the Federal Reserve’s capital plan rule relating to the CCAR process also provides that a BHC must receive prior approval for any dividend, stock repurchase, or other capital distribution, other than a capital distribution on a newly issued capital instrument, if the BHC is required to resubmit its capital plan. Among other circumstances, a firm may be required to resubmit its capital plan in connection with certain acquisitions or dispositions.
13
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.
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 orand (ii) the date by which each fund matures by its terms or is otherwise conformed to the Volcker Rule.
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.
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 AnalyticsSecurities 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
14
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 subject to the federal Gramm-Leach-Bliley Act. The CCPA’s 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, such as Colorado and Virginia, 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 Data Protection Directive which governed data privacy in the European Union.
In November 2021, the federal banking agencies issued a final rule requiring banking organizations to notify their primary banking regulator as soon as possible and broad consumer protection powers and authoritywithin 36 hours of determining that a “notification incident” has occurred. A notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver services to a material portion of its customer base, result in a material loss of revenue, profit, or franchise value, or impact the stability of the CFPB, the BankU.S. financial sector. The final rule also requires specific and its affiliates may incur additionalimmediate notifications by bank service providers that become aware of similar incidents. The final rule is effective April 1, 2022, with compliance costs or be required to expend additional funds for investments in their local community.
by May 1, 2022.
Anti-Money Laundering, Sanctions and Anti-Corruption Regulations
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
15
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 June 2021, FinCEN issued the priorities for anti-money laundering and countering the financing of terrorism policy required under AMLA. The priorities include: corruption, cybercrime, terrorist financing, fraud, transnational crime, drug trafficking, human trafficking and proliferation financing. In December 2021, FinCEN issued a notice of proposed rulemaking regarding beneficial ownership information reporting, under which certain domestic and foreign reporting companies would file reports with FinCEN regarding their beneficial ownership.
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 isLLC (formerly known as SVB Leerink LLC), a subsidiary of SVB Securities, 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 Asset Management, SVB Wealth Advisory and funds management entities associated with SVB Securities must comply withCapital LLC, a variety of regulations associated with its business lines, including (i) rules that govern the registration and examinationsubsidiary of SVB Securities, are registered with the SEC under the Investment Advisers Act of 1940, as amended, and are subject to its employees, (ii) substantive requirements 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. corresponding regulations.
SVB Securities alsoLLC and SVB Wealth 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,Each of SVB Securities LLC and SVB Wealth Advisory is required to maintain minimum net capital calculatedlevels, which could, in accordance with a specified formula in order to help meet its continuing commitments to customers and others. Under certain circumstances, this rule couldthe case of either entity, 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
Further, the Company has oversight responsibilities with respect to the regulatory compliance of certain unconsolidated subsidiaries and SVB Wealth Advisory are registeredaffiliates that the Company may be deemed to control for purposes of the BHC Act. In 2021, the Company restructured its relationships with Vouch Inc. and Bolster Networks, Inc. such that the SEC underCompany believes it is no longer deemed to control either entity for purposes of the Investment Advisers Act of 1940, as amended, and are subject to its rules and regulations. In addition, following completion of various studies on investment advisers and broker-dealers required by the Dodd-Frank Act, the SEC has, among other things, recommended to Congress that it consider various means to enhance the SEC’s examination authority over investment advisers, which may have an impact on SVB Asset Management and SVB Wealth Advisory that we cannot currently assess.BHC Act.
Securities Registration and Listing
SVB Financial’s common stock isand Series A, B, C, D and E preferred stock 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 KingdomU.K., 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,U.K., 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 in mid-year 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
16
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.
•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.
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.
•Liquidity risk could impair our ability to fund operations and jeopardize 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 merger and acquisitionM&A markets which are uncertain and may vary materially by period.
Operational Risks
•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.
•We face risks associated with the ability of our information technologyIT systems and our people and processes to support our operations and future growth effectively.
•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.
•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.
•The soundness of other financial institutions could adversely affect us.
17
Table 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.Contents
•We depend on the accuracy and completeness of information about customers and counterparties.
•We face risks associated with our current international operations and ongoing international expansion.
•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.
•We have recently experienced, and continue to experience, significant growth, including deposit growth. Our current level of growth may not be sustainable. Further, if our deposit growth continues at a similar or greater rate, we may need to raise additional equity to support our capital ratios.
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.
•As we have exceeded $100 billion of average total consolidated assets (over four quarters) during 2021, we are now subject to more stringent regulations, including certain enhanced prudential standards applicable to large bank holding companies. If we exceed $250 billion of average total consolidated assets, we will be subject to even more stringent regulations.
•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 clients 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.
•We may fail to realize growth prospects and benefits anticipated as a result of the Boston Private acquisition.
•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.
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.
18
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, 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, thereby reducing the rate of financing or other “exit” events for certain clients, 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 offset by strong financial markets performance, relief programs and decreased cash utilization, certain 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, volatility in financial markets may make IPOs 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, 2021, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $41.3 billion, or 62 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 and SLBO loans, 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. 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 2021, 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.
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 has substantially increased due to 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
19
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. Additionally, certain clients may prepay the principal amount of their loans. If we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our financial performance may be adversely impacted.
Commercial real estate loans. We acquired a portfolio of CRE loans as part of the Boston Private acquisition. CRE loans may lack standardized terms and may include a significant principal balance or “balloon” payment due on maturity. CRE loans may involve a higher risk of default compared to our other types loans as a result of several factors, including the financial condition of the borrower, prevailing economic conditions, occupancy, rental collections, interest rates and collateral value. Additionally, the adverse impacts of the COVID-19 pandemic on the commercial real estate sector, including retail stores, hotels and office buildings, creates greater risk exposure for our CRE loan portfolio.
Based on the credit profile of our overall loan portfolio, our level of nonperforming loans, loan charge-offs and ACL can be volatile and can vary materially from period to period. Increases in our level of nonperforming loans, the acquisition of PCD loans, increases in 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. 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 ACL or incur credit losses in excess of the allowance in future periods. For instance, during the first half of 2020 in response to the onset of the COVID-19 pandemic, we significantly increased our ACL. 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 ACL 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 ACL, 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 ACL 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 ACL will be sufficient to absorb future credit losses or prevent a material adverse effect on our business, financial condition or results of operations.
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 ACL. 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 ACL 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
20
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 ACL 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 may 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, such as the Federal Reserve. 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. Although it is expected that the Federal Reserve will increase the target Federal Funds rate in 2022 to combat recent inflationary trends, 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, to combat inflation or otherwise, 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. We are unable to predict changes in interest rates, which are affected by factors beyond our control, including inflation, deflation, recession, unemployment, money supply, and other changes in financial markets.
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 the administrator ceased publishing other LIBOR settings immediately after 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.
Regulators, industry groups and certain committees (for example, the ARRC) have published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., the SOFR 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
21
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 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 and, in some cases, we retain equity interests in these companies following their initial public offering. We have also made investments through SVB Financial, SVB Securities and our SVB Capital family of funds in venture capital funds and direct investments in companies. We may enter into hedging arrangements with respect to some of the SVB Capital equity positions; many of these interests are required to be carried at fair value and may be 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. Though valuations and financial markets have rebounded since the earlier stages of the COVID-19 pandemic, the prolonged negative effects of the COVID-19 pandemic may have a further impact on the value of these assets (potentially in a significant manner). Additionally, macroeconomic factors beyond our control, including inflationary trends, financial markets volatility and geopolitical issues and events, such as the escalating military tension between Russia and Ukraine, may adversely impact the value of our investments. 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. The net proceeds we receive from these financial instruments, and our financial statements more generally, may also be affected by hedging arrangements we may enter into with respect to such instruments at SVB Capital. 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 (or any potential related hedging transactions) may have a material impact on our financial statements and 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 16-”Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional details.
22
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 Securities, 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 technology sectors in 2021, a decline in this activity in the future could lead to decreased revenues of SVB Securities.
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
The COVID-19 pandemic has created significant economic and financial disruptions that have adversely affected, and may continue to adversely affect certain aspects of our business and operations.
The COVID-19 pandemic has caused significant impacts to global health and economic conditions that have adversely affected, and may continue to adversely affect, certain aspects of our business and 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 and in 2021, 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) fluctuations in the targeted federal funds rate as result of monetary policy measures in response to the effects of the COVID-19 pandemic, including inflationary pressures; (vi) the exacerbation of recent inflationary trends and (vii) 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 SBA’s 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 balance managing these impacts whilealso devoting resources and management attention toward 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 (including variants thereof), and the effectiveness and implementation of vaccination efforts. For example, the omicron variant of COVID-19 has led to a spike in COVID-19 cases across the United States, which has caused travel, supply chain and other disruptions, and certain governmental authorities and other third parties have re-imposed restrictions in order to respond to the rise in cases attributable to the omicron variant.
23
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 2021 and as disclosed in previous filings, we incurred an $80 million charge-off related to fraudulent activity. 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 potentially 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 IT 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, integrating new employees into the Company, 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
24
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 IT systems and our people and processes to support our operations and future growth effectively.
Our IT systems, the data stored in those systems, people and internal business processes are critical to our operations and future growth, and have been critical to our continued operations during the COVID-19 pandemic as we implemented work-from-home arrangements and onboarded new employees in an entirely remote work environment. 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. Further, the functionality and reliability of our IT systems may be compromised if the data contained in those systems is inaccurate, outdated or corrupt. 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 experienced major wildfires and blackouts and is located over major earthquake fault lines. We also maintain critical business facilities in Texas, which has experienced severe weather conditions, major blackouts and water service disruptions. Additionally, we conduct certain finance, human resources and technology and loan operations in India, which has experienced severe weather conditions, floods and public health issues as a result of the COVID-19 pandemic. 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 that continue to be in effect, 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.
25
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 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 due to climate change or otherwise, 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.
In response to the COVID-19 pandemic, we 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. Currently, the vast majority of our employees continue to work remotely as a result of the COVID-19 pandemic and our longer-term plan to increase virtual or remote working arrangements. 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, difficulties integrating new employees, 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, while we have begun reopening certain of our offices and welcoming back employees at those locations (in addition to allowing certain virtual or remote working arrangements), the manner and timing of fully reopening our offices is not yet finalized.Our ability to fully reopen our offices will be subject to a variety of complex considerations including, among others, the duration of the pandemic and emergence of new variants, including the omicron variant, international, federal, state and local government laws, regulations and guidance, health organization guidance, health and safety implications (including the availability of vaccinations, potential health testing requirements and vaccination mandates) and employee needs, and the practical requirements of potential office reconfigurations or a phased return. We have also expanded our work model to increase virtual or remote working arrangements once our offices reopen fully, and if implemented ineffectively, this 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 the U.K., Denmark, Germany, Ireland, Israel, China, Hong Kong, India and Canada 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, either due to their actions or inactions, or due to natural disasters or other external events beyond their control, 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, disruptions of global supply chains, 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.
26
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 IT 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 U.K., Israel, Germany, Denmark, Ireland, India, Hong Kong and China, including a joint-venture bank in China. We have expanded and plan to continue to expand and grow 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, human resources and finance operations. Additionally, we are in the process of converting our U.K. branch to a separate U.K. banking subsidiary due to our growth. 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; changes in governmental policies, unfavorable political and diplomatic developments, terrorism or other geopolitical events; 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 U.K. from the European Union and escalating military tension between Russia and Ukraine; 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.
27
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 presents both near and long-term risks to our business and that of our customers, and these risks are expected to increase over time. 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. Longer-term changes, such as increasing average temperatures and rising sea levels, may damage, destroy or otherwise impact the value or productivity of our properties and other assets, reduce the availability of insurance, and/or lead to prolonged disruptions in our operations. 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.
Climate exposes us to risks associated with the transition to a less carbon-dependent economy. Such risks may result from changes in policies, laws and regulations, technologies, or market preferences to address climate change. Such changes could materially and negatively impact our business, results of operations, financial condition and our reputation, in addition to having a similar impact on our customers. Federal and state regulatory authorities, investors and other third parties have increasingly viewed financial institutions as important in addressing the risks related to climate change, which may result in financial institutions facing increased pressure regarding the disclosure and management of climate risks and related lending and investment activities. Further, we have announced commitments related to the management of climate risks and the transition to a less carbon-dependent economy. Our inability to meet these commitments may subject us to, among other risks, increased business, operational and reputational risk.
Climate change could impose systemic risks upon the financial sector, either through operational disruptions or as a result of transitioning to a less carbon-dependent economy. While we are focused on enhancing our governance practices surrounding the management of climate change-related risks, we may face increased regulatory scrutiny related to our resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.
We have recently experienced, and continue to experience, significant growth, including deposit growth. Our current level of growth may not be sustainable. Further, if our deposit growth continues at a similar or greater rate, we may need to raise additional equity to support our capital ratios.
We have experienced significant balance sheet growth in recent periods, which puts a strain on our business, operations, and employees. Failure to effectively manage our growth could lead us to over-invest or under-invest in our operations, result in weaknesses in our internal controls, give rise to operational mistakes, financial losses, loss of business opportunities and loss of client satisfaction, invite increased regulatory scrutiny, and result in loss of employees and reduced productivity of remaining employees. If our management is unable to effectively manage our growth, our expenses may increase more than expected, and our revenues may not increase or may grow more slowly than expected.
In particular, we have experienced significant deposit inflows. In 2021, our average deposits increased by 97.2% to $147.9 billion and our deposits ended the year at $189.2 billion up from $102.0 billion at the end of 2020. In recent periods, deposit growth has been driven by our clients across all segments obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 were at notably high levels. We are unable to predict whether these liquidity events will continue at all or at the rate they have been recently occurring. In addition, our level of deposits depends on whether clients determine to keep proceeds from liquidity events and other funds in deposit products with us (as opposed to off-balance sheet products, such as
28
third-party money market funds). Although clients have historically retained a significant portion of their funds on our balance sheet, we are unable to predict whether they will continue to do so, and whether the recent level of deposit growth will be sustained.
The increase in on-balance sheet deposits also increases our assets and accordingly decreases our capital ratios for which assets (both total and risk-weighted) is the denominator. If there is further deposit growth we may need to raise additional capital, including common equity, as we have done in 2021. For example, to support this growth in 2021 we issued four series of preferred stock with total proceeds of $3.3 billion and issued 4,227,000 shares of common stock through two public offerings.
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 U.S Congress and/or 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,
Certain enhanced prudential standards and related requirements now apply to us, as we had approximately $6.0have exceeded $100 billion in on-balance sheet foreign exposures. Under the Federal Reserve’s enhanced prudential standard regulations, SVB Financial would become subject to more stringent prudential standards if, whether as a result of organic growth, potential future acquisitions or otherwise, we averagedaverage total consolidated assets of $50 billion or more atcalculated over four consecutive financial quarters. We are now a Category IV institution under the end of a four-quarter period. PursuantTailoring Rules, and therefore are subject to the Dodd-Frank Act, the more stringentadditional requirements, such as certain enhanced prudential standards include requirements relatedand monitoring and reporting certain risk-based indicators. Under the Tailoring Rules, Category IV firms are, among other things, subject 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 haveliquidity stress testing requirements. As 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.
As of year-end 2021, we arehad total consolidated assets of $211.5 billion. If we exceed $250 billion of average total consolidated assets, or exceed $75 billion in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposures, we will be subject to CCAR, the Federal Reserve may objecteven more stringent regulations as a Category III institution. Category III institutions are additionally subject to, or otherwise not respond favorably toamong other requirements, biennial company-run stress testing, supervisory capital stress testing on an annual basis, and increased capital and liquidity requirements.
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 which may becomethat are applicable to us.
29
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, SVB Securities and SVB Securities.Boston Private Wealth. 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 the Federal Reserve’s Regulation Y. 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 require us to evaluate our current operations, IT 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, IT 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
30
or financial condition as well as our ability to conduct our businesses (or one or more business lines) as they are presently being conducted. conducted, including our ability to make certain acquisitions or otherwise expand our businesses. 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.
We have procedures and controls designed to identify and address these conflicts of interest, including those designed to prevent the convergenceimproper sharing of international accounting standards, such as rules thatinformation among our businesses. However, appropriately identifying and dealing with conflicts of interest is complex and difficult, and our reputation could be damaged and the willingness of clients to enter into transactions with us may be adopted under the International Financial Reporting Standards (“IFRS”), may result in our Company being subjectaffected if we fail, or appear to new or changing accountingfail, to identify, disclose and reporting standards.deal appropriately with conflicts of interest. In addition, the bodies that interpret the accounting standards (such as banking regulatorspotential or outside auditors) may change their interpretationsperceived conflicts could give rise to litigation 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.
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-lawsbylaws 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.
31
science and healthcare clients are concentrated in the industries of biotechnology,biopharma, healthtech, medical devices, healthcare information technologyservices and healthcare services.diagnostics and tools. 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 companiesclients 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 areclients are: 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.
32
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 the acquisitions of Boston Private and MoffettNathanson LLC), 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 Leerink Holdings LLC, now known as SVB Securities, we have also expanded into new lines of business, namely, investment banking and M&A advisory services. In support of SVB Securities continued expansion into technology investment banking, we have continued to grow the investment banking team to deepen our expertise in the technology sector and acquired MoffettNathanson LLC in December 2021 to expand our equity research coverage to include companies in the technology industry. Moreover, our acquisition of Boston Private significantly expanded our wealth management and private banking business and introduced new lines of lending and new deposit products, new types of customers and a number of bank branches. For example, the Boston Private acquisition included a portfolio of commercial real estate loans, which expose us to various risks, including potential environmental liability, if we were to acquire a property, through foreclosure or other similar proceedings, that had material environmental violations. Additionally, in February 2022 we launched our first open-ended fund sponsored by SVB Financial to hold investments in other open-ended funds. We are also enhancing and expanding our payments processing capabilities and digital platforms to better serve our clients, including innovatingdeveloping new electronic payment processing solutions, developing new payments technologies, and supporting new or evolving disruptive payments systems.systems and services (including providing embedded payments services to enable clients to process payments on behalf of their own clients, e.g., merchant services and custodial account 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 payment system rules and legal, regulatory and compliance costs and risks.
Our ability to execute strategic activities and new business initiatives successfully, as well as expand and grow our existing capabilities (such as the acquisitions of Boston Privateand MoffettNathanson LLC) 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, retaining clients, attracting new clients, 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,Additionally, macroeconomic and geopolitical uncertainties and challenges may adversely impact our ability to execute our strategic undertakings. Moreover, 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. 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 an acquisition.
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.
33
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 acquisition. We may not realize all of these business opportunities and growth prospects. The Boston Private acquisition required significant efforts and expenditures, as will the related integration that is currently underway. 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. In 2021, we incurred approximately $129 million of merger-related charges in connection with the transaction. 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 continue 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 integration of operations successfully or on a timely basis, our expectations of future results of operations 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, IT 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.
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 forgiveness applications, our actions related to environmental, social and governance matters, or potential hedging arrangements) 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 widespread 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, or use of related risk mitigation techniques, such as hedging arrangements, will be effective under all circumstances or that itthey 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. In addition, ifAs we continue to grow to total average consolidated assets of $50 billion or greater or cross the Advanced Approaches Thresholds,and expand our business, we will become subjectneed to more stringent risk management requirements that could increase our compliance costs and require us to further enhanceevolve our risk management framework to support the size and practices. Seecomplexity of the section "Business-SupervisionCompany. Failure to adequately evolve our risk management framework may have adverse consequences on our business.
We do not currently pay dividends on shares of our common stock and Regulation-Enhanced Prudential Standards"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
34
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.
General Risk Factors
If we fail to retain key employees or recruit new employees, or if we are unable to effectively manage the growth of our 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 markets we serve. In addition, as we expand into international markets, we will need 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, inflationary pressures on wages, 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. Further, our performance may be adversely impacted if we are unable to effectively manage succession planning for key employees, as well as transitions and knowledge transfers related to key employee departures. The number of our FTEs increased from 4,461 at December 31, 2020 to 6,567 at December 31, 2021, and is expected to continue to increase through our organic growth. 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 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 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 this Part I, Item 1the 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 this report.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
35
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 tax laws and regulations by the Biden-Harris Administration and the U.S. Congress, administrative rulings or court decisions could increase our provision for income taxes and reduce our 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.
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;industry including as a result of current or anticipated military conflict, terrorism or other geopolitical events;
•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, including inflation, 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.
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
36
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 2956 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
Our Global Commercial BankGCB 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. With the acquisition of Boston Private, SVB Private Bank andoperates out of various regional offices. SVB Capital principally operateoperates out of our Menlo Park, California offices. SVB Securities 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—26—“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
Not applicable.
37
PART II.
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 | ||||||||||||
Holders
As of January 29, 2018,31, 2022, there were 625729 registered holders of our stock, and wecommon stock. We believe there were approximately 79,100318,874 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
We did not make any repurchases of shares of our equity securities during the three months ended December 31, 2021.
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, 20122016 through December 31, 2017,2021, 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.
38
Comparison of 5 Year Cumulative Total Return*
* $100 invested on 12/31/Fiscal year ended December 31st.
Copyright ©20182022Standard & Poor's, a division of S&P Global. All rights reserved.
| December 31, | ||||||||||||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||||||
| SVB Financial Group | $ | 100.00 | $ | 136.18 | $ | 110.64 | $ | 146.24 | $ | 225.93 | $ | 395.11 | ||||||||||||||||||||||||||
| S&P 500 | 100.00 | 121.83 | 116.49 | 153.17 | 181.35 | 233.41 | ||||||||||||||||||||||||||||||||
| NASDAQ Composite | 100.00 | 129.64 | 125.96 | 172.17 | 249.51 | 304.85 | ||||||||||||||||||||||||||||||||
| NASDAQ Bank | 100.00 | 106.14 | 88.44 | 109.61 | 101.31 | 144.54 | ||||||||||||||||||||||||||||||||
ITEM 6. [Reserved]
39
| 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 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Page Number | ||||||||
| 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 | |||||||||||||||
40
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 2020 results to 2019 results and other 2019 information not included herein, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 2020 Form 10-K filed with the SEC on March 1, 2021.
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 35nearly 40 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 20172021 Financial Performance
During 2021, we continued to execute on innovation companiesour strategic vision, extending and theirdiversifying our business and geographical footprint to support our clients as they grow to ensure we remain the partner of choice for innovators, enterprises, entrepreneurs and investors around the world. In the third quarter, we completed our acquisition of Boston Private to accelerate the growth and capabilities of our private bank and wealth management strategy. We also announced a joint venture with Nasdaq and a consortium of leading investment banks to create Nasdaq Private Market, an institutional-grade, secondary trading venue for private company stock. Throughout 2021, we hired over 100 investment bankers to expand our Healthcare Services and HealthTech investment banking practices and to launch our new Technology investment banking services. As part of this expansion, we also announced our acquisition of MoffettNathanson to add technology equity research capabilities. Lastly, we continued efforts to secure client relationships.make investments in our infrastructure and regulatory groups to support our tremendous growth as we became a Category IV banking organization and now prepare to potentially become a Category III banking organization. Overall, the investments in our systems, infrastructure and processes are intended to support our continued growth and increased needs of our clients and employees.
To support our continued balance sheet growth, we accessed the capital markets several times during 2021. During the year, we issued $3.4 billion of preferred stock, $2.4 billion of common stock (excluding $1.1 billion of shares issued to complete the Boston Private acquisition) and $1.7 billion of long-term debt. These issuances combined with our strong earnings for the year enabled us to further support our already strong capital ratios and maintain our growth momentum in the near term while allowing us to invest for the long-term.
41
Recent Developments - COVID-19
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 or otherwise impacted our business, financial condition and results of operations.
During the year ended 2021, the economy continued to generally improve with increased vaccine rates and business activity. However, there still remains much uncertainty around containment of the pandemic and the trajectory of the broader economic recovery, particularly in light of the spread of variants of the COVID-19 virus, including the Omicron variant. Variants have contributed to the significant increase in the number of cases in the United States and other international locations where we operate. We saw continued success in working with private equity/venture capital firmscannot predict at this time the scope and technology clientsduration of the pandemic, which will depend on a variety of factors, including but not limited to, the extent and spread of the Omicron variant and other variants of the virus; the availability, adoption and efficacy of vaccines and vaccine booster shots, as well as clientsgovernment and other actions to mitigate the spread of COVID-19, such as stay at home orders, vaccination mandates, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures. The economic, market and business conditions impacted by COVID-19 may be slow to recover or may worsen if the pandemic continues for a prolonged period of time. Even if the pandemic subsides, there may be additional variants of the virus or a resurgence of the pandemic, as we have seen domestically and internationally. We continue to be subject to heightened business, operational (including fraud), market, credit and other risks related to the COVID-19 pandemic environment, which may have an adverse effect on our business, financial condition and results of operations. (See “Risk Factors” under Part I, Item 1A of this report).
Although the effects of the pandemic remain uncertain, for the year ending 2022, we currently expect strong growth in average on-balance sheet deposits, average loans, net interest income, core fees, SVB Securities revenue and an improved outlook for net loan charge-offs to average loans. While credit metrics have been stable to date, we continue to monitor our portfolio vigilantly, in light of continued economic uncertainty, including inflationary trends and interest rate volatility and fading government stimulus. Additionally, volatile equity markets, IPO and M&A activity may impact investment banking and market-sensitive revenues affecting our 2022 outlook. Even after the pandemic subsides, it is possible that the U.S. and other major economies may experience a prolonged recession, which could materially and adversely affect our business, financial condition, liquidity, capital and results of operations.
Reference Rate Reform
The publication of the British Pound Sterling, Euro, Swiss Franc and Japanese Yen LIBOR settings and one-week and two-month U.S. dollar LIBOR settings terminated at the end of December 2021, leaving the remaining U.S. dollar LIBOR settings (i.e., overnight, one month, three month, six month and 12 month) in place which are expected to terminate at the end of June 2023. Therefore, existing contracts referencing all other U.S. dollar LIBOR settings must be remediated no later than June 30, 2023. We hold instruments that may be impacted by the discontinuance of LIBOR, including loans, investments, and derivative products that use LIBOR as a benchmark rate.
Our LIBOR Transition Program consists of dedicated leadership and staff, and continues to engage with relevant business lines and support groups. As part of this program, we continue to identify, assess, and monitor risks associated with the discontinuation of LIBOR, including monitoring the population of loans and contracts that are impacted and how LIBOR reference rates are reflected in our private banking division.measurement of sensitivity to changes in interest rates until publication of LIBOR rates are fully phased out. We ceased offering U.S. dollar LIBOR-based loans effective December 31, 2021. We completed a review across all business lines and confirmed that language to facilitate a transition to an alternative reference rate is included in our existing deals that carry LIBOR exposure. Migration of legacy LIBOR contracts has commenced based on regulatory timelines, with proactive remediation conducted for existing LIBOR facilities that contained currencies tied to LIBOR rates that ceased publication as of December 31, 2021. A communications and training plan supports the delivery of new Alternative Reference Rate (“ARR”) products and assists with the transition away from LIBOR.
We have adopted SOFR as our preferred replacement index for U.S. dollar LIBOR and received Term SOFR licensing from the Chicago Mercantile Exchange in the fourth quarter of 2021. We currently offer products based on Alternative Reference Rates across multiple currencies including the U.S. Dollar, British Pound Sterling, and Euro.
42
Results for the fiscal year ended, and as of, December 31, 20172021 (compared to the fiscal year ended, and as of, December 31, 2016,2020, where applicable):
| BALANCE SHEET | EARNINGS | |||||||
Assets.$ Loans.$ Total Client Funds. (on-balance sheet deposits and off-balance sheet client investment funds).$ AFS/HTM Fixed Income Investments.$ | EPS. Earnings per diluted share of Net Income.Consolidated net income available to common stockholders of - - Net interest margin of - Noninterest income of - Noninterest expense of Operating Efficiency Ratio.Operating efficiency ratio of | |||||||
| CAPITAL | CREDIT QUALITY | |||||||
- - Tier 1 risk-based capital ratio of - Total risk-based capital ratio of | Credit Quality. - - - Provision for loans of 0.10% as a percentage of period-end total loans. - Net loan charge-offs of | |||||||
+ Consists of fee income for foreign exchange, credit cards, deposit services, client investments, letters of credit and lending relatedstandby letters of credit, credit cards, client investments, wealth management and trust, foreign exchange and lending-related activities. 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”).
+++ 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.
43
A summary of our performance in 20172021 compared to 20162020 is as follows:
| Year ended December 31, | |||||||||||||||||||||||
| (Dollars in millions, except per share amounts, employees and ratios) | 2021 | 2020 | % Change | ||||||||||||||||||||
| Income Statement: | |||||||||||||||||||||||
| Diluted EPS | $ | 31.25 | $ | 22.87 | 36.6 | % | |||||||||||||||||
| Net income available to common stockholders | 1,770 | 1,191 | 48.6 | ||||||||||||||||||||
| Net interest income | 3,179 | 2,157 | 47.4 | ||||||||||||||||||||
| Net interest margin | 2.02 | % | 2.67 | % | (65) | bps | |||||||||||||||||
| Provision for credit losses (1) (2) | $ | 123 | $ | 220 | (44.1) | % | |||||||||||||||||
| Noninterest income | 2,738 | 1,840 | 48.8 | ||||||||||||||||||||
| Noninterest expense | 3,070 | 2,035 | 50.9 | ||||||||||||||||||||
| Non-GAAP core fee income (3) | 751 | 603 | 24.5 | ||||||||||||||||||||
| Non-GAAP core fee income, plus SVB Securities Revenue (3) | 1,289 | 1,084 | 18.9 | ||||||||||||||||||||
| Non-GAAP SVB Securities revenue (3) | 538 | 481 | 11.9 | ||||||||||||||||||||
| Balance Sheet: | |||||||||||||||||||||||
| Average AFS securities | $ | 24,996 | $ | 18,653 | 34.0 | % | |||||||||||||||||
| Average HTM securities | 58,030 | 13,113 | NM | ||||||||||||||||||||
| Average loans, amortized cost | 54,547 | 37,266 | 46.4 | ||||||||||||||||||||
| Average noninterest-bearing demand deposits | 99,461 | 50,193 | 98.2 | ||||||||||||||||||||
| Average interest-bearing deposits | 48,486 | 24,823 | 95.3 | ||||||||||||||||||||
| Average total deposits | 147,947 | 75,016 | 97.2 | ||||||||||||||||||||
| Earnings Ratios: | |||||||||||||||||||||||
| Return on average assets (4) | 0.84 | % | 1.39 | % | (39.6) | % | |||||||||||||||||
| Return on average SVBFG common stockholders’ equity (5) | 17.10 | 16.83 | 1.6 | ||||||||||||||||||||
| Asset Quality Ratios: | |||||||||||||||||||||||
| ACL for loans as a percentage of total period-end total loans | 0.64 | % | 0.99 | % | (35) | bps | |||||||||||||||||
| ACL for performing loans as a percentage of total performing loans | 0.58 | 0.87 | (29) | ||||||||||||||||||||
| Gross loan charge-offs as a percentage of average total loans | 0.25 | 0.28 | (3) | ||||||||||||||||||||
| Net loan charge-offs as a percentage of average total loans | 0.21 | 0.20 | 1 | ||||||||||||||||||||
| Capital Ratios: | |||||||||||||||||||||||
| SVBFG CET1 risk-based capital ratio | 12.09 | % | 11.04 | % | 105 | bps | |||||||||||||||||
| SVBFG total risk-based capital ratio | 16.58 | 12.64 | 394 | ||||||||||||||||||||
| SVBFG tier 1 risk-based capital ratio | 16.08 | 11.89 | 419 | ||||||||||||||||||||
| SVBFG tier 1 leverage ratio | 7.93 | 7.45 | 48 | ||||||||||||||||||||
| SVBFG tangible common equity to tangible assets (6) | 5.73 | 6.66 | (93) | ||||||||||||||||||||
| SVBFG tangible common equity to risk-weighted assets (6) | 11.98 | 11.87 | 11 | ||||||||||||||||||||
| Bank CET1 risk-based capital ratio | 14.89 | 10.70 | 419 | ||||||||||||||||||||
| Bank total risk-based capital ratio | 15.40 | 11.49 | 391 | ||||||||||||||||||||
| Bank tier 1 risk-based capital ratio | 14.89 | 10.70 | 419 | ||||||||||||||||||||
| Bank tier 1 leverage ratio | 7.24 | 6.43 | 81 | ||||||||||||||||||||
| Bank tangible common equity to tangible assets (6) | 7.09 | 6.24 | 85 | ||||||||||||||||||||
| Bank tangible common equity to risk-weighted assets (6) | 15.06 | 11.58 | 348 | ||||||||||||||||||||
| Other Ratios: | |||||||||||||||||||||||
| GAAP operating efficiency ratio (7) | 51.88 | % | 50.92 | % | 1.9 | % | |||||||||||||||||
| Total costs of deposits (8) | 0.04 | 0.08 | (50.0) | ||||||||||||||||||||
| Book value per common share (9) | $ | 214.30 | $ | 151.86 | 41.1 | ||||||||||||||||||
| Tangible book value per common share (10) | 205.64 | 147.92 | 39.0 | ||||||||||||||||||||
| Other Statistics: | |||||||||||||||||||||||
| Average FTEs | 5,466 | 4,040 | 35.3 | % | |||||||||||||||||||
| Period-end FTEs | 6,567 | 4,461 | 47.2 | ||||||||||||||||||||
| 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 | |||||||||
(1)This metric for the year ended December 31, 2021 includes a post-combination provision of $46 million to record the ACL for non-PCD loans and unfunded credit commitments acquired from Boston Private.
(2)This metric for the year ended December 31, 2021 includes the impact of an $80 million charge-off related to fraudulent activity discussed in previous filings.
44
(3)See “Results of Operations–Noninterest Income” for a description and reconciliation of non-GAAP core fee income and non-GAAP core fee income plus investment banking revenue and commissions.
(4)Ratio represents consolidated net income available to common stockholders divided by average assets.
(5)Ratio represents consolidated net income available to common stockholders divided by average SVBFG stockholders’ equity.
(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 NII 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.operations and are 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 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.
Allowance for Credit Losses
We discloseconsider this accounting policy to be critical as estimation of ECL involves material management estimates and is susceptible to significant changes in the near-term. Determining the ACL for loans and unfunded credit commitments requires us to make forecasts that are highly uncertain and require a high degree of judgment. A committee comprised of senior management evaluates the adequacy of the ACL for loans, which includes review of loan portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
Expected Credit Losses Estimate for Loans and Unfunded Credit Commitments
The methodology for estimating the amount of ECL reported in the ACL 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 estimate of 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 ACL relates to the macroeconomic forecasts used to estimate credit losses. To the extent the remaining contractual lives of loans in the portfolio extend beyond our three-year forecast period, we revert to historical averages using primarily 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.
The selection of variables used in our econometric models varies by loan portfolio, but typically includes real gross domestic product ("GDP") growth, unemployment rates, Housing Price Index ("HPI") changes and BBB corporate bond spread.
Changes in management’s assumptions and macroeconomic forecasts could significantly affect the estimate of ECL. 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 continue to remain uncertain. Alternative assumptions could have significant impact on the ECL. However, changing one assumption without reassessing other assumptions used in the quantitative or qualitative process could yield results that are not reasonable or appropriate. Our ECL models were designed to capture the correlation between economic conditions and historical portfolio changes. As such, evaluating shifts in individual variables in isolation may not be indicative of past or future performance.
45
Given the range of the most significant macroeconomic variables in the upside, or stronger near-term growth, and downside, or moderate recession, scenarios of our forecast used to develop the ECL as of December 31, 2021, our portfolio reserve coverage ranges from 0.49 percent to0.76 percent, with a funded reserve rate of 0.64 percent as of December 31, 2021. This range demonstrates the sensitivity of the ECL to key quantitative assumptions; however, it is not intended to estimate changes in the overall ECL as it does not reflect qualitative factor adjustments which are important considerations to ensure the allowance reflects our best estimate of current expected credit losses.
We 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 each of our critical accounting policiespolicy related to the allowance for loan losses and allowance for unfunded credit commitments, which were superseded by accounting standards adopted 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.
| 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 | ||||||||||||||
Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis)
Analysis of Net Interest Income Changes Due to Volume and Rate (Fully Taxable Equivalent Basis)
46
| 2021 compared to 2020 | 2020 compared to 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 compared to 2016 | 2016 compared to 2015 | Change due to | Change due to | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change due to | Change due to | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | 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 | $ | 7 | $ | (15) | $ | (8) | $ | 13 | $ | (83) | $ | (70) | |||||||||||||||||||||||||||||||||||||
| Fixed income investment portfolio (taxable) | 27,671 | 37,525 | 65,196 | (12,947 | ) | 15,238 | 2,291 | Fixed income investment portfolio (taxable) | 774 | (210) | 564 | 99 | (33) | 66 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed income investment portfolio (non-taxable) | 6,627 | (1,274 | ) | 5,353 | (919 | ) | (113 | ) | (1,032 | ) | Fixed income investment portfolio (non-taxable) | 71 | (14) | 57 | 24 | (4) | 20 | |||||||||||||||||||||||||||||||||||||||||||||
| Loans, net of unearned income | 139,416 | 52,217 | 191,633 | 160,623 | (19,615 | ) | 141,008 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans, amortized cost | Loans, amortized cost | 623 | (177) | 446 | 300 | (379) | (79) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in interest income, net | 177,666 | 95,951 | 273,617 | 147,830 | (1,560 | ) | 146,270 | Increase (decrease) in interest income, net | 1,475 | (416) | 1,059 | 436 | (499) | (63) | ||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | 1 | (3) | (2) | 6 | 1 | 7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market deposits | (5 | ) | 3,071 | 3,066 | (231 | ) | 745 | 514 | Money market deposits | 28 | (21) | 7 | 14 | (120) | (106) | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market deposits in foreign offices | 22 | (4 | ) | 18 | (16 | ) | 7 | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | (11 | ) | — | (11 | ) | (34 | ) | (50 | ) | (84 | ) | Time deposits | 2 | (1) | 1 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||
| Sweep deposits in foreign offices | (86 | ) | (10 | ) | (96 | ) | (247 | ) | 29 | (218 | ) | Sweep deposits in foreign offices | — | (4) | (4) | (1) | (18) | (19) | ||||||||||||||||||||||||||||||||||||||||||||
| Total increase (decrease) in deposits expense | 10 | 3,055 | 3,065 | (482 | ) | 646 | 164 | Total increase (decrease) in deposits expense | 31 | (29) | 2 | 20 | (137) | (117) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | (1,922 | ) | 1,378 | (544 | ) | 972 | 73 | 1,045 | Short-term borrowings | — | (3) | (3) | 2 | (3) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| 3.50% Senior Notes | 12 | — | 12 | 994 | 27 | 1,021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 5.375% Senior Notes | 32 | — | 32 | 59 | (28 | ) | 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long term debt | Long term debt | 26 | — | 26 | (9) | — | (9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total increase (decrease) in borrowings expense | Total increase (decrease) in borrowings expense | 26 | (3) | 23 | (7) | (3) | (10) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in interest expense, net | (2,667 | ) | 4,565 | 1,898 | 1,499 | 1,034 | 2,533 | Increase (decrease) in interest expense, net | 57 | (32) | 25 | 13 | (140) | (127) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Increase (decrease) in net interest income | $ | 180,333 | $ | 91,386 | $ | 271,719 | $ | 146,331 | $ | (2,594 | ) | $ | 143,737 | Increase (decrease) in net interest income | $ | 1,418 | $ | (384) | $ | 1,034 | $ | 423 | $ | (359) | $ | 64 | ||||||||||||||||||||||||||||||||||||
Net Interest Income (Fully Taxable Equivalent Basis)
The main factors affecting interest income and interest expense for 2016,2021, compared to 2015,2020, are discussed below:
•Interest income for 20162021 increased by $146.3 million$1.0 billion primarily due to:
◦A $621 million increase in interest income from our fixed income investment securities |
◦A $446 million increase in interest income on loans to $2.0 billion in 2021, compared to $40.3$1.5 billion for the comparable 2020 period. The increase was reflective of an increase in average loan balances of $17.3 billion, partially offset by a decrease in overall loan yields of 48 bps to 3.60 percent from 4.08 percent. Gross loan yields, excluding loan interest recoveries and loan fees, decreased 36 bps to 3.21 percent from 3.57 percent, driven by growth in our lower yielding Global Fund Banking portfolio, decreases in Federal Funds rates in the first quarter of 2020 and the addition of lower yielding Boston Private loans.
•Interest expense for 2021 increased by $25 million for 2015,primarily due to:
◦A $23 million increase in interest expense on borrowings due primarily to:to interest expense on our 3.125% Senior Notes issued in June 2020, our 1.800% Senior Notes issued in February 2021, our 2.100% Senior Notes issued in May 2021 and our 1.800% Senior Notes issued in October 2021.
47
Net Interest Margin (Fully Taxable Equivalent Basis)
Our net interest margin increaseddecreased by 33 basis points65 bps to 3.052.02 percent in 2017,2021, compared to 2.722.67 percent in 2016 and 2.57 percent in 2015.
The increasedecrease in our net interest margin in 20172021 was reflectivedue primarily ofto higher growth in our lower-yielding cash and investment securities portfolio relative to the impact of rising interest rates andgrowth in our loan portfolio driven by significant growth in our average deposits, as well as a shiftdecrease in the mix of average interest-earning assets towards our higher yielding loan portfolio.yields on loans, as discussed above. For the year ended December 31, 2017,2021, our loan portfolio comprised 4534 percent of our average interest-earning assets, an increasea decrease from 4346 percent for the year ended December 31, 2016.2020.
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, 20162021, 2020 and 2015:2019:
48
Average Balances, Yields and Rates Paid for the Years Ended December 31, 2017, 20162021, 2020 and 20152019
| 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, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 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) | $ | 20,800 | $ | 18 | 0.08 | % | $ | 12,252 | $ | 26 | 0.21 | % | $ | 5,932 | $ | 96 | 1.63 | % | ||||||||||||||||||||||||||||||||||||||
| Investment Securities: (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| AFS securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 24,996 | 334 | 1.34 | 18,653 | 337 | 1.81 | 9,598 | 218 | 2.27 | |||||||||||||||||||||||||||||||||||||||||||||||
| HTM securities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 52,937 | 865 | 1.63 | 10,728 | 298 | 2.78 | 13,041 | 351 | 2.69 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-taxable (3) | 5,093 | 134 | 2.63 | 2,385 | 77 | 3.24 | 1,631 | 57 | 3.49 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total loans, amortized cost (4) (5) | 54,547 | 1,966 | 3.60 | 37,266 | 1,520 | 4.08 | 29,916 | 1,599 | 5.35 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 158,373 | 3,317 | 2.09 | 81,284 | 2,258 | 2.77 | 60,118 | 2,321 | 3.86 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 2,241 | 1,021 | 592 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| ACL: loans | (441) | (509) | (306) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other assets (6) | 5,838 | 3,996 | 2,808 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 166,011 | $ | 85,792 | $ | 63,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Funding sources: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing checking and savings accounts | $ | 3,924 | $ | 5 | 0.12 | % | $ | 2,874 | $ | 7 | 0.24 | % | $ | 499 | $ | — | 0.09 | % | ||||||||||||||||||||||||||||||||||||||
| Money market deposits | 41,481 | 54 | 0.13 | 19,741 | 47 | 0.24 | 13,721 | 153 | 1.11 | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market deposits in foreign offices | 918 | — | 0.02 | 330 | — | 0.09 | 165 | — | 0.04 | |||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 994 | 3 | 0.31 | 336 | 2 | 0.56 | 112 | 1 | 1.14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Sweep deposits in foreign offices | 1,169 | — | 0.01 | 1,542 | 4 | 0.27 | 1,777 | 23 | 1.29 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 48,486 | 62 | 0.13 | 24,823 | 60 | 0.24 | 16,274 | 177 | 1.09 | |||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 74 | — | 0.16 | 401 | 3 | 0.83 | 145 | 4 | 2.49 | |||||||||||||||||||||||||||||||||||||||||||||||
| Long term debt | 1,775 | 48 | 2.70 | 632 | 22 | 3.45 | 685 | 31 | 4.60 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 50,335 | 110 | 0.22 | 25,856 | 85 | 0.33 | 17,104 | 212 | 1.24 | |||||||||||||||||||||||||||||||||||||||||||||||
| Portion of noninterest-bearing funding sources | 108,038 | 55,428 | 43,014 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total funding sources | 158,373 | 110 | 0.07 | 81,284 | 85 | 0.10 | 60,118 | 212 | 0.35 | |||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing funding sources: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Demand deposits | 99,461 | 50,193 | 38,783 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 3,660 | 2,168 | 1,484 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | 1,925 | 340 | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| SVBFG common stockholders’ equity | 10,353 | 7,080 | 5,675 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interests | 277 | 155 | 149 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Portion used to fund interest-earning assets | (108,038) | (55,428) | (43,014) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities, noncontrolling interest, and SVBFG stockholders' equity | $ | 166,011 | $ | 85,792 | $ | 63,212 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income and margin | $ | 3,207 | 2.02 | % | $ | 2,173 | 2.67 | % | $ | 2,109 | 3.51 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total deposits | $ | 147,947 | $ | 75,016 | $ | 55,057 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Average SVBFG common stockholders’ equity as a percentage of average assets | 6.24 | % | 8.25 | % | 8.98 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation to reported net interest income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustments for taxable equivalent basis | (28) | (16) | (13) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income, as reported | $ | 3,179 | $ | 2,157 | $ | 2,096 | ||||||||||||||||||||||||||||||||||||||||||||||||||
49
(1)Includes average interest-earning deposits in other financial institutions of $4.6 billion, $1.1 billion and $929 million in the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively. For December 31, 2021, December 31, 2020 and December 31, 2019, balances also include $15.9 billion, $9.9 billion and $4.1 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 $217 million, $191 million and $168 million in the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively. (6)Average investment securities of $3.2 billion, $2.0 billion, and $1.1 billion in the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable and other equity securities. |
Provision for Credit Losses
| 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 | |||||||||
The provision for credit losses is the combination of both(i) the provision for loan losses andloans, (ii) the provision for unfunded credit commitments. Ourcommitments and (iii) the provision for loan losses is a function of our reserve methodology, which is used to determine an appropriateHTM securities. Our 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 equalsreflects our best estimate of probable credit losses that are inherent in the portfolios at the balance sheet date.
The following table summarizes our ACL and provision for credit losses for loans, unfunded credit commitments and HTM securities for 2021, 2020 and 2019, respectively:
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| ACL, beginning balance | $ | 448 | $ | 305 | $ | 282 | ||||||||||||||
| Day one impact of adopting ASC 326 | — | 25 | — | |||||||||||||||||
| Initial allowance on PCD loans | 22 | — | — | |||||||||||||||||
| Provision for loans (1) (2) | 66 | 190 | 94 | |||||||||||||||||
| Gross loan charge-offs (2) | (138) | (103) | (93) | |||||||||||||||||
| Loan recoveries | 24 | 29 | 21 | |||||||||||||||||
| Foreign currency translation adjustments | — | 2 | 1 | |||||||||||||||||
| ACL, ending balance | $ | 422 | $ | 448 | $ | 305 | ||||||||||||||
| ACL for unfunded credit commitments, beginning balance | 121 | 68 | 55 | |||||||||||||||||
| Day one impact of adopting ASC 326 | — | 23 | — | |||||||||||||||||
| Provision for unfunded credit commitments (1) | 50 | 30 | 13 | |||||||||||||||||
| ACL for unfunded credit commitments, ending balance (3) | $ | 171 | $ | 121 | $ | 68 | ||||||||||||||
| ACL for HTM securities, beginning balance | — | — | — | |||||||||||||||||
| Provision for HTM securities | 7 | — | — | |||||||||||||||||
| ACL for HTM securities, ending balance (4) | $ | 7 | $ | — | $ | — | ||||||||||||||
| Ratios and other information: | ||||||||||||||||||||
| Provision for loans as a percentage of period-end total loans (5) | 0.10 | % | 0.42 | % | 0.28 | % | ||||||||||||||
| Gross loan charge-offs as a percentage of average total loans (2) (5) | 0.25 | 0.28 | 0.31 | |||||||||||||||||
| Net loan charge-offs as a percentage of average total loans (2) (5) | 0.21 | 0.20 | 0.24 | |||||||||||||||||
| ACL for loans as a percentage of period-end total loans (5) | 0.64 | 0.99 | 0.91 | |||||||||||||||||
| Provision for credit losses (1) | $ | 123 | $ | 220 | $ | 107 | ||||||||||||||
| Period-end total loans (5) | 66,276 | 45,181 | 33,328 | |||||||||||||||||
| Average total loans (5) | 54,547 | 37,266 | 30,077 | |||||||||||||||||
| Allowance for credit losses for nonaccrual loans | 35 | 54 | 45 | |||||||||||||||||
| Nonaccrual loans (5) | 84 | 104 | 103 | |||||||||||||||||
(1)The provision for credit losses for the year ended December 31, 2021 includes $46 million recognized as a result of the Boston Private acquisition, which consists of a $44 million initial provision for loans related to non-PCD loans and a $2 million initial provision for unfunded commitments.
(2)Metrics for the year ended December 31, 2021 includes the impact of an $80 million charge-off related to fraudulent activity on one loan as disclosed in previous filings.
(3)The "ACL for unfunded credit commitments” is included as a component of “Other liabilities.”
50
(4)The "ACL for HTM securities" is included as a component of "HTM securities" and presented net in our consolidated financial statements.
(5)For the years ended December 31, 2021 and December 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Loan amounts for the year ended December 31, 2019, are disclosed using the gross basis in accordance with the previous methodology.
For a more detailed discussion of credit quality and the allowance for loan losses,ACL, 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—10—“Loans and Allowance for Loan LossesCredit Losses: Loans and Allowance for 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 loan losses.
ACL.
Provision for Loan LossesLoans
We had a provision for loan lossesloans of $85.9$66 million in 2017,2021, compared to a provision of $95.7$190 million in 20162020. The provision for loans of $66 million in 2021 was driven primarily by a $64 million increase for organic growth in our loan portfolio, the $44 million initial provision for Boston Private non-PCD loans, and $113 million of charge-offs not specifically reserved for at December 31, 2020, of which $80 million was related to a single instance of fraudulent activity on one loan as disclosed in previous filings. These increases in the provision were partially offset by $24 million of recoveries, a $62 million reduction in performing reserves as a result of the ongoing improvement of economic scenarios in our forecast models, and a $69 million reduction in provision due to model enhancements.
The enhancements to our standard reserving model consisted primarily of (i) more granular prepayment modeling, (ii) the addition of two years of incremental data and (iii) re-selection of certain macroeconomic variables. We refined our prepayment assumptions to be more granular and product-specific, with the largest impact being a lower weighted average life in our SVB Private Bank portfolio reflective of higher prepayment rates in that segment. The additional two years of portfolio data reflected generally strong credit performance, despite the recently stressed economic environment. The re-selection of variables applied across the entirety of the standard SVB CECL model, though the resulting impact was most relevant to our SVB Private Bank portfolio. Our model for estimating the probability of default on SVB Private Bank loans previously referenced GDP as a key macroeconomic variable. The COVID-19 pandemic introduced unprecedented volatility in GDP forecasts and modelling outcomes, some of which did not fully align with our expectation of credit losses in the Private Bank, given the majority of this portfolio consists of mortgage loans, and credit quality indicators remained strong. Based on our additional historical experience, we now believe the Housing Price Index is a more appropriate macroeconomic variable for this segment, particularly in terms of its performance during the COVID pandemic and our expectation for Private Bank losses.
We had a provision for loans of $190 million in 2020, compared to a provision of $97.6$94 million in 2015.2019. The provision for loan lossesloans of $85.9$190 million in 20172020 was reflectivedriven primarily by $57 million in additional reserves for our performing loans based on our forecast models of $62.7the 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, $60 million in net new specificnonaccrual loans, $49 million for charge-offs not specifically reserved for at December 31, 2019 and $55 million in additional reserves for nonaccrual loans and $29.1 million from period-end loan growth, partially offset by a benefit from overall improved credit quality$29 million of our loan portfolio reflective of the increase of our private equity/venture capital loans, which tend to be of higher credit quality.
Provision for (Reduction of) Unfunded Credit Commitments
We recorded a provision for unfunded credit commitments of $6.4$50 million in 2017,2021, compared to a provision of $30 million in 2020. Our provision for unfunded credit commitments in 2021 was driven primarily by growth in our outstanding commitments and changes in the unfunded portfolio composition, as well as an increase in the expected future commitments for milestone tranches of Investor Dependent loans, which are tied to company performance or additional funding rounds, resulting in a longer weighted average life of these higher risk segments. These increases were partially offset by improved economic scenarios in our forecast models.
We recorded a provision for unfunded credit commitments of $11.0$30 million in 2016 and2020, compared to a reductionprovision of the allowance for unfunded credit commitments of $1.9$13 million in 2015.2019. Our provision for unfunded credit commitments in 20172020 was driven primarily by qualitative allocations based on our loan portfolio being comprised of larger loans and additional reserves as a resultthe forecast models of the increasecurrent 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.
Provision for HTM Securities
We recorded a provision for HTM securities of $7 million in 2021. Our provision for unfundedHTM securities was driven primarily by the creation of our corporate bond portfolio, which had a balance of $712 million at December 31, 2021. Our HTM portfolio as of December 31, 2021 was entirely made up of A3 or better rated bonds, all considered investment grade.
We recorded a provision for credit commitmentslosses for HTM securities of less than $1 million in 2016 reflected enhancements in factors used2020 under the CECL methodology adopted January 1, 2020, compared to estimatea provision of zero under the previous incurred loss methodology. Our provision for
51
HTM securities was driven primarily by the forecast models of the current economic environment, including the impact of the COVID-19 pandemic. Our HTM portfolio as of December 31, 2020 was entirely made up of Aa2 or better rated bonds, all considered high quality.
See Note 10 — “Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments” of the “Notes to Consolidated Financial Statements” under Part II, Item 8 of this report for further details on our allowancegross loan charge-offs and our ACL for loans and unfunded credit commitments. These enhancements were applied during the fourth quarter of 2016 and increased our allowance for unfunded credit commitments by $8.1 million, net. The increase 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.
Noninterest Income
For the year ended December 31, 2017,2021, noninterest income was $557.2 million,$2.7 billion, compared to $456.6 million and $472.8 million$1.8 billion for the comparable 2016 and 2015 periods, respectively.2020 period. For the year ended December 31, 2017,2021, non-GAAP noninterestcore fee income net of noncontrolling interests was $527.8$751 million, compared to $448.5 million and $441.1$603 million for the comparable 2016 and 2015 periods, respectively.2020 period. For the year ended December 31, 2017,2021, non-GAAP core fee incomeSVB Securities revenue was $379.0$538 million, compared to $316.2 million and $265.4$481 million for the comparable 2016 and 2015 periods, respectively.2020 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 noninterestSVB Securities revenue, non-GAAP core fee income andplus SVB Securities revenue, non-GAAP net gains on investment securities)securities and non-GAAP financial ratios). 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 (i) excluding items that represent income attributable to investors other than us and our subsidiaries and (ii) providing additional information used by management that is not otherwise required by GAAP or other certain non-recurring items.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, and not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.
Included in noninterestnet income is income and expense attributable to noncontrolling interests. We recognize, as part of our investment funds management business through SVB Capital and SVB Securities, 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 Securities 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, wealth management and trust 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.
Core fee income plus SVB Securities revenue is a non-GAAP measure, which represents GAAP noninterest income, but excludes certain line items where performance is typically subject to non-GAAPmarket 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 net of noncontrolling interests for 2017, 2016plus SVB Securities revenue represents core fee income plus investment banking revenue and 2015, respectively:commissions.
52
| 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 | ||||||||||
The following table provides a reconciliation of GAAP noninterest income to non-GAAP core fee income for 2017, 20162021, 2020 and 2015,2019, 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 millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| GAAP noninterest income | $ | 2,738 | $ | 1,840 | 48.8 | % | $ | 1,221 | 50.7 | % | ||||||||||||||||||||||
| Less: gains on investment securities, net | 761 | 421 | 80.8 | 135 | NM | |||||||||||||||||||||||||||
| Less: gains on equity warrant assets, net | 560 | 237 | 136.3 | 138 | 71.7 | |||||||||||||||||||||||||||
| Less: other noninterest income | 128 | 98 | 30.6 | 55 | 78.2 | |||||||||||||||||||||||||||
| Non-GAAP core fee income plus SVB Securities revenue (1) | $ | 1,289 | $ | 1,084 | 18.9 | $ | 893 | 21.4 | ||||||||||||||||||||||||
| Investment banking revenue | 459 | 414 | 10.9 | 195 | 112.3 | |||||||||||||||||||||||||||
| Commissions | 79 | 67 | 17.9 | 56 | 19.6 | |||||||||||||||||||||||||||
| Non-GAAP SVB Securities revenue (2) | $ | 538 | $ | 481 | 11.9 | $ | 251 | 91.6 | ||||||||||||||||||||||||
| Non-GAAP core fee income (3) | $ | 751 | $ | 603 | 24.5 | $ | 642 | (6.1) | ||||||||||||||||||||||||
(1)Non-GAAP core fee income plus SVB Securities 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 Securities 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 Securities 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 includes client investment fees, wealth management and trust 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.
factors, including unrealized changes in the values of our investments, changes in the amount of realized gains and losses from distributions and sales of public equity securities, 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.
53
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, 20162021, 2020 and 2015:2019:
| (Dollars in millions) | 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 Securities | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP gains on investment securities, net | $ | 353 | $ | 44 | $ | 22 | $ | 17 | $ | 31 | $ | 2 | $ | 170 | $ | 122 | $ | 761 | ||||||||||||||||||||||||||||||||||||||
| Less: gains attributable to noncontrolling interests, including carried interest allocation | 158 | 17 | 4 | — | — | — | — | 61 | 240 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP net gains on investment securities, net of noncontrolling interests | $ | 195 | $ | 27 | $ | 18 | $ | 17 | $ | 31 | $ | 2 | $ | 170 | $ | 61 | $ | 521 | ||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP gains on investment securities, net | $ | 116 | $ | 56 | $ | 19 | $ | 95 | $ | 61 | $ | — | $ | 66 | $ | 8 | $ | 421 | ||||||||||||||||||||||||||||||||||||||
| Less: gains attributable to noncontrolling interests, including carried interest allocation | 55 | 27 | 3 | — | — | — | — | 1 | 86 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP net gains on investment securities, net of noncontrolling interests | $ | 61 | $ | 29 | $ | 16 | $ | 95 | $ | 61 | $ | — | $ | 66 | $ | 7 | $ | 335 | ||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP gains (losses) on investment securities, net | $ | 75 | $ | 18 | $ | — | $ | 5 | $ | (4) | $ | 2 | $ | 33 | $ | 6 | $ | 135 | ||||||||||||||||||||||||||||||||||||||
| Less: gains attributable to noncontrolling interests, including carried interest allocation | 37 | 10 | — | — | — | — | — | 1 | 48 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | $ | 38 | $ | 8 | $ | — | $ | 5 | $ | (4) | $ | 2 | $ | 33 | $ | 5 | $ | 87 | ||||||||||||||||||||||||||||||||||||||
In 2021, we had net gains on investment securities of $761 million, compared to $421 million in 2020. Non-GAAP net gains on investment securities, net of noncontrolling interests were $521 million in 2021, compared to $335 million in 2020, respectively. Net gains on investment securities, net of noncontrolling interests of $521 million in 2021 were driven by the following:
•Gains of $195 million from our managed fund of funds portfolio driven by unrealized valuations increases of private and public positions as well as fund distributions driven primarily by realized gains from one public company position,
•Gains of $170 million from our strategic and other investments driven primarily by net unrealized valuation increases,
•Gains of $61 million from SVB Securities driven primarily by unrealized valuation gains from the SVB Securities funds, and
•Gains of $31 million from our AFS debt securities portfolio, resulting from the sale of $1.6 billion of mortgage-backed securities.
In 2020, we had net gains on investment securities of $421 million, compared to $135 million in 2019. Non-GAAP net gains on investment securities, net of noncontrolling interests were $334 million in 2020, compared to $87 million in 2019, respectively. Net gains on investment securities, net of noncontrolling interests of $334 million in 2020 were driven by the following:
•Gains of $90 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 million from our strategic and other investments portfolio, primarily driven by net unrealized valuation increases in both private and public company investments held in our strategic venture capital funds, and
•Gains of $95 million from our public equity securities, primarily driven by $72 million from unrealized gains for the 2.4 million common shares held as of December 31, 2020 in BigCommerce Holdings, Inc ("BigCommerce") and $15 million realized gains for the sale of BigCommerce equity shares,
•Gains of $61 million from our AFS debt securities portfolio, resulting from the sale of $2.6 billion of U.S. Treasury securities during the quarter, and
54
| (Dollars in thousands) | Managed Funds of Funds | Managed Direct Venture Funds | Debt Funds | Available- For-Sale Securities | Strategic and Other Investments | Total | ||||||||||||||||||
| Year ended December 31, 2017 | ||||||||||||||||||||||||
| GAAP gains (losses) on investment securities, net | $ | 41,140 | $ | 1,823 | $ | 8,950 | $ | (5,189 | ) | $ | 17,879 | $ | 64,603 | |||||||||||
| Less: gains attributable to noncontrolling interests, including carried interest allocation | 28,108 | 1,079 | — | — | — | 29,187 | ||||||||||||||||||
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | $ | 13,032 | $ | 744 | $ | 8,950 | $ | (5,189 | ) | $ | 17,879 | $ | 35,416 | |||||||||||
| Year ended December 31, 2016 | ||||||||||||||||||||||||
| GAAP gains (losses) on investment securities, net | $ | 10,139 | $ | (171 | ) | $ | 948 | $ | 12,195 | $ | 28,629 | $ | 51,740 | |||||||||||
| Less: gains attributable to noncontrolling interests, including carried interest allocation | 8,220 | 92 | — | — | — | 8,312 | ||||||||||||||||||
| Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | $ | 1,919 | $ | (263 | ) | $ | 948 | $ | 12,195 | $ | 28,629 | $ | 43,428 | |||||||||||
| Year ended December 31, 2015 | ||||||||||||||||||||||||
| GAAP gains on investment securities, net | $ | 40,827 | $ | 13,873 | $ | 3,337 | $ | 1,201 | $ | 30,207 | $ | 89,445 | ||||||||||||
| Less: gains attributable to noncontrolling interests, including carried interest allocation | 23,802 | 8,313 | — | — | — | 32,115 | ||||||||||||||||||
| Non-GAAP net gains on investment securities, net of noncontrolling interests | $ | 17,025 | $ | 5,560 | $ | 3,337 | $ | 1,201 | $ | 30,207 | $ | 57,330 | ||||||||||||
Gains on Equity Warrant Assets, Net
A summary of gains on equity warrant assets, net, for 2017, 20162021, 2020 and 20152019 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 millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Equity warrant assets (1): | ||||||||||||||||||||||||||||||||
| Gains on exercises, net | $ | 446 | $ | 179 | 149.2 | % | $ | 107 | 67.3 | % | ||||||||||||||||||||||
| Terminations | (2) | (2) | — | (4) | (50.0) | |||||||||||||||||||||||||||
| Changes in fair value, net | 116 | 60 | 93.3 | 35 | 71.4 | |||||||||||||||||||||||||||
| Total gains on equity warrant assets, net | $ | 560 | $ | 237 | 136.3 | $ | 138 | 71.7 | ||||||||||||||||||||||||
(1)At December 31, 2021, we held warrants in 2,831 companies, compared to 2,602 companies at December 31, 2020. The total value of our warrant portfolio was $277 million at December 31, 2021 and $203 million at December 31, 2020. Warrants in 47 companies each had fair values greater than $1 million and collectively represented $140.0 million, or 50.5 percent, |
Gains on equity warrant assets, net, were $560 million in 2021, compared to $237 million in 2020. Net gains on equity warrant assets of $560 million in 2021 were primarily due to the following:
•Net gains on warrant exercises of $446 million reflective of $116 million in gains related to Coinbase's direct listing, with the remaining gains driven primarily by IPO activity, and
•Net gains of $116 million from warrant valuations increases, driven by our private company portfolio reflective of pricing updates and pending exit activity.
Gains on equity warrant assets, net, of $237 million in 2020 were primarily due to the following:
•Net gains of $180 million from the exercises of equity warrant assets in 2020 driven by robust IPO, SPAC and M&A activity during 2020, including $11 million from our exercised warrant position in BigCommerce, and
•Net gains of $60 million from changes in warrant valuations in 2020 driven by valuation increases in our private company warrant portfolio.
Overall, net gains on investment securities and net gains on equity warrant assets were exceptionally strong for 2021. Combined, they totaled $1.3 billion ($1.1 billion net of noncontrolling interest) for the full year ended December 31, 2017, we recognized total gains of $29.8 million from both2021.
Gains (or losses) related to our equity warrant assets and investment securities in our consolidated statementspublic companies are based on valuation changes or the sale of income. As of December 31, 2017, an additional $40.5 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 2017any securities, and is reflective of the increase in Roku’s common stock from the date of exercise through its closingare subject to such companies' stock price, of $51.78 on December 31, 2017.
55
Non-GAAP Core Fee Income and Non-GAAP SVB Securities 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 millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Non-GAAP core fee income (1): | ||||||||||||||||||||||||||||||||
| Client investment fees | $ | 75 | $ | 132 | (43.2) | % | $ | 182 | (27.5) | % | ||||||||||||||||||||||
| Wealth management and trust fees | 44 | — | — | — | — | |||||||||||||||||||||||||||
| Foreign exchange fees | 262 | 179 | 46.4 | 159 | 12.6 | |||||||||||||||||||||||||||
| Credit card fees | 131 | 98 | 33.7 | 119 | (17.6) | |||||||||||||||||||||||||||
| Deposit service charges | 112 | 90 | 24.4 | 89 | 1.1 | |||||||||||||||||||||||||||
| Lending related fees | 76 | 57 | 33.3 | 50 | 14.0 | |||||||||||||||||||||||||||
| Letters of credit and standby letters of credit fees | 51 | 47 | 8.5 | 43 | 9.3 | |||||||||||||||||||||||||||
| Total non-GAAP core fee income (1) | $ | 751 | $ | 603 | 24.5 | $ | 642 | (6.1) | ||||||||||||||||||||||||
| Investment banking revenue | 459 | 414 | 10.9 | 195 | 112.3 | |||||||||||||||||||||||||||
| Commissions | 79 | 67 | 17.9 | 56 | 19.6 | |||||||||||||||||||||||||||
| Total non-GAAP SVB Securities revenue (2) | $ | 538 | $ | 481 | 11.9 | $ | 251 | 91.6 | ||||||||||||||||||||||||
| Total non-GAAP core fee income plus SVB Securities revenue (3) | $ | 1,289 | $ | 1,084 | 18.9 | $ | 893 | 21.4 | ||||||||||||||||||||||||
| 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 | ||||||||||
(2)Non-GAAP SVB Securities 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.
| 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 | ||||||||||
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$75 million in 2017,2021, compared to $32.2 million and $21.6$132 million in 2016 and 2015, respectively.2020. The increases weredecrease in client investment fees is reflective of thea reduction in fee margin resulting from lower short-term market rates, partially offset by large increaseincreases in average off-balance sheet client investment funds driven by our clients’ increased utilizationfunds.
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Client investment fees by type: | ||||||||||||||||||||||||||||||||
| Sweep money market fees | $ | 43 | $ | 74 | (41.9) | % | $ | 104 | (28.8) | % | ||||||||||||||||||||||
| Asset management fees | 31 | 43 | (27.9) | 29 | 48.3 | |||||||||||||||||||||||||||
| Repurchase agreement fees | 1 | 15 | (93.3) | 49 | (69.4) | |||||||||||||||||||||||||||
| Total client investment fees | $ | 75 | $ | 132 | (43.2) | $ | 182 | (27.5) | ||||||||||||||||||||||||
56
| 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 | ||||||||||
The following table summarizes average client investment funds for 2017, 20162021, 2020 and 2015:2019:
| 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) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Sweep money market funds | $ | 88,913 | $ | 50,828 | 74.9 | % | $ | 40,667 | 25.0 | % | ||||||||||||||||||||||
| Managed client investment funds (1)(2) | 78,450 | 56,473 | 38.9 | 41,887 | 34.8 | |||||||||||||||||||||||||||
| Repurchase agreements | 13,830 | 10,079 | 37.2 | 9,079 | 11.0 | |||||||||||||||||||||||||||
| Total average client investment funds (3) | $ | 181,193 | $ | 117,380 | 54.4 | $ | 91,633 | 28.1 | ||||||||||||||||||||||||
(1)These funds represent investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)As of the third quarter of 2021, these funds exclude Private Bank.
(3)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, 20162021, 2020 and 2015:2019:
| 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) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Sweep money market funds | $ | 109,241 | $ | 59,844 | 82.5 | % | $ | 43,226 | 38.4 | % | ||||||||||||||||||||||
| Managed client investment funds (1)(2) | 85,475 | 70,671 | 20.9 | 46,904 | 50.7 | |||||||||||||||||||||||||||
| Repurchase agreements | 15,370 | 10,538 | 45.9 | 9,062 | 16.3 | |||||||||||||||||||||||||||
| Total period-end client investment funds (3) | $ | 210,086 | $ | 141,053 | 48.9 | $ | 99,192 | 42.2 | ||||||||||||||||||||||||
(1)These funds represent investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)As of the third quarter of 2021, these funds exclude Private Bank AUM.
(3)Client investment funds are maintained at third-party financial institutions and are not recorded on our balance sheet.
Wealth Management and Trust Fees
Wealth management and trust fees was a new core fee income line item for the year ended 2021 reflective of the acquisition of Boston Private. Wealth management and trust fees were $44 million for the year ended December 31, 2021. A summary of wealth management and trust fees for the year ended December 31, 2021 and 2020 is as follows:
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Wealth management and trust fees by type: | ||||||||||||||||||||||||||||||||
| Wealth management fees | $ | 40 | $ | — | — | % | $ | — | — | % | ||||||||||||||||||||||
| Trust fees | 4 | — | — | — | — | |||||||||||||||||||||||||||
| Total wealth management and trust fees | $ | 44 | $ | — | — | $ | — | — | ||||||||||||||||||||||||
The following table summarizes the activity relating to Private Bank AUM for the year ended December 31, 2021:
| Year ended | |||||||||||||||||||
| (Dollars in | |||||||||||||||||||
| December 31, 2021 | |||||||||||||||||
| $ | 1,667 | |||||||||||||||||||
| 17,980 | ||||||||||||||||||||
| Net flows | (922) | |||||||||||||||||||
| Market returns | 921 | |||||||||||||||||||
| Ending balance | $ | 19,646 | ||||||||||||||||||
(1)Represents Private Bank AUM previously reported in off-balance sheet managed client investment funds above.
(2)Represents Private Bank AUM acquired from the acquisition of Boston Private on July 1, 2021.
57
Foreign Exchange Fees
Foreign exchange fees were $262 million in 2021, compared to $179 million in 2020. The increases in foreign exchange fees were driven primarily by increases in spot contract commissions reflective of increased private equity/venture capital deal activity for the year ended December 31, 2021 compared to 2020.
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Foreign exchange fees by instrument type: | ||||||||||||||||||||||||||||||||
| Spot contract commissions | $ | 240 | $ | 158 | 51.9 | % | $ | 146 | 8.2 | % | ||||||||||||||||||||||
| Forward contract commissions | 20 | 20 | — | 13 | 53.8 | |||||||||||||||||||||||||||
| Option premium fees | 2 | 1 | 100.0 | — | — | |||||||||||||||||||||||||||
| Total foreign exchange fees | $ | 262 | $ | 179 | 46.4 | $ | 159 | 12.6 | ||||||||||||||||||||||||
Credit Card Fees
Credit card fees were $131 million in 2021, compared to $98 million in 2020. Credit card fees increased in the year ended December 31, 2021, due to higher transaction volumes reflective of increased spending, new client growth and relationship expansion compared to the comparable 2020 periods, which were reflective of the slowdown in spending during 2020 due to the height of the COVID-19 pandemic. A summary of credit card fees by instrument type for 2021, 2020 and 2019 is as follows:
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Credit card fees by instrument type: | ||||||||||||||||||||||||||||||||
| Card interchange fees, net | $ | 108 | $ | 76 | 42.1 | % | $ | 94 | (19.1) | % | ||||||||||||||||||||||
| Merchant service fees | 18 | 18 | — | 18 | — | |||||||||||||||||||||||||||
| Card service fees | 5 | 4 | 25.0 | 7 | (42.9) | |||||||||||||||||||||||||||
| Total credit card fees | $ | 131 | $ | 98 | 33.7 | $ | 119 | (17.6) | ||||||||||||||||||||||||
Deposit Service Charges
Deposit service charges were $112 million in 2021, compared to $90 million in 2020. Deposit service charges increased due to the increases in product revenues from strong deposit growth and higher transaction volumes.
Lending Related Fees
Lending related fees were $43.3$76 million in 2017,2021, compared to $33.4 million and $32.5$57 million in 2016 and 2015, respectively.2020. 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 2021, 2020 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, 2015.2019 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 millions) | (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 59 | $ | 42 | 40.5 | % | $ | 35 | 20.0 | % | |||||||||||||||||||||||||||||
| Other | 9,155 | 7,741 | 18.3 | 8,511 | (9.0 | ) | Other | 17 | 15 | 13.3 | 15 | — | ||||||||||||||||||||||||||||||||||||||
| Total lending related fees | $ | 43,265 | $ | 33,395 | 29.6 | $ | 32,536 | 2.6 | Total lending related fees | $ | 76 | $ | 57 | 33.3 | $ | 50 | 14.0 | |||||||||||||||||||||||||||||||||
Letters of Credit and Standby Letters of Credit Fees
Letters of credit and standby letters of credit fees were $28.5$51 million in 2017,2021, compared to $25.6 million and $20.9$47 million in 2016 and 2015, respectively.2020. The increases wereincrease was primarily driven by increases in deferred fee income reflective of larger letter of credit issuances.
58
Investment Banking Revenue
Investment banking revenue was $459 million in 2021, compared to $414 million in 2020. The increase was due to an increase in the amount of total closed deals during 2021. A summary of investment banking revenue by type for 2021, 2020 and 2019 is as follows:
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Investment banking revenue: | ||||||||||||||||||||||||||||||||
| Underwriting fees | $ | 304 | $ | 353 | (13.9) | % | $ | 153 | 130.7 | % | ||||||||||||||||||||||
| Advisory fees | 90 | 40 | 125.0 | 38 | 5.3 | |||||||||||||||||||||||||||
| Private placements and other | 65 | 21 | NM | 4 | NM | |||||||||||||||||||||||||||
| Total investment banking revenue | $ | 459 | $ | 414 | 10.9 | $ | 195 | 112.3 | ||||||||||||||||||||||||
Commissions
Commissions were $79 million in 2021, compared to $67 million in 2020. 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 higher trading volumes. The Company also earns subscription fees for market intelligence services that are recognized over the period in which they are delivered. Fees received before the subscription period ends is initially recorded as deferred revenue (a contract liability) in other liabilities in our consolidated balance sheet.
Other Noninterest Income
| 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 | ||||||||||
Noninterest Expense
A summary of noninterest expense for 2017, 20162021, 2020 and 20152019 is as follows:
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Compensation and benefits | $ | 2,015 | $ | 1,318 | 52.9 | % | $ | 990 | 33.1 | % | ||||||||||||||||||||||
| Professional services | 392 | 247 | 58.7 | 205 | 20.5 | |||||||||||||||||||||||||||
| Premises and equipment | 178 | 127 | 40.2 | 97 | 30.9 | |||||||||||||||||||||||||||
| Net occupancy | 83 | 101 | (17.8) | 69 | 46.4 | |||||||||||||||||||||||||||
| Business development and travel | 24 | 24 | — | 69 | (65.2) | |||||||||||||||||||||||||||
| FDIC and state assessments | 48 | 28 | 71.4 | 18 | 55.6 | |||||||||||||||||||||||||||
| Merger-related charges | 129 | — | — | — | — | |||||||||||||||||||||||||||
| Other | 201 | 190 | 5.8 | 153 | 24.2 | |||||||||||||||||||||||||||
| Total noninterest expense | $ | 3,070 | $ | 2,035 | 50.9 | $ | 1,601 | 27.1 | ||||||||||||||||||||||||
59
| 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 | ||||||||||
| 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 | ) | |||||||||||
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 millions, except employees) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Compensation and benefits: | ||||||||||||||||||||||||||||||||
| Salaries and wages | $ | 721 | $ | 516 | 39.7 | % | $ | 437 | 18.1 | % | ||||||||||||||||||||||
| Incentive compensation plans | 784 | 464 | 69.0 | 288 | 61.1 | |||||||||||||||||||||||||||
| Other employee incentives and benefits (1) | 510 | 338 | 50.9 | 265 | 27.5 | |||||||||||||||||||||||||||
| Total compensation and benefits | $ | 2,015 | $ | 1,318 | 52.9 | $ | 990 | 33.1 | ||||||||||||||||||||||||
| Period-end FTEs | 6,567 | 4,461 | 47.2 | 3,564 | 25.2 | |||||||||||||||||||||||||||
| Average FTEs | 5,466 | 4,040 | 35.3 | 3,362 | 20.2 | |||||||||||||||||||||||||||
(1)Other employee incentives and benefits includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), ESOP, warrant and other incentive plans, retention plans, agency fees and other employee-related expenses. |
Compensation and benefits expense was $606.4 million$2.0 billion in 2017,2021, compared to $514.3 million$1.3 billion in 2016 and $473.8 million in 2015.2020. The key factors driving the increase in compensation and benefits expense in 20172021 were as follows:
•An increase of $32.9$205 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
•An increase of $26.6$320 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.
•An increase of $18.1$172 million in other employee incentives and benefits expense attributable primarily to increases in share-based compensation expense due to the increased restricted stock awards granted during 2021, the warrant incentive plan driven by a significant increase in gains on equity warrant assets, payroll taxes due to an increase in incentive compensation and benefits, primarily due to higher agency fees, group health and life insurance expenses and share-based plan expenses.
Our variable compensation plans primarily consist ofinclude our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, Deferred Compensation Plan, 401(k) and ESOP Plan, SVB Securities Incentive Compensation Plan, SVB Securities Retention ProgramAward, EHOP, 2006 Incentive Plan and Warrant Incentive Plan.ESPP. Total costs incurred under these plans were $183.9$917 million in 2017,2021, compared to $145.3$547 million in 2016 and $155.5 million in 2015.2020. These amounts are included in total compensation and benefits expense discussed above.
Professional Services
Professional services expense was $121.9$392 million in 2017,2021, compared to $95.0$247 million in 2016 and $82.8 million in 2015.2020. The increase in 2017December 31, 2021 was driven primarily by higher consulting fees associated with our initiatives related to enhancementsour regulatory programs as well as continued investments in our regulatory, risk managementinfrastructure 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.internationally.
Premises and Equipment
Premises and equipment expense was $71.8$178 million in 2017,2021, compared to $65.5$127 million in 2016 and $51.9 million in 2015.2020. The increase was driven primarily by an increase in computer maintenance expenses related to investments to projects, systemsnew vendor and technology toproject depreciation that began in 2021 and increased software support our revenue growth and related initiatives as well as other operating costs.maintenance service fees.
Net Occupancy
Net occupancy expense was $48.4$83 million in 2017,2021, compared to $39.9$101 million in 20162020. The decrease was primarily driven by $29 million of impairment and $34.7accelerated depreciation of right to use assets and other fixed assets recorded in 2020 related to vacating leased office space in several locations.
60
Business Development and Travel
Business development and travel expense was $24 million in 2015. The increase2021, compared to $24 million in 2020. Business development and travel expense was flat compared to 2020 due primarily due to lease renewals at higher costs, reflectivethe impact of market conditions,the COVID-19 pandemic on domestic and international travel restrictions during 2020 and early 2021 which started to ease during the expansionlatter half of certain offices to support our growth.2021 resulting in continued business development and travel.
FDIC and State Assessments
FDIC and state assessments expense was $35.1$48 million in 2017,2021, compared to $30.3$28 million in 2016 and $25.5 million in 2015.2020. The increase was due primarily to the increase in our organic average assets.deposits as well as the acquisition of Boston Private deposits.
Merger-related Charges
| Year ended December 31, | ||||||||||||||||||
| (Dollars in thousands) | 2017 | 2016 | % Change 2017/2016 | 2015 | % Change 2016/2015 | |||||||||||||
| Lending and other client related processing costs | $ | 23,768 | $ | 19,867 | 19.6 | % | $ | 15,944 | 24.6 | % | ||||||||
| Telephone | 10,647 | 9,793 | 8.7 | 9,398 | 4.2 | |||||||||||||
| 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 | |||||||||||||
| Postage and supplies | 2,797 | 2,851 | (1.9 | ) | 3,154 | (9.6 | ) | |||||||||||
| Other | 21,419 | 17,890 | 19.7 | 19,999 | (10.5 | ) | ||||||||||||
| Total other noninterest expense | $ | 72,145 | $ | 62,243 | 15.9 | $ | 58,287 | 6.8 | ||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | |||||||||||||||||||||||||||||||
| Personnel-related | $ | 17 | ||||||||||||||||||||||||||||||
| Occupancy and facilities | 39 | |||||||||||||||||||||||||||||||
| Professional services | 56 | |||||||||||||||||||||||||||||||
| Systems integration and related charges | 17 | |||||||||||||||||||||||||||||||
| Total merger-related charges | $ | 129 | ||||||||||||||||||||||||||||||
Operating Efficiency Ratio
Our operating efficiency ratio increased to 51.88 percent for the year ended December 31, 2021 compared to 50.92 percent for the year ended December 31, 2020. This increase was due to growth ofin noninterest expense slightly outpacing revenue growth. The increase in noninterest expense was driven by increased compensation and benefits expense, professional services expense, merger-related charges and premises and equipment expense. These increases were partially offset by higher revenue driven by interest income on our credit cardloan and payment product offerings.investment security portfolios and net gains on investment securities and equity warrant assets.
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 net 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, 20162021, 2020 and 20152019 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 millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Noninterest income (1) | $ | (124) | $ | (29) | NM | $ | (20) | 45.0 | % | |||||||||||||||||||||||
| Noninterest expense (1) | 1 | — | — | 1 | (100.0) | |||||||||||||||||||||||||||
| Carried interest allocation (2) | (117) | (57) | 105.3 | (29) | 96.6 | |||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | $ | (240) | $ | (86) | 179.1 | $ | (48) | 79.2 | ||||||||||||||||||||||||
(2)Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds.
61
Net income attributable to noncontrolling interests was $28.7$240 million in 2017,2021, compared to $7.6$86 million in 2016.2020. Net income attributable to noncontrolling interests of $28.7$240 million for 2017the year ended December 31, 2021 was driven primarily by net gains on investment securities (including carried interest allocation) from unrealized valuation of our managed funds of funds and our SVB Securities funds.
Net income attributable to noncontrolling interests was $86 million in 2020. Net income attributable to noncontrolling interests of $86 million for 2020 was primarily a result of the following:
•Net gains on investment securities (including carried interest allocation) attributable to noncontrolling interests of $29.2$86 million ($25.529 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 $0.5was less than $1 million, primarily related to management fees paid by the noncontrolling interests to our subsidiaries that serve as the general partner.
Income Taxes
Our effective income tax expense rate was 42.026.2 percent in 2017,2021, compared to 39.527.0 percent in 2016 and 39.9 percent in 2015.2020. 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, 20162021 and 20152020 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 20172021 was duedriven 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.
Operating Segment Results
We have threefour segments for which we report our financial information: Global Commercial Bank (“GCB”),GCB, SVB Private Bank, SVB Capital and SVB Capital.Securities.
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, 20162021, 2020 and 2015:2019:
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 millions) | (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 1,274,366 | $ | 1,040,712 | 22.5 | % | $ | 853,882 | 21.9 | % | Net interest income | $ | 2,946 | $ | 2,025 | 45.5 | % | $ | 1,850 | 9.5 | % | |||||||||||||||||||||||||||||
| Provision for credit losses | (81,553 | ) | (93,885 | ) | (13.1 | ) | (94,913 | ) | (1.1 | ) | Provision for credit losses | (55) | (166) | (66.9) | (92) | 80.4 | ||||||||||||||||||||||||||||||||||
| Noninterest income | 366,000 | 320,421 | 14.2 | 272,862 | 17.4 | Noninterest income | 708 | 606 | 16.8 | 638 | (5.0) | |||||||||||||||||||||||||||||||||||||||
| Noninterest expense | (706,341 | ) | (632,264 | ) | 11.7 | (578,888 | ) | 9.2 | Noninterest expense | (1,277) | (1,020) | 25.2 | (875) | 16.6 | ||||||||||||||||||||||||||||||||||||
| Income before income tax expense | $ | 852,472 | $ | 634,984 | 34.3 | $ | 452,943 | 40.2 | Income before income tax expense | $ | 2,322 | $ | 1,445 | 60.7 | $ | 1,521 | (5.0) | |||||||||||||||||||||||||||||||||
| 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 | $ | 44,173 | $ | 31,218 | 41.5 | $ | 26,031 | 19.9 | |||||||||||||||||||||||||||||||||||||||||
| Total average assets | 46,303,582 | 41,494,321 | 11.6 | 38,438,858 | 7.9 | Total average assets | 141,393 | 75,034 | 88.4 | 56,043 | 33.9 | |||||||||||||||||||||||||||||||||||||||
| Total average deposits | 41,043,731 | 37,301,483 | 10.0 | 34,996,194 | 6.6 | Total average deposits | 138,336 | 72,127 | 91.8 | 53,054 | 36.0 | |||||||||||||||||||||||||||||||||||||||
Income before income tax expense from our GCB increased to $852.5 million$2.3 billion in 2017,2021, compared to $635.0 million$1.4 billion in 2016 and $452.9 million in 2015, which reflected the continued growth of our core commercial business and clients.2020. The key components of GCB's performance are discussed below:below.
GCB had a provision for credit losses of $55 million for 2021, compared to a provision of $166 million for 2020. The provision of $55 million for 2021 was driven primarily by an increase of organic growth in our loan yields.portfolio and charge-offs not specifically reserved for at December 31, 2020, of which $80 million was related to the single instance of fraudulent
62
activity on one loan discussed in prior filings, partially offset by a reduction in provision due to model enhancements and a decrease in net new nonaccrual loans and recoveries.
The provision for credit losses of $166 million for 2020, compared to a provision of $92 million for the comparable 2019 period. The $74 million increase is primarily due to the $59 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. The provision of $166 million also consisted of $30 million in additional reserves for period-end loan growth, $49 million for charge-offs not specifically reserved for at December 31, 2019 and $60 million in net new nonaccrual loans, partially offset by $29 million of recoveries.
Noninterest income increased by $45.6$102 million in 2017,2021, related primarily to an overall increase in our non-GAAP core fees (higherfee income, due primarily to higher foreign exchange fees, credit card fees, lending related fees and deposit service charges, partially offset by lower client investment fees and credit card fees).fees. The overall increase in foreign exchange fees was due primarily to an increase in our client count as well as volume related to increased client engagement. The increase in client investmenthigher foreign exchange fees was due to higher client investment fund balances, as well as from improved spreads on our client investment funds due todriven by increases in general market rates and the reintroduction of fees that had been previously waived due to the low rate environment. The increase inspot contract commissions, credit card fees was primarily reflective of increased client utilization of our credit card productsspending as we attracted new customers and custom payment solutions providedexpanded on current relationships and deposit service charges due to newincreased product revenues from strong deposit growth and existing clients,higher transaction volumes, partially offset by higher rebate/rewards expense.the impact of the federal funds rate decreases on client investment fee yields.
Noninterest expense increased by $74.1$257 million in 2017,2021, due primarily to increased expenses for compensation and benefits and professional services. Compensation and benefits expenses increasedexpense as a result of higher incentive compensation expense and higher salaries and wages expenses, higher incentiveexpenses. Incentive compensation and higher other employee compensation and benefits.expense increased due primarily as a result of a strong performance during 2021. 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 112 to 1,8623,489 FTEs in 2017, compared to 1,7502021, from 2,874 FTEs in 2016. The increase in GCB incentive compensation expense was 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 was primarily related to enhancements in our regulatory, risk management and compliance infrastructure to support our growth 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.for the 2020 period.
SVB Private Bank
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Net interest income | $ | 194 | $ | 77 | 151.9 | % | $ | 51 | 51.0 | % | ||||||||||||||||||||||
| Provision for credit losses | (14) | (21) | (33.3) | (2) | NM | |||||||||||||||||||||||||||
| Noninterest income | 56 | 3 | NM | 4 | (25.0) | |||||||||||||||||||||||||||
| Noninterest expense | (212) | (46) | NM | (40) | 15.0 | |||||||||||||||||||||||||||
| Income before income tax expense | $ | 24 | $ | 13 | 84.6 | $ | 13 | — | ||||||||||||||||||||||||
| Total average loans, amortized cost | $ | 8,958 | $ | 4,196 | 113.5 | $ | 3,341 | 25.6 | ||||||||||||||||||||||||
| Total average assets | 10,140 | 4,230 | 139.7 | 3,371 | 25.5 | |||||||||||||||||||||||||||
| Total average deposits | 8,645 | 2,172 | NM | 1,524 | 42.5 | |||||||||||||||||||||||||||
| 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 | |||||||||||||
Income before income tax expense from SVB Private Bank decreasedincreased to $38.2$24 million in 2017,2021, compared to $42.1$13 million in 2016. Income before income tax expense was $31.5 million in 2015.2020. The key drivers of SVB Private Bank's performance are discussed below:
The provision for credit losses decreased by $7 million primarily due to a reduction in provision due to previously discussed model enhancements, partially offset by a day one provision for loans on non-PCD loans and unfunded commitments of $46 million as a result of the Boston Private acquisition.
Noninterest expense increased $166 million to $212 million in 2021 related primarily to compensation and benefits expense. Compensation and benefits expense increased as a result of an increase in average loan balancesnumber of FTEs due primarily to the acquisition of Boston Private and higher loan yields.
63
SVB Capital
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2017 | 2016 | % Change 2017/2016 | 2015 | % Change 2016/2015 | |||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (expense) | $ | 48 | $ | (49 | ) | (198.0 | )% | $ | 3 | NM% | ||||||||||||||||||||||||||||||||||||||||
| Noninterest income | 58,992 | 49,365 | 19.5 | 70,857 | (30.3 | ) | Noninterest income | $ | 487 | $ | 226 | 115.5 | % | $ | 122 | 85.2 | % | |||||||||||||||||||||||||||||||||
| Noninterest expense | (19,340 | ) | (15,546 | ) | 24.4 | (14,699 | ) | 5.8 | Noninterest expense | (71) | (51) | 39.2 | (31) | 64.5 | ||||||||||||||||||||||||||||||||||||
| Income before income tax expense | $ | 39,700 | $ | 33,770 | 17.6 | $ | 56,161 | (39.9 | ) | Income before income tax expense | $ | 416 | $ | 175 | 137.7 | $ | 91 | 92.3 | ||||||||||||||||||||||||||||||||
| Total average assets | $ | 325,939 | $ | 338,848 | (3.8 | ) | $ | 337,884 | 0.3 | Total average assets | $ | 700 | $ | 437 | 60.2 | $ | 405 | 7.9 | ||||||||||||||||||||||||||||||||
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. The performance of these securities may be impacted by the effects of the COVID-19 pandemic.
Income before income tax expense from SVB Capital was $39.7$416 million in 2017,2021, compared to $33.8$175 million in 2016 and $56.2 million in 2015.2020. The key drivers of SVB Capital's performance are discussed below:below.
•Net gains on investment securities of $35.8$398 million, in 2017, compared to were driven primarily by unrealized net gainsvaluation increases of $23.5 million in 2016. The net gains on investment securities of $35.8 million in 2017 were related toprivate and public positions as well as fund distributions driven primarily by realized gains from distributions from our strategic venture capital fund investments and net unrealized valuation increases in the investments held by the funds in our managed funds of funds portfolio driven by IPO and M&A activity in 2017, and
one public company position.•Fund management fees of $21.2$77 million, for 2017, comparedincluded in other noninterest income, and
•Gains on equity warrant assets of $6 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 to $19.2$71 million in 2016.2021 from 2020 due to a $20 million increase in compensation and benefits as a result of higher incentive compensation expense and higher salaries and wages expenses. Incentive compensation expense increased as a result of a strong performance during 2021. The increase in salaries and wages was due primarily to an increase in the additionaverage number of new managed fundsFTEs at SVB Capital.
Capital, which increased to 77 FTEs at year end December 31, 2021, from 47 for 2020.SVB Securities
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change 2021/2020 | 2019 | % Change 2020/2019 | |||||||||||||||||||||||||||
| Net interest income | $ | 1 | $ | 1 | — | % | $ | 1 | — | % | ||||||||||||||||||||||
| Noninterest income | 608 | 497 | 22.3 | 264 | 88.3 | |||||||||||||||||||||||||||
| Noninterest expense | (561) | (379) | 48.0 | (253) | 49.8 | |||||||||||||||||||||||||||
| Income before income tax expense | $ | 48 | $ | 119 | (59.7) | $ | 12 | NM | ||||||||||||||||||||||||
| Total average assets | $ | 830 | $ | 557 | 49.0 | $ | 398 | 39.9 | ||||||||||||||||||||||||
On December 10, 2021 we completed the acquisition of MoffettNathanson LLC. Upon the closing of the acquisition, MoffettNathanson LLC's operations and results were included within the SVB Securities reportable segment. The acquisition enables SVB Securities to 2015expand its equity research coverage to include companies in both the healthcare and technology industries.
64
Noninterest income increased $111 million to $608 million in 2016, compared to net gains of $51.4 million in 2015. The net gains on investment securities of $23.5 million 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
Noninterest expense increased $182 million to $561 million in 2021. The $182 million increase was primarily driven by an increase in compensation and benefit expense driven primarily by an increase in incentive compensation expense as a result of a strong performance during 2021, as compared to 2020 and an increase in salaries and wages expense due to strategic hires made during 2021 to support the additionexpansion of new managed funds at SVB Capital.
Securities' Technology, Healthcare Services and HealthTech investment banking activities.Consolidated Financial Condition
Our total assets, and total liabilities and stockholders' equity were $51.2$211.5 billion at December 31, 20172021 and $44.7$115.5 billion at both December 31, 2016 and December 31, 2015.2020. 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$14.6 billion at December 31, 2017, an increase2021, a decrease of $0.4$3.1 billion, or 14.817.3 percent, compared to $2.5$17.7 billion at December 31, 2016.2020. The decrease was driven primarily by investing activities of $90.3 billion consisting primarily of purchases of investment securities, net of maturities and paydowns, and funding of loans, partially offset by financing activities of $85.5 billion consisting primarily of a net increase in period-end cash balances was primarily due to growth in our noninterest-bearing deposit balances during the year endeddeposits. As of December 31, 2017.
Investment Securities
Investment securities totaled $24.4$128.0 billion at December 31, 2017,2021, an increase of $2.7$78.7 billion, or 12.8159.5 percent, compared to $21.7$49.3 billion at December 31, 2016, which decreased by $4.1 billion or 16.2 percent, compared to $25.8 billion at December 31, 2015.2020. Our investment securities portfolio consists primarilyis comprised of: (i) an AFS securities portfolio and a HTM securities portfolio, both of which primarily representrepresents 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.equity warrant assets exercised. The major components of the change in investment securities are explained below.
65
The following table presents a profile of our investment securities portfolio at December 31, 2017, 20162021 and 2015:2020:
| 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 | ||||||
| December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||||||||
| AFS securities, at fair value: | ||||||||||||||||||||
| U.S. Treasury securities | $ | 15,850 | $ | 4,470 | ||||||||||||||||
| U.S. agency debentures | 196 | 237 | ||||||||||||||||||
| Foreign government debt securities | 61 | 24 | ||||||||||||||||||
| Residential MBS: | ||||||||||||||||||||
| Agency-issued MBS | 8,589 | 13,503 | ||||||||||||||||||
| Agency-issued CMO—fixed rate | 982 | 8,107 | ||||||||||||||||||
| Agency-issued CMBS | 1,543 | 4,572 | ||||||||||||||||||
| Total AFS securities | 27,221 | 30,913 | ||||||||||||||||||
| HTM securities, at amortized cost: | ||||||||||||||||||||
| U.S. agency debentures | 609 | 402 | ||||||||||||||||||
| Residential MBS: | ||||||||||||||||||||
| Agency-issued MBS | 64,439 | 7,740 | ||||||||||||||||||
| Agency-issued CMO—fixed rate | 10,226 | 1,735 | ||||||||||||||||||
| Agency-issued CMO—variable rate | 100 | 137 | ||||||||||||||||||
| Agency-issued CMBS | 14,959 | 2,943 | ||||||||||||||||||
| Municipal bonds and notes (1) | 7,157 | 3,635 | ||||||||||||||||||
| Corporate bonds (1) | 712 | — | ||||||||||||||||||
| Total HTM securities | 98,202 | 16,592 | ||||||||||||||||||
| Non-marketable and other equity securities: | ||||||||||||||||||||
| Non-marketable securities (fair value accounting): | ||||||||||||||||||||
| Consolidated venture capital and private equity fund investments | 130 | 89 | ||||||||||||||||||
| Unconsolidated venture capital and private equity fund investments | 208 | 185 | ||||||||||||||||||
| Other investments without a readily determinable fair value | 164 | 61 | ||||||||||||||||||
| Other equity securities in public companies (fair value accounting) | 117 | 281 | ||||||||||||||||||
| Non-marketable securities (equity method accounting): | ||||||||||||||||||||
| Venture capital and private equity fund investments | 671 | 362 | ||||||||||||||||||
| Debt funds | 5 | 5 | ||||||||||||||||||
| Other investments | 294 | 203 | ||||||||||||||||||
| Investments in qualified affordable housing projects, net | 954 | 616 | ||||||||||||||||||
| Total non-marketable and other equity securities | 2,543 | 1,802 | ||||||||||||||||||
| Total investment securities | $ | 127,966 | $ | 49,307 | ||||||||||||||||
(1)ACL balance is $7 million for HTM securities for December 31, 2021 and less than $1 million for December 31, 2020.
Available-for-Sale Securities
Period-end AFS securities were $11.1$27.2 billion at December 31, 2017,2021, a decrease of $3.7 billion, or 11.9 percent, compared to $12.6$30.9 billion at December 31, 2016, and $16.42020. The $3.7 billion atdecrease in period-end AFS securities balances from December 31, 2015. The2020 to December 31, 2021 was driven primarily by a $8.8 billion re-designation of AFS securities to HTM securities, paydowns and maturities of $4.8 billion, sale of investments of $1.6 billion and a decrease in fair value of $1.5 billion in 2017 was primarily$818 million due to $3.3 billionthe increase in paydowns, scheduled maturities and called maturities and sales of $0.6 billion of agency backed collateralized mortgage obligations,interest rates, partially offset by purchases of new investments$12.1 billion. Securities classified as AFS are carried at fair value with changes in fair value recorded as unrealized gains or losses in a separate component of $2.4 billion. The paydowns, scheduled maturities and called maturities 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.
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, 2017.2021. 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
66
maturity. Expected maturities for mortgage-backed securitiesMBS may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securitiesMBS 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 averageexpected yield on mortgage-backed securitiesMBS is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | One Year or Less | After One Year to Five Years | After Five Years to Ten Years | After Ten Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 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 | $ | 15,850 | 1.05 | % | $ | 247 | 0.49 | % | $ | 15,091 | 1.05 | % | $ | 512 | 1.21 | % | $ | — | — | % | ||||||||||||||||||||||||||||||||||||||||||
| U.S. agency debentures | 196 | 0.96 | 80 | 0.27 | 36 | 1.04 | 80 | 1.58 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign government debt securities | 61 | (0.81) | 61 | (0.81) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential MBS: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued MBS | 8,589 | 1.28 | — | — | — | — | — | — | 8,589 | 1.28 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued CMO - fixed rate | 982 | 1.41 | — | — | — | — | — | — | 982 | 1.41 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued CMBS | 1,543 | 1.76 | — | — | 67 | 1.13 | 1,476 | 1.79 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 27,221 | 1.17 | $ | 388 | 0.24 | $ | 15,194 | 1.05 | $ | 2,068 | 1.64 | $ | 9,571 | 1.29 | |||||||||||||||||||||||||||||||||||||||||||||||
| 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$98.2 billion at December 31, 2017,2021, an increase of $4.3$81.6 billion, or 50.3491.8 percent, compared to $8.4$16.6 billion at December 31, 2016.2020. The $81.6 billion increase in period-end HTM security balances from December 31, 2020 to December 31, 2021 was due to newdriven by purchases of $6.0$85.6 billion, primarily comprisedwith an additional $982 million of agency backed mortgagesecurities assumed with the Boston Private acquisition, and the re-designation of $8.8 billion of AFS securities to HTM securities, partially offset by $13.8 billion in paydowns and scheduled maturities of $1.7 billion.
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 net unrealized gains or losses 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 net of ACL and fully taxable equivalent yields on fixed income investment securities classified as HTM as of December 31, 2017.2021. 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 securitiesMBS may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securitiesMBS 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 averageexpected yield on mortgage-backed securitiesMBS is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | One Year or Less | After One Year to Five Years | After Five Years to Ten Years | After Ten Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Net Carry Value | Weighted Average Yield | Net Carry Value | Weighted Average Yield | Net Carry Value | Weighted Average Yield | Net Carry Value | Weighted Average Yield | Net Carry Value | Weighted Average Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. agency debentures | $ | 609 | 2.05 | % | $ | 1 | 2.26 | % | $ | 133 | 2.43 | % | $ | 475 | 1.94 | % | $ | — | — | % | ||||||||||||||||||||||||||||||||||||||||||
| Residential MBS: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued MBS | 64,439 | 1.55 | — | — | 7 | 2.28 | 806 | 2.17 | 63,626 | 1.54 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued CMO - fixed rate | 10,226 | 1.35 | — | — | 14 | 1.72 | 316 | 1.61 | 9,896 | 1.35 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued CMO - variable rate | 100 | 0.74 | — | — | — | — | — | — | 100 | 0.74 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency-issued CMBS | 14,959 | 1.63 | — | — | 211 | 0.75 | 971 | 1.93 | 13,777 | 1.63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Municipal bonds and notes | 7,156 | 2.82 | 48 | 2.82 | 176 | 2.43 | 1,152 | 2.76 | 5,780 | 2.85 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | 706 | 1.86 | — | — | 33 | 1.70 | 673 | 1.87 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 98,195 | 1.64 | $ | 49 | 2.80 | $ | 574 | 1.75 | $ | 4,393 | 2.32 | $ | 93,179 | 1.61 | |||||||||||||||||||||||||||||||||||||||||||||||
67
| 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 | 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 | % | $ | — | — | % | |||||||||||||||
| 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 collateralized mortgage obligations - fixed rate | 2,829,979 | 1.78 | — | — | — | — | 462,533 | 1.48 | 2,367,446 | 1.84 | |||||||||||||||||||||||||
| Agency-issued collateralized mortgage obligations - variable rate | 255,782 | 0.74 | — | — | — | — | — | — | 255,782 | 0.74 | |||||||||||||||||||||||||
| Agency-issued commercial mortgage-backed securities | 1,868,985 | 2.49 | — | — | — | — | — | — | 1,868,985 | 2.49 | |||||||||||||||||||||||||
| Municipal bonds and notes | 743,761 | 3.55 | 7,073 | 3.90 | 73,054 | 3.00 | 233,728 | 2.33 | 429,906 | 4.31 | |||||||||||||||||||||||||
| Total | $ | 12,663,455 | 2.40 | $ | 7,801 | 4.24 | $ | 402,547 | 2.47 | $ | 1,310,124 | 2.01 | $ | 10,942,983 | 2.44 | ||||||||||||||||||||
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. AtThe estimated weighted-average duration of our fixed income investment securities portfolio was 4.0 and 3.7 years at December 31, 2017,2021 and December 31, 2020, respectively. The weighted-average duration of our estimatedtotal fixed income securities portfolio durationincluding the impact of our fair value swaps was 3.0 years, compared to 2.5 and 2.73.7 years at December 31, 20162021. We are focused on maintaining AFS portfolio duration to approximately two years to mitigate OCI risk while buying three- to five-year duration HTM securities to support portfolio yields. The weighted-average duration of our AFS securities portfolio was 3.5 years at December 31, 2021 and 2015, respectively.3.7 years at December 31, 2020. The weighted-average duration of our AFS securities portfolio including the impact of our fair value swaps was 2.4 years at December 31, 2021. The weighted-average duration of our HTM securities portfolio was 4.1 years at December 31, 2021 and 3.7 years at December 31, 2020. We continue to invest excess on-balance sheet liquidity in high-quality securities (agency MBS/CMOs/CMBS, municipal and corporate securities), primarily classified as HTM.
Non-Marketable and Other Equity Securities
Non-marketable and other equity securities were $2.5 billion ($2.2 billion net of noncontrolling interest) at December 31, 2021, an increase of $741 million, or 41.1 percent, compared to $1.8 billion ($1.6 billion net of noncontrolling interest) at December 31, 2020. 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 securities compared to the amounts attributable to SVBFG.
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, 20162021 and 2015:December 31, 2020:
| 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, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 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) | $ | 130 | $ | 36 | $ | 89 | $ | 23 | ||||||||||||||||||||||||||||||
| Unconsolidated venture capital and private equity fund investments (2) | 208 | 208 | 185 | 185 | ||||||||||||||||||||||||||||||||||
| Other investments without a readily determinable fair value (3) | 164 | 164 | 61 | 61 | ||||||||||||||||||||||||||||||||||
| Other equity securities in public companies (fair value accounting) (4) | 117 | 117 | 281 | 281 | ||||||||||||||||||||||||||||||||||
| Non-marketable securities (equity method accounting) (5): | ||||||||||||||||||||||||||||||||||||||
| Venture capital and private equity fund investments | 671 | 397 | 362 | 215 | ||||||||||||||||||||||||||||||||||
| Debt funds | 5 | 5 | 5 | 5 | ||||||||||||||||||||||||||||||||||
| Other investments | 294 | 294 | 203 | 203 | ||||||||||||||||||||||||||||||||||
| Investments in qualified affordable housing projects, net | 954 | 954 | 616 | 616 | ||||||||||||||||||||||||||||||||||
| Total non-marketable and other equity securities | $ | 2,543 | $ | 2,175 | $ | 1,802 | $ | 1,589 | ||||||||||||||||||||||||||||||
(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, 2021 and December 31, 2020:
68
| December 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Carrying value (as reported) | Amount attributable to SVBFG | Carrying value (as reported) | Amount attributable to SVBFG | ||||||||||||||||||||||||||||||||||
| Strategic Investors Fund, LP | $ | 2 | $ | — | $ | 5 | $ | 1 | ||||||||||||||||||||||||||||||
| Capital Preferred Return Fund, LP | 61 | 13 | 50 | 11 | ||||||||||||||||||||||||||||||||||
| Growth Partners, LP | 67 | 23 | 34 | 11 | ||||||||||||||||||||||||||||||||||
| Total consolidated venture capital and private equity fund investments | $ | 130 | $ | 36 | $ | 89 | $ | 23 | ||||||||||||||||||||||||||||||
(2)The carrying value represents investments in 150 and 162 funds (primarily venture capital funds) at December 31, 2021 and December 31, 2020, 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 are carried 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 9—“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.
69
(5)The following table shows the carrying value and our ownership percentage of each investment at December 31, 2021 and 2020 (equity method accounting):
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 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 | $ | 3 | $ | 4 | $ | 3 | ||||||||||||||||||||||||||||||
| Strategic Investors Fund III, LP | 25 | 21 | 16 | 13 | ||||||||||||||||||||||||||||||||||
| Strategic Investors Fund IV, LP | 36 | 30 | 25 | 21 | ||||||||||||||||||||||||||||||||||
| Strategic Investors Fund V funds | 87 | 45 | 67 | 35 | ||||||||||||||||||||||||||||||||||
| CP II, LP (i) | 2 | 1 | 8 | 5 | ||||||||||||||||||||||||||||||||||
| Other venture capital and private equity fund investments | 518 | 298 | 242 | 138 | ||||||||||||||||||||||||||||||||||
| Total venture capital and private equity fund investments | $ | 671 | $ | 398 | $ | 362 | $ | 215 | ||||||||||||||||||||||||||||||
| Debt funds: | ||||||||||||||||||||||||||||||||||||||
| Gold Hill Capital 2008, LP (ii) | $ | 4 | $ | 4 | $ | 4 | $ | 4 | ||||||||||||||||||||||||||||||
| Other debt funds | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||
| Total debt funds | $ | 5 | $ | 5 | $ | 5 | $ | 5 | ||||||||||||||||||||||||||||||
| Other investments: | ||||||||||||||||||||||||||||||||||||||
| SPD Silicon Valley Bank Co., Ltd. | $ | 154 | $ | 154 | $ | 115 | $ | 115 | ||||||||||||||||||||||||||||||
| Other investments | 140 | 140 | 88 | 88 | ||||||||||||||||||||||||||||||||||
| Total other investments | $ | 294 | $ | 294 | $ | 203 | $ | 203 | ||||||||||||||||||||||||||||||
| 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)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 | ||||||||||||
| 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 | ||||||||||||
Volcker Rule
The Volcker Rule prohibits, subject to certain exceptions, a banking entity, such as the Company, from sponsoring, investing in, or having certain relationships with covered funds. Under the currently effective regulations implementing the Volcker Rule, covered funds are defined to include many venture capital and private equity funds.
of the Volcker Rule untilby 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.
70
Loans
Upon the completion of the acquisition of Boston Private on July 1, 2021, we have modified our portfolio segments and classes of financing receivables to include many venture capitalaccommodate Boston Private 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 for additional information on our current portfolio segments and private equity funds. As noted above, the Company currently maintains certain investments in “illiquid” funds that would be prohibited but are now held under the approved extension. Asclasses of financing receivables.
Loans at amortized cost basis increased by $21.1 billion to $66.3 billion at December 31, 2017, such investments had an estimated aggregate carrying value of approximately $153 million (and an aggregate fair value of approximately $253 million). See "Business - Supervision and Regulatory - Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds" under Part I, Item I of this report.
| 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) | 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 | ||||||||||
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 sectorclass of financing receivables is as follows:
| December 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in millions) | Amount | Percentage | Amount | Percentage | ||||||||||||||||||||||
| Global fund banking | $ | 37,958 | 57.3 | % | $ | 25,543 | 56.5 | % | ||||||||||||||||||
| Investor dependent: | ||||||||||||||||||||||||||
| Early stage | 1,593 | 2.4 | 1,486 | 3.3 | ||||||||||||||||||||||
| Growth stage | 3,951 | 5.9 | 3,486 | 7.7 | ||||||||||||||||||||||
| Total investor dependent | 5,544 | 8.3 | 4,972 | 11.0 | ||||||||||||||||||||||
| Cash flow dependent - SLBO | 1,798 | 2.7 | 1,989 | 4.4 | ||||||||||||||||||||||
| Innovation C&I | 6,673 | 10.1 | 5,136 | 11.3 | ||||||||||||||||||||||
| Private bank | 8,743 | 13.2 | 4,901 | 10.9 | ||||||||||||||||||||||
| CRE | 2,670 | 4.0 | — | — | ||||||||||||||||||||||
| Premium wine | 985 | 1.5 | 1,053 | 2.3 | ||||||||||||||||||||||
| Other C&I | 1,257 | 1.9 | — | — | ||||||||||||||||||||||
| Other | 317 | 0.5 | 28 | 0.1 | ||||||||||||||||||||||
| PPP | 331 | 0.5 | 1,559 | 3.5 | ||||||||||||||||||||||
| Total loans | $ | 66,276 | 100.0 | $ | 45,181 | 100.0 | ||||||||||||||||||||
| 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 | % | ||||||
| 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 | ||||||||||||
| 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 | ||||||||||||
(i) Global Fund Banking
Our Global Fund Banking loan structures that include meaningful financial covenants. The sponsor's equity contribution is often 50 percent or more of the acquisition price.
(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 classes of financing receivables for our technology and life science/healthcare market segments are classified as Investor Dependent, Cash Flow Dependent - SLBO or Innovation C&I for reporting purposes.
71
Investor dependent loans represented 8 percent of total loans at December 31, 2021 and 11 percent at December 31, 2020. These loans are made to companies in both our Early Stage and Growth Stage practices.
Cash flow dependent loans for SLBO lending represented 3 percent of total loans at December 31, 2021, compared to 4 percent at December 31, 2020.
Innovation C&I loans, which include asset-based loans, represented 10 percent of total loans at December 31, 2021 and 11 percent at December 31, 2020. Working capital lines and accounts receivable financing, both part of our asset-based lending, each represented approximately one percent and less than one percent of total loans, respectively, at both December 31, 2021 and December 31, 2020.
(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, as well as high net worth clients acquired from Boston Private. Our lending to SVB Private Bank clients represented 1113 percent of total gross loans at both December 31, 20172021 and 11 percent at December 31, 2016.2020. Many of these clients have mortgages,our Private Bank products are secured by real estate, which represented 8588 percent of this portfolio at December 31, 2017; the balance of this portfolio consisted of2021; these products include mortgage loans, owner-occupied commercial mortgage loans, home equity lines of credit, restricted stock purchase loans, capital call lines of credit and other secured lending products such as real estate secured loans to eligible employees through our EHOP. The remaining balance of our Private Bank portfolio consists of restricted and private stock loans, personal capital call lines of credit, lines of credit against liquid assets and other secured and unsecured lending.lending products.
(iv) Commercial Real Estate
The CRE loan portfolio acquired from Boston Private is made up of acquisition financing for commercial properties, such as office buildings, retail properties, apartment buildings and industrial/warehouse space. As such, all of these products are secured by real estate. Our lending to commercial real estate clients represented 4 percent of total loans at December 31, 2021.
The following table provides a summary of total loans by size and class of financing receivables. The breakout below is based on total client balances (individually or in the aggregate) as of December 31, 2021:
| December 31, 2021 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Less than Five Million | Five to Ten Million | Ten to Twenty Million | Twenty to Thirty Million | Thirty Million or More | Total | ||||||||||||||||||||||||||||||||
| Global fund banking | $ | 996 | $ | 1,494 | $ | 2,905 | $ | 3,163 | $ | 29,405 | $ | 37,963 | ||||||||||||||||||||||||||
| Investor dependent: | ||||||||||||||||||||||||||||||||||||||
| Early stage | 1,392 | 219 | 124 | — | — | 1,735 | ||||||||||||||||||||||||||||||||
| Growth stage | 855 | 1,068 | 1,122 | 374 | 551 | 3,970 | ||||||||||||||||||||||||||||||||
| Total investor dependent | 2,247 | 1,287 | 1,246 | 374 | 551 | 5,705 | ||||||||||||||||||||||||||||||||
| Cash flow dependent - SLBO | 7 | 31 | 287 | 508 | 965 | 1,798 | ||||||||||||||||||||||||||||||||
| Innovation C&I | 462 | 432 | 920 | 912 | 4,018 | 6,744 | ||||||||||||||||||||||||||||||||
| Private bank | 6,674 | 950 | 735 | 217 | 167 | 8,743 | ||||||||||||||||||||||||||||||||
| CRE | 823 | 652 | 869 | 246 | 80 | 2,670 | ||||||||||||||||||||||||||||||||
| Premium wine | 215 | 267 | 269 | 124 | 120 | 995 | ||||||||||||||||||||||||||||||||
| Other C&I | 444 | 169 | 262 | 217 | 249 | 1,341 | ||||||||||||||||||||||||||||||||
| Other | 93 | 123 | 101 | — | — | 317 | ||||||||||||||||||||||||||||||||
| Total Loans (1) | $ | 11,961 | $ | 5,405 | $ | 7,594 | $ | 5,761 | $ | 35,555 | $ | 66,276 | ||||||||||||||||||||||||||
(1)Included in total loans at amortized cost is approximately $331 million in PPP loans. The PPP loans consist of loans from all classes of financing receivables.
At December 31, 2021, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $41.3 billion, or 62 percent of our total loan portfolio. These loans represented 768 clients, and of these loans, $21 million were on nonaccrual status as of December 31, 2021.
72
The following table provides a summary of loans by size and class of financing receivables. The breakout below is based on total client balances (individually or in the aggregate) as of December 31, 2020:
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 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 | $ | 1,360 | $ | 2,637 | $ | 2,777 | $ | 17,723 | $ | 25,549 | ||||||||||||||||||||||||||
| Investor dependent | ||||||||||||||||||||||||||||||||||||||
| Early stage | 1,896 | 221 | 101 | 28 | — | 2,246 | ||||||||||||||||||||||||||||||||
| Growth stage | 1,096 | 1,090 | 971 | 365 | 307 | 3,829 | ||||||||||||||||||||||||||||||||
| Total investor dependent | 2,992 | 1,311 | 1,072 | 393 | 307 | 6,075 | ||||||||||||||||||||||||||||||||
| Cash flow dependent - SLBO | 18 | 67 | 546 | 654 | 714 | 1,999 | ||||||||||||||||||||||||||||||||
| Innovation C&I | 632 | 561 | 997 | 939 | 2,412 | 5,541 | ||||||||||||||||||||||||||||||||
| Private bank | 3,505 | 597 | 319 | 95 | 385 | 4,901 | ||||||||||||||||||||||||||||||||
| Premium wine | 242 | 273 | 300 | 121 | 145 | 1,081 | ||||||||||||||||||||||||||||||||
| Other | — | 19 | 16 | — | — | 35 | ||||||||||||||||||||||||||||||||
| Total loans (1) | $ | 8,441 | $ | 4,188 | $ | 5,887 | $ | 4,979 | $ | 21,686 | $ | 45,181 | ||||||||||||||||||||||||||
(1)Included in total loans at amortized cost is approximately $1.6 billion in PPP loans. The PPP loans consist of loans from all classes of financing receivables.
At 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 percent of our total loan portfolio. These loans represented 544 clients, and of these loans, $65 million were on nonaccrual status as of December 31, 2020.
State Concentrations
Approximately 31 percent and 1030 percent of our outstanding total gross loan balances as of December 31, 20172021 were to borrowers based in California, and New York, respectively, compared to 33 percent and 1126 percent as of December 31, 2016.2020. Additionally, borrowers in Massachusetts increased to 12 percent at December 31, 2021, compared to 10 percent as of December 31, 2020. Borrowers in New York represented approximately 10 percent of total loan balances at both December 31, 2021 and December 31, 2020. Other than California, Massachusetts and New York, there are no additional states with gross loan balances greater than or equal to 10 percent.
percent of total loans as of December 31, 2021.
See generally "Risk Factors—Credit Risks" set forth under Part I, Item 1A of this report.
73
As of December 31, 2017,2021, 91 percent, or $21.2$60.4 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 8992 percent, or $17.8$41.4 billion, as of December 31, 2016.2020. The following table sets forth the remaining contractual maturity distribution of our grosstotal loans by industry sectorclass of financing receivables at December 31, 2017,2021, 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 millions) | One Year or Less | After One Year and Through Five Years | After Five Years Through Fifteen Years | After Fifteen Years | Total | |||||||||||||||||||||||||||
| Fixed-rate loans: | ||||||||||||||||||||||||||||||||
| Global fund banking | $ | 496 | $ | 2 | $ | 4 | $ | — | $ | 502 | ||||||||||||||||||||||
| Investor dependent: | ||||||||||||||||||||||||||||||||
| Early stage | 143 | 38 | — | — | 181 | |||||||||||||||||||||||||||
| Growth stage | 56 | 60 | — | — | 116 | |||||||||||||||||||||||||||
| Total investor dependent | 199 | 98 | — | — | 297 | |||||||||||||||||||||||||||
| Cash flow dependent - SLBO | 3 | 46 | — | — | 49 | |||||||||||||||||||||||||||
| Innovation C&I | 263 | 220 | — | — | 483 | |||||||||||||||||||||||||||
| Private bank | 11 | 89 | 177 | 1,308 | 1,585 | |||||||||||||||||||||||||||
| CRE | 157 | 522 | 449 | 34 | 1,162 | |||||||||||||||||||||||||||
| Premium wine | 5 | 174 | 446 | 57 | 682 | |||||||||||||||||||||||||||
| Other C&I | 8 | 100 | 149 | 310 | 567 | |||||||||||||||||||||||||||
| Other | 86 | 39 | 4 | 67 | 196 | |||||||||||||||||||||||||||
| PPP | 74 | 257 | — | — | 331 | |||||||||||||||||||||||||||
| Total fixed-rate loans | $ | 1,302 | $ | 1,547 | $ | 1,229 | $ | 1,776 | $ | 5,854 | ||||||||||||||||||||||
| Variable-rate loans: | ||||||||||||||||||||||||||||||||
| Global fund banking | $ | 36,218 | $ | 1,067 | $ | 171 | $ | — | $ | 37,456 | ||||||||||||||||||||||
| Investor dependent: | ||||||||||||||||||||||||||||||||
| Early stage | 94 | 1,318 | — | — | 1,412 | |||||||||||||||||||||||||||
| Growth stage | 425 | 3,161 | 249 | — | 3,835 | |||||||||||||||||||||||||||
| Total investor dependent | 519 | 4,479 | 249 | — | 5,247 | |||||||||||||||||||||||||||
| Cash flow dependent - SLBO | 207 | 1,463 | 79 | — | 1,749 | |||||||||||||||||||||||||||
| Innovation C&I | 1,090 | 4,694 | 406 | — | 6,190 | |||||||||||||||||||||||||||
| Private bank | 264 | 375 | 596 | 5,923 | 7,158 | |||||||||||||||||||||||||||
| CRE | 207 | 714 | 552 | 35 | 1,508 | |||||||||||||||||||||||||||
| Premium wine | 92 | 157 | 54 | — | 303 | |||||||||||||||||||||||||||
| Other C&I | 304 | 131 | 89 | 166 | 690 | |||||||||||||||||||||||||||
| Other | 16 | 51 | 27 | 27 | 121 | |||||||||||||||||||||||||||
| PPP | — | — | — | — | — | |||||||||||||||||||||||||||
| Total variable-rate loans | $ | 38,917 | $ | 13,131 | $ | 2,223 | $ | 6,151 | $ | 60,422 | ||||||||||||||||||||||
| Total loans | $ | 40,219 | $ | 14,678 | $ | 3,452 | $ | 7,927 | $ | 66,276 | ||||||||||||||||||||||
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.
Paycheck Protection Program
We accepted applications under the PPP administered by the 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"), and originated loans to qualified small businesses until the loan origination phase of the PPP ended on June 30, 2021. 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
74
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). Additional loans were issuable up until June 30, 2021, pursuant to the PPP Extension Act of 2021, and qualifying PPP borrowers were able to apply for second draw loans in an amount of up to $2 million. We continued to participate in the forgiveness stage of the PPP through the fourth quarter of 2021.
As of December 31, 2021, we have outstanding PPP loans in the amount of $331 million, as approved by the SBA, compared to $1.6 billion at December 31, 2020. This funded amount reflects repayments received as of such date.
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 for a majority of participants. As of December 31, 2021, a single loan remained modified under these programs, with an outstanding balance of $10 million. The borrower lengthened their existing interest-only payment period under the deferral program and is currently making interest-only payments. As of December 31, 2020, loans modified under these programs had outstanding balances of $769 million, $13 million and $2 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 TDR classification 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.
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
As of December 31, 2021 we have identified the following risks to credit quality: (i) increased COVID-19 exposure from acquired Boston Private loans, (ii) larger Growth Stage and Innovation C&I loan sizes, (iii) company valuation volatility and (iv) macroeconomic risks, particularly supply chain constraints and inflation.
75
(i) Increased COVID-19 exposure from acquired Boston Private loans - We acquired CRE loans from Boston Private that have a balance of $2.7 billion at December 31, 2021. CRE is generally more impacted by restrictions to reduce the spread of COVID-19 and Allowancetransitions to hybrid work environments. This risk is mitigated by the reserves held for Loan Lossesthis loan class and our limited overall exposure, with CRE representing only 4 percent of total loans at December 31, 2021.
(ii) Larger Growth Stage and Innovation C&I loan sizes - The size of individual loans to our Investor Dependent - Growth Stage and Innovation C&I clients has increased, which may introduce greater volatility to those portfolios' credit quality.
(iii) Company valuation volatility - Given the very choppy markets which are generally a precursor to private company valuations, we could see a pullback from the very high valuations that exist today.
(iv) Macroeconomic risks, particularly supply chain constraints and inflation - We see limited impact to each of these across the portfolio though the risk exists that one, or the combination of these, could post an issue for different segments.
Additionally, we have identified the following table presentsfactors that could have a summarypositive impact on credit quality: (i) recovering business activity, (ii) continued investor support and (iii) improved risk profile of loan portfolio.
(i) Recovering business activity - We continue to monitor our loan portfolio for the impact of the COVID-19 pandemic, especially the emergence of COVID-19 variants and continued spread. Our portfolio has limited direct exposure to the industries most severely impacted by the pandemic.
(ii) Continued investor support - We continue to see robust venture capital investment activity forand dry powder available in the allowance formarket.
(iii) Improved risk profile of loan portfolio - As described above, our Investor Dependent - Early Stage class, which historically has been the most vulnerable loan class with the most losses, asis now only 2 percent of total loans. Furthermore, over 70 percent of total loans are now in our Global Fund Banking and Private Bank classes, which have low credit loss experience.
We continue to monitor the current environment to evaluate the impact of the five most recent year-ends:above on our portfolio's credit quality and to identify the emergence of additional factors.
| 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 | ||||||||||
The following table summarizes the allocation of the allowanceACL for loans for our portfolio segments:
| December 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in millions) | ACL Amount | Percent of Total Loans (1) | ACL Amount | Percent of Total Loans (1) | ||||||||||||||||||||||
| Global fund banking | $ | 67 | 57.3 | % | $ | 46 | 56.5 | % | ||||||||||||||||||
| Investor dependent | 146 | 8.3 | 213 | 11.0 | ||||||||||||||||||||||
| Cash flow dependent and innovation C&I | 118 | 12.8 | 125 | 15.7 | ||||||||||||||||||||||
| Private bank | 33 | 13.2 | 53 | 10.9 | ||||||||||||||||||||||
| CRE | 36 | 4.0 | — | — | ||||||||||||||||||||||
| Other C&I | 14 | 1.9 | — | — | ||||||||||||||||||||||
| Premium wine and other | 8 | 2.0 | 9 | 2.4 | ||||||||||||||||||||||
| PPP | — | 0.5 | 2 | 3.5 | ||||||||||||||||||||||
| Total | $ | 422 | 100.0 | % | $ | 448 | 100.0 | % | ||||||||||||||||||
(1)Represents loan losses among specific classesbalances as a percentage of total loans at each respective year-end.
To determine the ACL for performing loans as of December 31, 2021 and 2020, we utilized three scenarios, on a weighted basis, from Moody's Analytics December 2021 and 2020 forecasts, respectively, in our expected lifetime loss estimate. The baseline scenario, which carries the five most recent year-ends:highest weighting of 40 percent in both periods, reflected an unemployment rate of 4.3 percent as of December 31, 2021, as a result of the ongoing economic stabilization seen in 2021, compared to 6.7 percent as of December 31, 2020. The baseline scenario also included a GDP growth rate of 6.8 percent and 4.0 percent as of December 31, 2021 and 2020, respectively, reflecting ongoing expected economic recovery as the impact of the COVID-19 pandemic continues to subside. As part of the 2021 model enhancement we added the housing price index as an input, which the baseline scenario reflected as 5.9 percent as of December 31, 2021, consistent with the imbalance between supply and demand in the housing market. In addition to the baseline, we also utilized a more favorable (Moody's
76
| 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 | % | |||||||||||||||
Gross Loan Charge-Offs
Gross loan charge-offs were $138 million for the year ended December 31, 2021, of which $113 million was not specifically reserved for in prior quarters. Gross loan charge-offs not previously reserved for were primarily driven by $80 million related to a single instance of fraudulent activity on one loan disclosed in previous filings. The remaining $33 million of gross loan charge-offs not previously reserved for came primarily from our Investor Dependent and Innovation C&I loan portfolios.
Gross loan charge-offs were $103 million for the year ended December 31, 2020, primarily driven by $89 million charge-offs for our Investor Dependent clients and $11 million charge-offs from our Cash Flow Dependent - SLBO portfolio. The remaining charge-offs came primarily from our Private bank and Premium Wine and Other portfolios.
Net Charge-offs to Average Loans Outstanding
The following table summarizes our net charge-offs to average outstanding loans by classes of financing receivables for the years ended December 31, 2021 and 2020:
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Net Charge-offs | Average Loan Balance | Percentage | Net Charge-offs | Average Loan Balance | Percentage | ||||||||||||||||||||||||||||||||
| Global fund banking (1) | $ | 80 | $ | 30,358 | 0.26 | % | $ | — | $ | 19,403 | — | % | ||||||||||||||||||||||||||
| Investor dependent: | ||||||||||||||||||||||||||||||||||||||
| Early stage | 28 | 2,131 | 1.31 | 25 | 1,570 | 1.59 | ||||||||||||||||||||||||||||||||
| Growth stage | — | 3,546 | — | 39 | 3,293 | 1.18 | ||||||||||||||||||||||||||||||||
| Total investor dependent | 28 | 5,677 | 0.49 | 64 | 4,863 | 1.32 | ||||||||||||||||||||||||||||||||
| Cash flow dependent- SLBO | 5 | 1,685 | 0.30 | — | 2,014 | — | ||||||||||||||||||||||||||||||||
| Innovation C&I | (3) | 6,600 | (0.05) | 8 | 4,200 | 0.19 | ||||||||||||||||||||||||||||||||
| Private bank | 3 | 6,704 | 0.04 | 2 | 4,260 | 0.05 | ||||||||||||||||||||||||||||||||
| CRE | — | 1,366 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Premium wine | — | 1,047 | — | — | 1,079 | — | ||||||||||||||||||||||||||||||||
| Other C&I | — | 628 | — | — | — | — | ||||||||||||||||||||||||||||||||
| Other | 1 | 155 | 0.65 | — | 112 | — | ||||||||||||||||||||||||||||||||
| PPP | — | 327 | — | — | 1,335 | — | ||||||||||||||||||||||||||||||||
| Total | $ | 114 | $ | 54,547 | 0.21 | % | $ | 74 | $ | 37,266 | 0.20 | % | ||||||||||||||||||||||||||
(1)Global fund banking net charge-offs for the year ended December 31, 2021 includes the impact of an $80 million charge-off related to fraudulent activity on one loan as disclosed in previous filings.
77
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”)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 allowanceACL for loan losses: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 millions) | 2021 | 2020 | ||||||||||||
| Nonperforming, past due, and restructured loans: | ||||||||||||||
| Nonaccrual loans | $ | 84 | $ | 104 | ||||||||||
| Loans past due 90 days or more still accruing interest | 7 | — | ||||||||||||
| Total nonperforming loans | 91 | 104 | ||||||||||||
| OREO and other foreclosed assets | 1 | 1 | ||||||||||||
| Total nonperforming assets | $ | 92 | $ | 105 | ||||||||||
| Performing TDRs | $ | 40 | $ | 5 | ||||||||||
| Nonaccrual loans as a percentage of total loans | 0.13 | % | 0.23 | % | ||||||||||
| Nonperforming loans as a percentage of total loans | 0.14 | 0.23 | ||||||||||||
| Nonperforming assets as a percentage of total assets | 0.04 | 0.09 | ||||||||||||
| ACL for loans (1) | $ | 422 | $ | 448 | ||||||||||
| As a percentage of total loans | 0.64 | % | 0.99 | % | ||||||||||
| As a percentage of total nonperforming loans | 463.74 | 429.54 | ||||||||||||
| ACL for nonaccrual loans (1) | $ | 35 | $ | 54 | ||||||||||
| As a percentage of total loans | 0.05 | % | 0.12 | % | ||||||||||
| As a percentage of total nonperforming loans | 38.46 | 51.83 | ||||||||||||
| ACL for total performing loans (1) | $ | 387 | $ | 394 | ||||||||||
| As a percentage of total loans | 0.58 | % | 0.87 | % | ||||||||||
| As a percentage of total performing loans | 0.58 | 0.87 | ||||||||||||
| Total loans | $ | 66,276 | $ | 45,181 | ||||||||||
| Total performing loans | 66,185 | 45,077 | ||||||||||||
| ACL for unfunded credit commitments (2) | 171 | 121 | ||||||||||||
| As a percentage of total unfunded credit commitments | 0.39 | % | 0.38 | % | ||||||||||
| Total unfunded credit commitments (3) | $ | 44,016 | $ | 31,982 | ||||||||||
(2)The “ACL 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. At December 31, 2016. The decrease was reflective2021, this includes an initial allowance of $2 million related to Boston Private commitments. See “Provision for Credit Losses” for a two basis point decrease indetailed discussion of the reserveschanges to the allowance.
(3)Includes unfunded loan commitments and letters of credit.
Our ACL for gross performing loans and a one basis point decrease in the reserves for nonaccrual loans.Our reserve percentage for performing loans as a percentage of total gross loans decreased 35 bps to 0.920.64 percent at December 31, 2017,2021, compared to 0.940.99 percent at December 31, 2016, reflective2020. The 35 bps decrease consists primarily of the continued shift in the mix ofa 29 bps decrease for our overall loan portfolio to our higher quality private equity/venture capital loan portfolio. Ourperforming loans reserve percentage for nonaccrual loans as a percentage of total gross loans decreasedand a 7 bps decrease for our nonaccrual individually assessed loans. The decreases were primarily driven by improved economic conditions and enhancements in our reserving model, which were partially offset by increases from organic loan growth and the acquisition of Boston Private. Much of our organic loan growth is driven by our Global Fund Banking portfolio, which historically has had very low loss rates. Should the growth in this lower risk portfolio persist, it will continue to 0.18 percentreduce the ratio of ACL to total loans.
Our performing loans reserve as a percentage of total loans includes 9 bps from the inclusion of Boston Private; nonaccrual reserves as a percentage of total loans includes less than one basis point from Boston Private. For a detailed discussion of changes in the current period's provision, including the impacts of the model enhancements and the Boston Private acquisition, see "Provision for Credit Losses."
78
Our ACL for performing loans was $387 million at December 31, 2017,2021, compared to 0.19 percent$394 million at December 31, 2016,2020. The $7 million decrease was driven primarily by the improved economic scenarios in our forecast models, reflective of the ongoing improvement of the economic outlooks as the impact of the COVID-19 pandemic begins to subside and enhancements to our reserving model, which was partially offset by growth in our loan portfolio. For a resultdetailed discussion of charge-offschanges in the current period's provision, including the impacts of previously reserved nonaccrual loans.the model enhancements and the Boston Private acquisition see "Provision for Credit Losses."
Nonaccrual Loans
| 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 | ||||||||||
The following table presents a summary of changes in nonaccrual loans for the years ended December 31, 20172021 and 2016:2020:
| Year ended December 31, | ||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||
| Balance, beginning of period (1) | $ | 104 | $ | 103 | ||||||||||
| Additions | 98 | 201 | ||||||||||||
| Paydowns and other reductions | (91) | (137) | ||||||||||||
| Charge-offs | (27) | (63) | ||||||||||||
| Balance, end of period | $ | 84 | $ | 104 | ||||||||||
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, 2021 and 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 loan balance decreased $20 million to $84 million at December 31, 2021, compared to $104 million at December 31, 2020. The decrease was driven by $27 million in charge-offs and $91 million in paydowns and other reductions, partially offset by $98 million in new nonaccrual loans. Charge-offs of nonaccrual loans aswere primarily driven by clients in our Investor Dependent - Early Stage loan class. Paydowns and other reductions were primarily driven by $22 million from one Investor Dependent - Growth Stage client, $17 million from one Premium Wine client, and $14 million from one CRE client. New nonaccrual loans were driven primarily by the acquisition of $31 million nonaccrual loans from Boston Private, $17 million from one Premium Wine client, and $12 million from two Private Bank clients. The remaining new nonaccrual loans were primarily driven by our Investor Dependent portfolio. As of December 31, 2017 included $89.4 million from five clients (three software/internet clients represented $58.8 million, one life science/healthcare client represented $19.2 million and one hardware client represented $11.4 million). Two of these loans are sponsored buyout loans that were added to our nonaccrual portfolio in 2015, another is a Corporate Finance client that was added during 2016 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 million, for which2021, we have specifically reserved $26.9 million.$35 million for our nonaccrual loans.
Average nonaccrual loans for the yearsyear ended December 31, 2017, 2016, 2015, 2014 and 20132021 were $123.8$105 million $108.7compared to $85 million $80.3 million, $24.5 million and $40.8 million, respectively.at December 31, 2020. The increase in average nonaccrual loans was attributable toprimarily driven by organic loan growth throughout the increase in nonaccrualyear and the acquisition of loans from our software/internet and hardware loan portfolios partially offset by a decreaseBoston Private in our life sciences/healthcare portfolio.the third quarter of 2021, while many paydowns occurred during the fourth quarter. If the nonaccrual loans for the years ended December 31, 2017, 2016, 2015, 20142021 and 20132020 had not been nonperforming, $7.7 million, $4.6 million, $4.5 million, $1.2$3 million and $3.5$2 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, 20172021 and 2016December 31, 2020 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 millions) | 2021 | 2020 | % Change | |||||||||||||||||
| Derivative assets (1) | $ | 565 | $ | 488 | 15.8 | % | ||||||||||||||
| Foreign exchange spot contract assets, gross | 119 | 2,108 | (94.4) | |||||||||||||||||
| AIR | 470 | 245 | 91.8 | |||||||||||||||||
| FHLB and FRB stock | 107 | 61 | 75.4 | |||||||||||||||||
| Net deferred tax assets | 24 | 1 | NM | |||||||||||||||||
| Accounts receivable | 54 | 37 | 45.9 | |||||||||||||||||
| Other assets | 589 | 266 | 121.4 | |||||||||||||||||
| Total AIR and other assets | $ | 1,928 | $ | 3,206 | (39.9) | |||||||||||||||
Foreign Exchange Spot Contract Assets
The increasedecrease of $156 million$2.0 billion in foreign exchange spot contract assets was primarily due to a higherdecrease in the number of unsettled clientspot trades with large notional balances at December 31, 20172021 as December 31, 2020 had several large unsettled spot trades at year-end.
Accrued interest receivable
The increase of $225 million in AIR was primarily due to increases in the period-end balances of our HTM investment securities portfolio and loans at December 31, 2021 as compared to December 31, 2016.2020.
Net Deferred Tax Assets
Net deferred tax assets incorporating the new federalincreased $23 million as our tax rate relatedposition changed from a payable to a receivable primarily due 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 were partially offset by decreasesdecrease in the fair value of our AFS securities and the adoption of fair value accounting on loans and debt securities and section 481(a) adjustments,for income tax purposes as well as ana result of the Boston Private acquisition.
Other Assets
Other assets includes various asset amounts for other operational transactions. The increase of $323 million was due primarily to $122 million increase in allowance for loan losses.current taxes receivable reflective of an overpayment of federal and state taxes, a $28 million increase in prepaid expenses, a $29 million increase in capitalized cloud computing costs reflective of investments in systems and technology to support our revenue growth and related initiatives and the acquisition of Boston Private which impacted several line items within other assets.
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, 20172021 and 2016: 2020:
| 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 | ||||
| December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| Equity warrant assets | $ | 277 | $ | 203 | 36.5 | % | ||||||||||||||
| Foreign exchange forward, swap and option contracts | 171 | 217 | (21.2) | |||||||||||||||||
| Client interest rate derivatives | 99 | 68 | 45.6 | |||||||||||||||||
| Interest rate swaps | 18 | — | — | |||||||||||||||||
| Total derivatives assets | $ | 565 | $ | 488 | 15.8 | |||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Foreign exchange forward, swap and option contracts | $ | 137 | $ | 210 | (34.8) | |||||||||||||||
| Client interest rate derivatives | 101 | 27 | NM | |||||||||||||||||
| Total derivatives liabilities | $ | 238 | $ | 237 | 0.4 | |||||||||||||||
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, 2017,2021, we held warrants in 1,8682,831 companies, compared to 1,7392,602 companies at December 31, 2016.2020. Warrants in 1447 companies each had values greater than $1.0$1 million and collectively represented $29.1$140 million, or 2450.5 percent, of the fair value of the total warrant portfolio. The change in fair value of equity warrant assets is recorded in gains"Gains on equity warrant assets, net,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, 20172021 and 2016:2020:
80
| Year ended December 31, | ||||||||||||||||||||||
| Year ended December 31, | ||||||||||||||||||||||
| (Dollars in thousands) | 2017 | 2016 | ||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | 2021 | 2020 | |||||||||||||||||||
| Balance, beginning of period | $ | 131,123 | $ | 137,105 | Balance, beginning of period | $ | 203 | $ | 165 | |||||||||||||
| New equity warrant assets | 15,201 | 13,420 | New equity warrant assets | 25 | 20 | |||||||||||||||||
| Non-cash increases in fair value | 10,702 | 9,710 | Non-cash increases in fair value | 116 | 60 | |||||||||||||||||
| Exercised equity warrant assets | (28,841 | ) | (26,097 | ) | Exercised equity warrant assets | (65) | (40) | |||||||||||||||
| Terminated equity warrant assets | (4,422 | ) | (3,015 | ) | Terminated equity warrant assets | (2) | (2) | |||||||||||||||
| Balance, end of period | $ | 123,763 | $ | 131,123 | Balance, end of period | $ | 277 | $ | 203 | |||||||||||||
Foreign Exchange Forward and Foreign Currency Option Contracts
We enter into foreign exchange forward and swap contracts and foreign currency option contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients' need.needs. For each forward, swap or option contract entered into with our clients, we enter into an opposite way forward, swap 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 swaps and foreign currency option contracts, net of cash collateral, was zero at December 31, 20172021 and $0.8$31 million at December 31, 2016.2020. For additional information on our foreign exchange forward contracts and swap and foreign currency option contracts, see Note 13—16—“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$47 million at December 31, 2016.2021 and $67 million at December 31, 2020. For additional information on our client interest rate derivatives, refer to Note 13—16—“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 AFS securities portfolio, we enter into pay-fixed, receive-floating interest rate swap contracts to hedge against exposure to changes in the fair value of the securities resulting from changes in interest rates. We designate these interest rate swap contracts as fair value 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 was $5 million at December 31, 2021. We had zero net exposure for interest rate swaps at December 31, 2020. Refer to Note 16—“Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report for additional information.
Deposits
The following table presents the composition of our deposits as of December 31, 2017, 20162021 and 2015:2020:
| December 31, | ||||||||||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | 2021 | 2020 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand | $ | 36,655,497 | $ | 31,975,457 | $ | 30,867,497 | Noninterest-bearing demand | $ | 125,851 | $ | 66,519 | |||||||||||||||||||||
| Interest bearing checking and savings accounts | 556,121 | 375,710 | 330,525 | |||||||||||||||||||||||||||||
| Interest-bearing checking and savings accounts | Interest-bearing checking and savings accounts | 5,106 | 4,801 | |||||||||||||||||||||||||||||
| Money market | 5,975,220 | 5,331,054 | 6,128,442 | Money market | 54,842 | 28,406 | ||||||||||||||||||||||||||
| Money market deposits in foreign offices | 111,201 | 107,657 | 88,656 | Money market deposits in foreign offices | 696 | 617 | ||||||||||||||||||||||||||
| Sweep deposits in foreign offices | 908,890 | 1,133,872 | 1,657,177 | Sweep deposits in foreign offices | 969 | 951 | ||||||||||||||||||||||||||
| Time | 47,146 | 56,118 | 70,479 | Time | 1,739 | 688 | ||||||||||||||||||||||||||
| Total deposits | $ | 44,254,075 | $ | 38,979,868 | $ | 39,142,776 | Total deposits | $ | 189,203 | $ | 101,982 | |||||||||||||||||||||
The increase in deposits of $5.3$87.2 billion in 20172021 was driven primarily by increasesgrowth across all portfolios with the primary contributor coming from our Technology and healthcare portfolio driven by exits in our noninterest-bearing demandthe first half of 2021 and money market deposits with growth in ourstrong private equity/venture capital and China market segment portfolios.fundraising throughout 2021 . The Boston Private acquisition contributed $8.9 billion of deposit growth. 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
81
At December 31, 2017, 172021, 33 percent of our total deposits were interest-bearing deposits, compared to 1835 percent at December 31, 2016 and 21 percent at December 31, 2015.2020.
Uninsured Deposits in U.S. Offices
At December 31, 2017,2021 and 2020, the aggregate balanceamount of time deposit accounts individually equal to or greater than $100,000 totaled $41 million, compared to $61 million atestimated uninsured deposits in U.S. offices that exceed the FDIC insurance limit were $166.0 billion and $88.6 billion, respectively. At December 31, 20162021 and $116 million at December 31, 2015. At December 31, 2017, all time2020, foreign deposits of $16.1 billion and $8.4 billion, respectively, were not subject to any U.S. federal or state deposit accounts individually equal to or greater than $100,000 were scheduled to mature within one year. insurance regime. The amounts disclosed above are derived using the same methodologies and assumptions used for regulatory reporting requirements.
Time Deposits
The maturity profile of our time deposits as of December 31, 20172021 is as follows:
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Three months or less | More than three months to six months | More than six months to twelve months | More than twelve months | Total | |||||||||||||||||||||||||||
| U.S. time deposits in excess of the FDIC insured amount | $ | 53 | $ | 54 | $ | 85 | $ | 16 | $ | 208 | ||||||||||||||||||||||
| Non-U.S. time deposits in excess of insured amount | 1,048 | 286 | 18 | — | 1,352 | |||||||||||||||||||||||||||
| Remaining time deposits | 69 | 51 | 51 | 8 | 179 | |||||||||||||||||||||||||||
| Total time deposits | $ | 1,170 | $ | 391 | $ | 154 | $ | 24 | $ | 1,739 | ||||||||||||||||||||||
| 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, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (Dollars in millions) | Amount | Rate | Amount | Rate | ||||||||||||||||||||||
| Securities sold under agreement to repurchase | $ | 61 | 0.05 | % | $ | — | — | % | ||||||||||||||||||
| Other short-term borrowings | 60 | 0.07 | 21 | 0.08 | ||||||||||||||||||||||
| Total short-term borrowings | $ | 121 | 0.06 | $ | 21 | 0.08 | ||||||||||||||||||||
| 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 | ||||||||||||
| 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 | |||||||||
| 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 | ||||||||
82
Average daily balances for our short-term borrowings in 2021, 2020 and 2019 were as follows:
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Average daily balances: | ||||||||||||||||||||
| Short-term FHLB advances | $ | — | $ | 296 | $ | 64 | ||||||||||||||
| Federal Funds purchased (1) | 1 | 13 | 25 | |||||||||||||||||
| Securities sold under agreements to repurchase | 41 | 65 | 37 | |||||||||||||||||
| Other short-term borrowings (2) | 32 | 27 | 19 | |||||||||||||||||
| Total average short-term borrowings | $ | 74 | $ | 401 | $ | 145 | ||||||||||||||
| Weighted average interest rate during the year: | ||||||||||||||||||||
| Short-term FHLB advances | — | % | 0.62 | % | 2.57 | % | ||||||||||||||
| Federal Funds purchased | 0.13 | 0.73 | 2.45 | |||||||||||||||||
| Securities sold under agreements to repurchase | 0.05 | 1.74 | 2.65 | |||||||||||||||||
| Other short-term borrowings | 0.30 | 0.28 | 1.92 | |||||||||||||||||
(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, 2021 and 2020:
| Principal value at December 31, 2021 | December 31, | |||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | ||||||||||||||||||||||||
| 3.50% Senior Notes due 2025 | $ | 350 | $ | 349 | $ | 349 | ||||||||||||||||||||
| 3.125% Senior Notes due 2030 | 500 | 496 | 495 | |||||||||||||||||||||||
| 1.800% Senior Notes due 2031 | 500 | 494 | — | |||||||||||||||||||||||
| 2.100% Senior Notes due 2028 | 500 | 496 | — | |||||||||||||||||||||||
| 1.800% Senior Notes due 2026 | 650 | 645 | — | |||||||||||||||||||||||
| Junior subordinated debentures | 100 | 90 | — | |||||||||||||||||||||||
| Total long-term debt | $ | 2,600 | $ | 2,570 | $ | 844 | ||||||||||||||||||||
As of December 31, 2021, long-term debt was comprised of our 3.50% Senior Notes issueddue 2025, 3.125% Senior Notes due 2030, 1.800% Senior Notes due 2031, 2.100% Senior Notes due 2028, 1.800% Senior Notes due 2026 and junior subordinated debentures. The increase was driven by issuances of senior notes during the Bank, were repaid on June 1, 2017. The interest rate swap agreement relating to this issuance was terminated upon repaymentfirst, second and fourth quarters of 2021 and the assumption of junior subordinated debentures as part of the notes.Boston Private acquisition. For more information on our long-term debt outstanding at December 31, 2021, refer to Note 15—“Short-Term Borrowings and Long-Term Debt” of the “Notes to the Consolidated Financial Statements” under Part II, Item 8 of this report.
83
Table 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.Contents
Other Liabilities
A summary of other liabilities at December 31, 20172021 and 20162020 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 millions) | 2021 | 2020 | % Change | |||||||||||||||||
| Foreign exchange spot contract liabilities, gross | $ | 160 | $ | 2,165 | (92.6) | % | ||||||||||||||
| Accrued compensation | 896 | 545 | 64.4 | |||||||||||||||||
| Derivative liabilities (1) | 238 | 237 | 0.4 | |||||||||||||||||
| Allowance for unfunded credit commitments | 171 | 121 | 41.3 | |||||||||||||||||
| Net deferred tax liabilities | — | 173 | (100.0) | |||||||||||||||||
| Other liabilities | 1,122 | 731 | 53.5 | |||||||||||||||||
| Total other liabilities | $ | 2,587 | $ | 3,972 | (34.9) | |||||||||||||||
(1)See “Derivatives” section above. |
Foreign Exchange Spot Contract Liabilities
Foreign exchange spot contract liabilities represent unsettled client trades at the end of the period. The increasedecrease of $134.8 million$2.0 billion in foreign exchange spot contract liabilities was primarily due to a higherdecrease in the number of unsettled clientspot trades with large notional balances at December 31, 20172021 as compared to December 31, 2016.2020 had several large unsettled spot trades at year-end.
Accrued Compensation
Accrued compensation includes amounts for our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, ESOP, SVB Securities Incentive Compensation Plan, SVB Securities Retention Award and other compensation arrangements. The increase of $31.7$351 million was driven primarily theby an increase in accrued incentive pay as a result of larger incentive compensation accruals at December 31, 2017 based on our strong 2021 full-year financial performance for 2017.and an increase in the number of average FTEs in 2021. 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
Net Deferred Tax Liabilities
Net deferred tax liabilities decreased$173 million as our tax position changed to a net deferred tax asset position of $24 million due primarily to the decrease in the fair value of our AFS securities and the adoption of fair value accounting on loans and debt securities for income tax purposes as a result of the Boston Private acquisition.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $391 million was driven primarily by $60 million of unsettled fixed income investment securities purchases and a $112 million increase in investments payable related to investments in qualified affordable housing projects.
Noncontrolling Interests
Noncontrolling interests totaled $373 million and $213 million at December 31, 2017, compared to $45.3 million at2021 and December 31, 2016. The increase in the reserves was driven by the increase in unfunded credit commitments.
84
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.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $4.2$16.2 billion at December 31, 2017,2021, an increase of $537 million,$8.0 billion, or 14.797.5 percent, compared to $3.6$8.2 billion at December 31, 2016. This2020. The increase was driven primarily the result of net income of $491 million in 2017 and an increase in additional paid-in capital of $72 million reflective of amortization of share-based compensation and theby a $3.4 billion issuance of common stock, under our equity incentive plans. These increases wereof which $1.1 billion was issued to complete the acquisition of Boston Private, $3.3 billion issuance of preferred stock and $1.8 billion of net income, offset partially offsetby the decrease in AOCI of $632 million. The decrease in AOCI was driven primarily by a $47$644 million (or $465 million net of tax) decrease in the fair value of our AFS securities portfolio ($28 million netreflective of tax). The net decreaseincreases 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.rates.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Common Stock
On March 22, 2021, to support the continued growth of our balance sheet, we issued and sold 2,000,000 shares of common stock at a price of $500.00 per share. We received net proceeds of $972 million after deducting underwriting discounts and commissions. On April 14, 2021, we issued and sold an additional 300,000 shares of common stock under the full exercise of the underwriter's over-allotment option resulting in additional net proceeds of approximately $146 million after deducting discounts and commissions. On July 1, 2021, we issued 1,887,981 shares of common stock for the acquisition of Boston Private at an exchange ratio of 0.0228 SIVB shares per Boston Private share totaling $1.1 billion. On August 12, 2021, we issued and sold an additional 2,227,000 shares of common stock at an offering price of $564.00 per share, which resulted in net proceeds of $1.2 billion.
Preferred Stock
On February 2, 2021, SVB Financial Group issued 750,000 depositary shares each representing a 1/100th ownership interest in a share of 4.10% Non-Cumulative Perpetual Series B Preferred Stock (''Series B Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series B Preferred Stock is perpetual and has no stated maturity. Dividends are approved by the Board of Directors and, if declared, 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. As of December 31, 2021, our Series B Preferred Stock had a carrying value of $739 million and a liquidation preference of $750 million.
On May 13, 2021, SVB Financial Group issued 1,000,000 depositary shares each representing a 1/100th ownership interest in a share of 4.00% Non-Cumulative Perpetual Series C Preferred Stock (''Series C Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series C Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.000 percent from the original issue date to, but excluding, May 15, 2026, and (ii) for the May 15, 2026 dividend date and during each subsequent five year period, the five-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 five-year maturities) plus 3.202 percent. As of December 31, 2021, our Series C Preferred Stock had a carrying value of $985 million and a liquidation preference of $1.0 billion.
On October 28, 2021, SVB Financial Group issued 1,000,000 depositary shares each representing a 1/100th ownership interest in a share of 4.25% Non-Cumulative Perpetual Series D Preferred Stock (''Series D Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series D Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in
85
arrears, at a rate per annum equal to (i) 4.250 percent from the original issue date to, but excluding, November 15, 2026, and (ii) for the November 15, 2026 dividend date and during each subsequent five year period, the five-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 five-year maturities) plus 3.074 percent. As of December 31, 2021, our Series D Preferred Stock had a carrying value of $989 million and a liquidation preference of $1.0 billion.
On October 28, 2021, SVB Financial Group also issued 600,000 depositary shares each representing a 1/100th ownership interest in a share of 4.70% Series E Preferred Stock ("Series E Preferred Stock”) with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series E Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.700 percent from the original issue date to, but excluding, November 15, 2031, and (ii) for the November 15, 2031 dividend date and during each subsequent ten years 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 five-year maturities) plus 3.064 percent. As of December 31, 2021, our Series E Preferred Stock had a carrying value of $593 million and a liquidation preference of $600 million.
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 as defined under the Federal Reserve’s Regulation Y, respectively, as of December 31, 2017, 20162021, and 2015.2020. 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 | Required Minimum + Capital Conservation Buffer (1) | Well Capitalized Minimum | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| SVB Financial: | ||||||||||||||||||||||||||||||||||||||
| CET1 risk-based capital ratio (2) (3) | 12.09 | % | 11.04 | % | 4.5 | % | 7.0 | % | N/A | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (3) | 16.08 | 11.89 | 6.0 | 8.5 | 6.0 | |||||||||||||||||||||||||||||||||
| Total risk-based capital ratio (3) | 16.58 | 12.64 | 8.0 | 10.5 | 10.0 | |||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (2) (3) | 7.93 | 7.45 | 4.0 | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to tangible assets ratio (4)(5) | 5.73 | 6.66 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to risk-weighted assets ratio (4)(5) | 11.98 | 11.87 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank: | ||||||||||||||||||||||||||||||||||||||
| CET1 risk-based capital ratio (3) | 14.89 | % | 10.70 | % | 4.5 | % | 7.0 | % | 6.5 | % | ||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (3) | 14.89 | 10.70 | 6.0 | 8.5 | 8.0 | |||||||||||||||||||||||||||||||||
| Total risk-based capital ratio (3) | 15.40 | 11.49 | 8.0 | 10.5 | 10.0 | |||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (3) | 7.24 | 6.43 | 4.0 | N/A | 5.0 | |||||||||||||||||||||||||||||||||
| Tangible common equity to tangible assets ratio (4)(5) | 7.09 | 6.24 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to risk-weighted assets ratio (4)(5) | 15.06 | 11.58 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
(3)Capital ratios include regulatory capital phase-in of the ACL 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.
Our risk-based capital ratios, tier 1 capital ratios and leverage ratios increased for both SVB Financial and theSilicon Valley Bank decreased as of December 31, 2017, as2021, compared to December 31, 2016.2020. The decreases were a result of the proportionally higher increase in capital ratios was driven primarily by increases in our capital, partially offset by increases in our risk-weighted assets compared toand average assets. The increase in capital for SVB Financial was driven by the increasesissuance of common and preferred stock and net income. The increase in capital for Silicon Valley Bank was driven by a $5.8 billion downstream capital infusion from our bank holding company during the year ended
86
December 31, 2017.2021. 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-endwas driven by increases in our fixed income investments and loan and investment growth relative to the increase in tier 1 capital, primarily from retained earnings.portfolios. All of our reported capital ratios wereremain above the levels considered to be “well capitalized” as of December 31, 2017 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, thisthese financial measuremeasures 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 millions, except ratios) | SVB Financial | |||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
| GAAP SVBFG stockholders’ equity | $ | 16,236 | $ | 8,220 | $ | 6,470 | $ | 5,116 | $ | 4,180 | ||||||||||||||||||||||
| Less: preferred stock | 3,646 | 340 | 340 | — | — | |||||||||||||||||||||||||||
| Less: intangible assets | 535 | 204 | 187 | — | — | |||||||||||||||||||||||||||
| Plus: net deferred taxes on intangible assets | 26 | — | — | — | — | |||||||||||||||||||||||||||
| Tangible common equity | $ | 12,081 | $ | 7,676 | $ | 5,943 | $ | 5,116 | $ | 4,180 | ||||||||||||||||||||||
| GAAP total assets | $ | 211,478 | $ | 115,511 | $ | 71,005 | $ | 56,928 | $ | 51,214 | ||||||||||||||||||||||
| Less: intangible assets | 535 | 204 | 187 | — | — | |||||||||||||||||||||||||||
| Plus: net deferred taxes on intangible assets | 26 | — | — | — | — | |||||||||||||||||||||||||||
| Tangible assets | $ | 210,969 | $ | 115,307 | $ | 70,818 | $ | 56,928 | $ | 51,214 | ||||||||||||||||||||||
| Risk-weighted assets | $ | 100,812 | $ | 64,681 | $ | 46,577 | $ | 38,528 | $ | 32,737 | ||||||||||||||||||||||
| Non-GAAP tangible common equity to tangible assets | 5.73 | % | 6.66 | % | 8.39 | % | 8.99 | % | 8.16 | % | ||||||||||||||||||||||
| Non-GAAP tangible common equity to risk-weighted assets | 11.98 | 11.87 | 12.76 | 13.28 | 12.77 | |||||||||||||||||||||||||||
Non-GAAP tangible common equity and tangible assets (Dollars in thousands, except ratios) | SVB Financial | |||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP SVBFG stockholders’ equity | $ | 4,179,795 | $ | 3,642,554 | $ | 3,198,134 | $ | 2,813,072 | $ | 1,961,635 | ||||||||||||||||||||||||||||||||||||||||||
| Non-GAAP tangible common equity and tangible assets (Dollars in millions, except ratios) | Non-GAAP tangible common equity and tangible assets (Dollars in millions, except ratios) | Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Tangible common equity | $ | 4,179,795 | $ | 3,642,554 | $ | 3,198,134 | $ | 2,813,072 | $ | 1,961,635 | Tangible common equity | $ | 14,795 | $ | 7,069 | $ | 5,034 | $ | 4,555 | $ | 3,763 | |||||||||||||||||||||||||||||||
| 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 | $ | 208,576 | $ | 113,303 | $ | 69,564 | $ | 56,047 | $ | 50,384 | |||||||||||||||||||||||||||||||
| Risk-weighted assets | $ | 32,736,959 | $ | 28,248,750 | $ | 25,919,594 | $ | 21,755,091 | $ | 16,901,501 | Risk-weighted assets | $ | 98,214 | $ | 61,023 | $ | 44,502 | $ | 37,104 | $ | 31,403 | |||||||||||||||||||||||||||||||
| 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 | 7.09 | % | 6.24 | % | 7.24 | % | 8.13 | % | 7.47 | % | |||||||||||||||||||||||||||||||
| 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 | 15.06 | 11.58 | 11.31 | 12.28 | 11.98 | |||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||
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.
87
The following table summarizes our unfunded commercial commitments as of December 31, 2017:2021:
| Amount of Commitments Expiring per Period | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amount of commitment expiring per period | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial commitments: | Commercial commitments: | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loan commitments available for funding | $ | 15,512,326 | $ | 11,583,641 | $ | 2,882,181 | $ | 782,180 | $ | 264,324 | ||||||||||||||||||||||||||||||||||||||||||
| Loan commitments available for funding | Loan commitments available for funding | $ | 40,327 | $ | 27,302 | $ | 7,288 | $ | 3,989 | $ | 1,748 | |||||||||||||||||||||||||||||||||||||||||
| Standby letters of credit | 1,932,300 | 1,860,376 | 55,174 | 16,309 | 441 | Standby letters of credit | 3,612 | 3,492 | 89 | 18 | 13 | |||||||||||||||||||||||||||||||||||||||||
| Commercial letters of credit | 17,911 | 17,911 | — | — | — | Commercial letters of credit | 77 | 40 | 37 | — | — | |||||||||||||||||||||||||||||||||||||||||
| Total unfunded credit commitments | Total unfunded credit commitments | $ | 44,016 | $ | 30,834 | $ | 7,414 | $ | 4,007 | $ | 1,761 | |||||||||||||||||||||||||||||||||||||||||
The following table summarizes our contractual obligations to make future payments as of December 31, 2017:2021:
| 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 millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||||||||||||||
| SVBFG contractual obligations: | ||||||||||||||||||||||||||||||||
| Deposits (1) (2) | $ | 189,203 | $ | 189,203 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Borrowings (2) | 2,691 | 121 | 349 | 645 | 1,576 | |||||||||||||||||||||||||||
| Non-cancelable operating leases | 416 | 77 | 139 | 88 | 112 | |||||||||||||||||||||||||||
| Commitments to qualified affordable housing projects | 482 | 173 | 271 | 14 | 24 | |||||||||||||||||||||||||||
| Total obligations attributable to SVBFG | $ | 192,792 | $ | 189,574 | $ | 759 | $ | 747 | $ | 1,712 | ||||||||||||||||||||||
(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 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$3.0 million of remaining unfunded commitments to venture capital and private equity funds. See Note 8—9—“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.
88
Historically, client deposits have 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. We may also offer more investment alternatives for our off-balance sheet products which may impact deposit levels. At December 31, 2017,2021, our period-end total deposit balances increased to $44.3$189.2 billion,, compared to $39.0$102.0 billion at December 31, 2016.2020.
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, 2021, 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 $7.3 billion, of which $2.7$6.3 billion was unused and available to support additional borrowings. The fair valueAs of December 31, 2021, 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 $0.8 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 $2.1 billion at December 31, 2021. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $5.5 billion at December 31, 2021.
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, 20162021 and 2015,2020, 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 millions) | 2021 | 2020 | ||||||||||||||||||
| Average cash and cash equivalents | $ | 23,041 | $ | 13,273 | ||||||||||||||||
| Percentage of total average assets | 13.9 | % | 15.5 | % | ||||||||||||||||
| Net cash provided by operating activities | $ | 1,812 | $ | 1,446 | ||||||||||||||||
| Net cash used for investing activities | (90,336) | (31,206) | ||||||||||||||||||
| Net cash provided by financing activities | 85,468 | 40,653 | ||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (3,056) | $ | 10,893 | ||||||||||||||||
| 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$23.0 billion in 2017,2021, compared to $2.9$13.3 billion for 2016. In 2017, our average2020. Average deposits increased $4.0 billion and our fixed income securities portfolio increased $0.9$72.9 billion which enabled us to grow our average loan portfolio by $2.9$17.3 billion in 2017.2021.
Cash provided by operating activities of $580 million$1.8 billion in 20172021 included net income before noncontrolling interests of $519 million. These net inflows also benefited from $16 million of adjustments to reconcile net income to net cash and $45$2.1 billion partially offset by $254 million from changes in other assets and liabilities.
Cash used for investing activities of $6.5$90.3 billion in 2015 included $7.52021 was driven by $97.7 billion forin purchases of fixed income investment securities and $2.3a $13.7 billion from the net increase in loans funded. These cash outflows wereloan balances, partially offset by $3.2$19.8 billion in proceeds from sales, maturities and paydowns ofprincipal pay downs from our fixed income investment securities portfolio.portfolio and $1.1 billion in proceeds from the acquisition of Boston Private.
Cash provided by financing activities of $5.8$85.5 billion in 2015 included2021 reflective primarily of a $4.7$78.2 billion increase in deposits, a $767 million$5.7 billion in capital raised by our preferred and common stock issuances, and $1.6 billion increase in short-term borrowings and $346 million from the issuance of our 3.50% Senior Notes in January 2015.long-term debt.
89
Cash and cash equivalents at December 31, 20152021 were $1.5$14.6 billion, compared to $1.8$17.7 billion at December 31, 2014.2020.
December 31, 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 $495 million 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.
90
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.
We utilize a simulation model to perform sensitivity analysis on the economic value of our equityEVE 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. 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”)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. Although we ceased offering LIBOR-based loans as of December 31, 2021, our simulation results will reflect changes in LIBOR rates until publication rates are fully phased out. 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 weighteduse 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.
Simulation results presented include a beta assumption that is applied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations about deposit repricing behavior. This model assumes the overall beta on interest bearingfor interest-bearing deposits is approximately 35.0 percent, which means60 percent. That is, overall changes in interest-bearing deposit repricing is assumed torates would be approximately 35.060 percent of a giventhe change in short-term interestmarket rates. ThisThese repricing isassumptions are reflected as a changechanges in interest expense on interest bearinginterest-bearing deposit balances.
91
The acquisition of Boston Private was completed in July 2021. The acquisition added approximately $10 billion of total assets and $9 billion of deposits to the year ended December 31, 2017, our results include two key modeling assumption changes relating to our non-maturity depositsbalance sheet. Most of the assets added were fixed and prepayments on outstandingvariable rate residential mortgages and commercial loans. The impact was seen primarily in ourBoth the EVE and NII sensitivity profile and, to a lesser degree, on our NII 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")bps at December 31, 20172021 and at December 31, 2016 (as revised based on the assumption changes noted above):2020.
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 millions) | Change in interest rates (bps) (Dollars in millions) | Estimated | Estimated Increase/(Decrease) In EVE | Estimated | Estimated Increase/ (Decrease) In NII | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EVE | Amount | Percent | NII | Amount | Percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021: | December 31, 2021: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| +200 | $ | 8,091,107 | $ | 805,624 | 11.1 | % | $ | 1,885,885 | $ | 400,127 | 26.9 | % | +200 | $ | 14,950 | $ | (5,722) | (27.7) | % | $ | 5,258 | $ | 981 | 22.9 | % | |||||||||||||||||||||||||||||||||||
| +100 | 7,716,066 | 430,583 | 5.9 | 1,683,742 | 197,984 | 13.3 | +100 | 17,799 | (2,873) | (13.9) | 4,745 | 468 | 10.9 | |||||||||||||||||||||||||||||||||||||||||||||||
| — | 7,285,483 | — | — | 1,485,758 | — | — | — | 20,672 | — | — | 4,277 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| -100 | 6,637,588 | (647,895 | ) | (8.9 | ) | 1,252,063 | (233,695 | ) | (15.7 | ) | -100 | 21,904 | 1,232 | 6.0 | 4,002 | (275) | (6.4) | |||||||||||||||||||||||||||||||||||||||||||
| -200 | 5,718,401 | (1,567,082 | ) | (21.5 | ) | 1,108,712 | (377,046 | ) | (25.4 | ) | -200 | 21,308 | 636 | 3.1 | 3,911 | (366) | (8.6) | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2016: (As revised) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020: | December 31, 2020: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| +200 | $ | 7,601,404 | $ | 1,129,823 | 17.5 | % | $ | 1,543,247 | $ | 365,734 | 31.1 | % | +200 | $ | 9,500 | $ | (1,724) | (15.4) | % | $ | 3,063 | $ | 691 | 29.1 | % | |||||||||||||||||||||||||||||||||||
| +100 | 7,073,407 | 601,826 | 9.3 | 1,360,356 | 182,843 | 15.5 | +100 | 10,558 | (666) | (5.9) | 2,729 | 357 | 15.1 | |||||||||||||||||||||||||||||||||||||||||||||||
| — | 6,471,581 | — | — | 1,177,513 | — | — | — | 11,224 | — | — | 2,372 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| -100 | 5,765,799 | (705,782 | ) | (10.9 | ) | 1,075,353 | (102,160 | ) | (8.7 | ) | -100 | 11,582 | 358 | 3.2 | 2,310 | (62) | (2.6) | |||||||||||||||||||||||||||||||||||||||||||
| -200 | 4,860,540 | (1,611,041 | ) | (24.9 | ) | 1,039,903 | (137,610 | ) | (11.7 | ) | -200 | 11,534 | 310 | 2.8 | 2,306 | (66) | (2.8) | |||||||||||||||||||||||||||||||||||||||||||
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, 20172021 increased $9.5 billion from December 31, 20162020, driven by $0.8 billion, driven primarily by the change in ouroverall balance sheet composition. Rising interest rates also impacted this measure, to a lesser extent. Atgrowth as well as yield curve steepening during the first half of 2021. For the period ended December 31, 2017, as2021, compared to December 31, 2016, total2020, cash balances decreased by $3.1 billion, fixed income investments in our AFS portfolio decreased by $3.7 billion, while HTM portfolio balances increased by $81.6 billion and loan balances increased by $3.2$21.1 billion. Funding for these assets came primarily from growth of $87.2 billion primarily in variable-rate loans. Total fixed income securities also increased by $2.7total deposits, which consisted of a $59.3 billion dueand $27.9 billion increase in non-interest bearing and interest bearing accounts, respectively. The mix of non-interest bearing 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 slightly by $5.3 billion.
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 investment 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.
In March 2021 we purchased interest rate swaps to offset some of the +100additional EVE sensitivity that has resulted from rapid balance sheet growth. As of December 31, 2021, the estimated change in EVE in an up to 100 bps rate shock scenario. EVE sensitivitywould be
92
-15.4 percent without any hedging applied. The addition of pay fixed swaps reduces this exposure to -13.9 percent in the -100 and -200 bps rate shock scenarios increased $58 million and $44 million, respectively.same scenario. The EVE exposures shown in the table above include the impact of our hedging activity.
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 31,2021, NII sensitivity was 10.9 percent in the +100 bps interest rate scenario, compared to 15.1 percent at December 31, 2020. Our estimatedNII sensitivity in the +200 bps interest rate shock scenario was 22.9 percent compared to 29.2 percent at December 31, 2020. NII sensitivity in the -100 bps scenario of negative 6.4 percent was higher at December 31, 2021, compared to a negative 2.6 percent at December 31, 2020. The -200 bps scenario currently indicates a higher percentage change in NII of negative 8.6 percent at December 31, 2021, compared to negative 2.8 percent at December 31, 2020. 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, 2021 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 as well as unrealized income associated with more recent hedging activity that has been undertaken to reduce EVE exposure. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition described previously, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at December 31, 20172021 increased fromcompared to December 31, 20162020 by $308 million,$1.9 billion, driven primarily due toby the changegrowth in the balance sheet composition previously notedthat has taken place year-to-date. Specifically, a large portion of asset growth has been deployed in the EVE sectionfixed income investment securities portfolio as noted above. As of December 31, 2021, we also held a relatively high cash position which is expected to decrease as excess funds are invested.
A larger portionmajority of higher-yielding,our loans are indexed to Prime and LIBOR. Despite no longer offering LIBOR-based loans as of December 31, 2021, we have begun offering loans based on SOFR and other recognized alternative reference rates. Additionally, despite no longer offering new LIBOR-based loans, our simulation result will reflect changes in LIBOR until the published rates are phased out. In the upward 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 downward rate shock scenarios.
For the amount of simulated changes in short-term market interest rates.
93
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Page Number | |||||
Report of Independent Registered Public Accounting Firm (Auditor Firm ID: 185) | |||||
94
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, 20172021 and 2016, and2020, 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, 2017,2021, 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, 2017,2021, 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, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2021, 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, 2017,2021 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Boston Private Financial Holdings, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Boston Private Financial Holdings, Inc’s internal control over financial reporting associated with approximately 2% of total consolidated revenue and approximately 4% of total consolidated assets included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Boston Private Financial Holdings, Inc.
Change in Accounting Principle
As discussed in Notes 2 and 10 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’sManagement'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”)(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
95
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 for certain portfolio segments evaluated on a collective basis
As discussed in Notes 2 and 10 of the consolidated financial statements, the Company’s allowance for credit losses for loans (ALL) and unfunded credit commitments (AUCC) were $422 million and $171 million as of December 31, 2021, 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, 2021 collective ALL and collective AULC for the Global Funds Banking, Investor Dependent, Cash Flow Dependent & Innovation C&I, Premium Wine, and legacy Private Bank portfolio segments 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, 2021 collective ALL and collective AULC estimates, including controls over the:
•periodic review and monitoring of the collective ALL and the collective AULC methodology
96
•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, 2021 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 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, 2021 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
97
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||||||
| (Dollars in millions, except par value and share data) | 2021 | 2020 | ||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 14,619 | $ | 17,675 | ||||||||||
| Available-for-sale securities, at fair value (cost of $27,370 and $30,245, respectively) | 27,221 | 30,913 | ||||||||||||
| Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $7 and $0 (fair value of $97,227 and $17,217, respectively) | 98,195 | 16,592 | ||||||||||||
| Non-marketable and other equity securities | 2,543 | 1,802 | ||||||||||||
| Total investment securities | 127,959 | 49,307 | ||||||||||||
| Loans, amortized cost | 66,276 | 45,181 | ||||||||||||
| Allowance for credit losses: loans | (422) | (448) | ||||||||||||
| Net loans | 65,854 | 44,733 | ||||||||||||
| Premises and equipment, net of accumulated depreciation and amortization | 270 | 176 | ||||||||||||
| Goodwill | 375 | 143 | ||||||||||||
| Other intangible assets, net | 160 | 61 | ||||||||||||
| Lease right-of-use assets | 313 | 210 | ||||||||||||
| Accrued interest receivable and other assets | 1,928 | 3,206 | ||||||||||||
| Total assets | $ | 211,478 | $ | 115,511 | ||||||||||
| Liabilities and total equity | ||||||||||||||
| Liabilities: | ||||||||||||||
| Noninterest-bearing demand deposits | $ | 125,851 | $ | 66,519 | ||||||||||
| Interest-bearing deposits | 63,352 | 35,463 | ||||||||||||
| Total deposits | 189,203 | 101,982 | ||||||||||||
| Short-term borrowings | 121 | 21 | ||||||||||||
| Lease liabilities | 388 | 259 | ||||||||||||
| Other liabilities | 2,587 | 3,972 | ||||||||||||
| Long-term debt | 2,570 | 844 | ||||||||||||
| Total liabilities | 194,869 | 107,078 | ||||||||||||
| Commitments and contingencies (Note 21 and Note 26) | 0 | 0 | ||||||||||||
| SVBFG stockholders’ equity: | ||||||||||||||
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; 383,500 and 350,000 shares issued and outstanding, respectively | 3,646 | 340 | ||||||||||||
| Common stock, $0.001 par value, 150,000,000 shares authorized; 58,748,469 and 51,888,463 shares issued and outstanding, respectively | — | — | ||||||||||||
| Additional paid-in capital | 5,157 | 1,585 | ||||||||||||
| Retained earnings | 7,442 | 5,672 | ||||||||||||
| Accumulated other comprehensive income | (9) | 623 | ||||||||||||
| Total SVBFG stockholders’ equity | 16,236 | 8,220 | ||||||||||||
| Noncontrolling interests | 373 | 213 | ||||||||||||
| Total equity | 16,609 | 8,433 | ||||||||||||
| Total liabilities and total equity | $ | 211,478 | $ | 115,511 | ||||||||||
| 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.
98
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 millions, except per share amounts) | (Dollars in millions, except per share amounts) | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||
| Interest income: | Interest income: | |||||||||||||||||||||||||||||||
| Loans | $ | 1,025,788 | $ | 834,155 | $ | 693,147 | Loans | $ | 1,966 | $ | 1,520 | $ | 1,599 | |||||||||||||||||||
| Investment securities: | Investment securities: | |||||||||||||||||||||||||||||||
| Taxable | 412,133 | 346,937 | 344,646 | Taxable | 1,199 | 635 | 569 | |||||||||||||||||||||||||
| Non-taxable | 5,714 | 2,234 | 2,905 | Non-taxable | 106 | 61 | 45 | |||||||||||||||||||||||||
| 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 | 18 | 26 | 97 | |||||||||||||||||||||||||
| Total interest income | 1,465,140 | 1,193,396 | 1,046,765 | Total interest income | 3,289 | 2,242 | 2,310 | |||||||||||||||||||||||||
| Interest expense: | Interest expense: | |||||||||||||||||||||||||||||||
| Deposits | 8,676 | 5,611 | 5,447 | Deposits | 62 | 60 | 178 | |||||||||||||||||||||||||
| Borrowings | 36,095 | 37,262 | 34,893 | Borrowings | 48 | 25 | 35 | |||||||||||||||||||||||||
| Total interest expense | 44,771 | 42,873 | 40,340 | Total interest expense | 110 | 85 | 213 | |||||||||||||||||||||||||
| Net interest income | 1,420,369 | 1,150,523 | 1,006,425 | Net interest income | 3,179 | 2,157 | 2,097 | |||||||||||||||||||||||||
| 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 | 123 | 220 | 107 | ||||||||||||||||||||||||||||
| Net interest income after provision for credit losses | Net interest income after provision for credit losses | 3,056 | 1,937 | 1,990 | ||||||||||||||||||||||||||||
| Noninterest income: | Noninterest income: | |||||||||||||||||||||||||||||||
| Gains on investment securities, net | 64,603 | 51,740 | 89,445 | Gains on investment securities, net | 761 | 421 | 135 | |||||||||||||||||||||||||
| 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 | 560 | 237 | 138 | ||||||||||||||||||||||||||||
| Client investment fees | Client investment fees | 75 | 132 | 182 | ||||||||||||||||||||||||||||
| Wealth management and trust fees | Wealth management and trust fees | 44 | — | — | ||||||||||||||||||||||||||||
| Foreign exchange fees | 115,760 | 104,183 | 87,007 | Foreign exchange fees | 262 | 179 | 159 | |||||||||||||||||||||||||
| Credit card fees | 76,543 | 68,205 | 56,657 | Credit card fees | 131 | 98 | 119 | |||||||||||||||||||||||||
| Deposit service charges | 58,715 | 52,524 | 46,683 | Deposit service charges | 112 | 90 | 89 | |||||||||||||||||||||||||
| Client investment fees | 56,136 | 32,219 | 21,610 | |||||||||||||||||||||||||||||
| Lending related fees | 43,265 | 33,395 | 32,536 | Lending related fees | 76 | 57 | 50 | |||||||||||||||||||||||||
| Letters of credit and standby letters of credit fees | 28,544 | 25,644 | 20,889 | Letters of credit and standby letters of credit fees | 51 | 47 | 43 | |||||||||||||||||||||||||
| Other (2) | 59,110 | 50,750 | 47,004 | |||||||||||||||||||||||||||||
| Investment banking revenue | Investment banking revenue | 459 | 414 | 195 | ||||||||||||||||||||||||||||
| Commissions | Commissions | 79 | 67 | 56 | ||||||||||||||||||||||||||||
| Other | Other | 128 | 98 | 55 | ||||||||||||||||||||||||||||
| Total noninterest income | 557,231 | 456,552 | 472,794 | Total noninterest income | 2,738 | 1,840 | 1,221 | |||||||||||||||||||||||||
| Noninterest expense: | Noninterest expense: | |||||||||||||||||||||||||||||||
| Compensation and benefits | 606,402 | 514,270 | 473,841 | Compensation and benefits | 2,015 | 1,318 | 990 | |||||||||||||||||||||||||
| Professional services | 121,935 | 94,982 | 82,839 | Professional services | 392 | 247 | 205 | |||||||||||||||||||||||||
| Premises and equipment | 71,753 | 65,502 | 51,927 | Premises and equipment | 178 | 127 | 97 | |||||||||||||||||||||||||
| Net occupancy | 48,397 | 39,928 | 34,674 | Net occupancy | 83 | 101 | 69 | |||||||||||||||||||||||||
| Business development and travel | 41,978 | 40,130 | 39,524 | Business development and travel | 24 | 24 | 69 | |||||||||||||||||||||||||
| FDIC and state assessments | 35,069 | 30,285 | 25,455 | FDIC and state assessments | 48 | 28 | 18 | |||||||||||||||||||||||||
| Correspondent bank fees | 12,976 | 12,457 | 13,415 | |||||||||||||||||||||||||||||
| Merger-related charges | Merger-related charges | 129 | — | — | ||||||||||||||||||||||||||||
| Other | 72,145 | 62,243 | 58,287 | Other | 201 | 190 | 153 | |||||||||||||||||||||||||
| Total noninterest expense (1) | 1,010,655 | 859,797 | 779,962 | |||||||||||||||||||||||||||||
| Total noninterest expense | Total noninterest expense | 3,070 | 2,035 | 1,601 | ||||||||||||||||||||||||||||
| Income before income tax expense | 874,641 | 640,599 | 603,574 | Income before income tax expense | 2,724 | 1,742 | 1,610 | |||||||||||||||||||||||||
| Income tax expense (3) | 355,463 | 250,333 | 228,754 | |||||||||||||||||||||||||||||
| Income tax expense | Income tax expense | 651 | 448 | 425 | ||||||||||||||||||||||||||||
| Net income before noncontrolling interests | 519,178 | 390,266 | 374,820 | Net income before noncontrolling interests | 2,073 | 1,294 | 1,185 | |||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (28,672 | ) | (7,581 | ) | (30,916 | ) | Net income attributable to noncontrolling interests | (240) | (86) | (48) | ||||||||||||||||||||||
| 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 | (63) | (17) | — | ||||||||||||||||||||||||||||
| Net income available to common stockholders | Net income available to common stockholders | $ | 1,770 | $ | 1,191 | $ | 1,137 | |||||||||||||||||||||||||
| Earnings per common share—basic | Earnings per common share—basic | $ | 31.74 | $ | 23.05 | $ | 21.90 | |||||||||||||||||||||||||
| Earnings per common share—diluted | Earnings per common share—diluted | 31.25 | 22.87 | 21.73 | ||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
99
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net income before noncontrolling interests | $ | 2,073 | $ | 1,294 | $ | 1,185 | ||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||
| Change in foreign currency cumulative translation gains and losses: | ||||||||||||||||||||
| Foreign currency translation (losses) gains | (2) | 16 | 3 | |||||||||||||||||
| Related tax benefit (expense) | — | (5) | (1) | |||||||||||||||||
| Change in unrealized gains and losses on available-for-sale securities: | ||||||||||||||||||||
| Unrealized holding (losses) gains | (644) | 606 | 190 | |||||||||||||||||
| Related tax benefit (expense) | 179 | (168) | (53) | |||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income | (31) | (61) | 4 | |||||||||||||||||
| Related tax expense (benefit) | 9 | 17 | (1) | |||||||||||||||||
| Cumulative-effect adjustment for unrealized losses on securities transferred from AFS to HTM | (132) | — | — | |||||||||||||||||
| Related tax benefit | 37 | — | — | |||||||||||||||||
| Amortization of unrealized holding (gains) losses on securities transferred from available-for-sale to held-to-maturity | (1) | 2 | (2) | |||||||||||||||||
| Related tax expense (benefit) | — | (1) | 1 | |||||||||||||||||
| Change in unrealized gains and losses on cash flow hedges: | ||||||||||||||||||||
| Unrealized gains (losses) | — | 232 | (8) | |||||||||||||||||
| Related tax (expense) benefit | — | (64) | 2 | |||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income | (63) | (50) | 5 | |||||||||||||||||
| Related tax expense (benefit) | 17 | 14 | (2) | |||||||||||||||||
| Other comprehensive (loss) income, net of tax | (632) | 538 | 139 | |||||||||||||||||
| Comprehensive income | 1,441 | 1,832 | 1,324 | |||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | (240) | (86) | (48) | |||||||||||||||||
| Comprehensive income attributable to SVBFG | $ | 1,201 | $ | 1,746 | $ | 1,276 | ||||||||||||||
| 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.
100
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 millions, except share data) | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | — | 52,586,498 | $ | — | $ | 1,378 | $ | 3,792 | $ | (54) | $ | 5,116 | $ | 149 | $ | 5,265 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities (ASU 2017-08) | — | — | — | — | (1) | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of SVB Securities | — | — | — | — | — | — | — | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 601,319 | — | 25 | — | — | 25 | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 340 | — | — | — | — | — | 340 | — | 340 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,137 | — | 1,137 | 48 | 1,185 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (51) | (51) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 139 | 139 | — | 139 | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 67 | — | — | 67 | — | 67 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (1,532,210) | — | — | (352) | — | (352) | — | (352) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 340 | 51,655,607 | $ | — | $ | 1,470 | $ | 4,576 | $ | 85 | $ | 6,471 | $ | 151 | $ | 6,622 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment for the day one adoption of ASC 326, net of tax | — | — | — | — | (35) | — | (35) | — | (35) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 477,079 | — | 31 | — | — | 31 | — | 31 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,208 | — | 1,208 | 86 | 1,294 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (24) | (24) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 538 | 538 | — | 538 | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 84 | — | — | 84 | — | 84 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (244,223) | — | — | (60) | — | (60) | — | (60) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (17) | — | (17) | — | (17) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 340 | 51,888,463 | $ | — | $ | 1,585 | $ | 5,672 | $ | 623 | $ | 8,220 | $ | 213 | $ | 8,433 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 445,025 | — | 11 | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | — | 4,527,000 | — | 2,363 | — | — | 2,363 | — | 2,363 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for the acquisition of Boston Private | — | 1,887,981 | — | 1,060 | — | — | 1,060 | — | 1,060 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 3,306 | — | — | — | — | — | 3,306 | — | 3,306 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,833 | — | 1,833 | 240 | 2,073 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (80) | (80) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | (632) | (632) | — | (632) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 138 | — | — | 138 | — | 138 | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (63) | — | (63) | — | (63) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 3,646 | 58,748,469 | $ | — | $ | 5,157 | $ | 7,442 | $ | (9) | $ | 16,236 | $ | 373 | $ | 16,609 | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
101
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 | |||||||||
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income before noncontrolling interests | $ | 2,073 | $ | 1,294 | $ | 1,185 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Provision for credit losses | 123 | 220 | 107 | |||||||||||||||||
| Changes in fair value of equity warrant assets, net of proceeds from exercises | (26) | (2) | 2 | |||||||||||||||||
| Changes in fair values of derivatives, net | (4) | (48) | (19) | |||||||||||||||||
| Gains on investment securities, net | (761) | (421) | (135) | |||||||||||||||||
| Distributions of earnings from non-marketable and other equity securities | 201 | 86 | 95 | |||||||||||||||||
| Depreciation and amortization | 151 | 101 | 83 | |||||||||||||||||
| Amortization of premiums and discounts on investment securities, net | 451 | 75 | 16 | |||||||||||||||||
| Amortization of share-based compensation | 136 | 84 | 67 | |||||||||||||||||
| Amortization of deferred loan fees | (269) | (174) | (155) | |||||||||||||||||
| Deferred income tax (benefit) expense | (8) | 7 | (3) | |||||||||||||||||
| Excess tax benefit from exercise of stock options and vesting of restricted shares | (40) | (6) | (10) | |||||||||||||||||
| Losses from the write-off of premises and equipment and right-of-use assets | 39 | 30 | 5 | |||||||||||||||||
| Other losses | — | — | 9 | |||||||||||||||||
| Changes in other assets and liabilities: | ||||||||||||||||||||
| Accrued interest receivable and payable, net | (185) | (26) | (24) | |||||||||||||||||
| Accounts receivable and payable, net | 17 | 19 | (17) | |||||||||||||||||
| Income tax receivable and payable, net | (122) | 98 | (12) | |||||||||||||||||
| Accrued compensation | 332 | 191 | (15) | |||||||||||||||||
| Foreign exchange spot contracts, net | (16) | (21) | 60 | |||||||||||||||||
| Proceeds from termination of interest rate swaps | — | 228 | — | |||||||||||||||||
| Other, net | (280) | (289) | (75) | |||||||||||||||||
| Net cash provided by operating activities | 1,812 | 1,446 | 1,164 | |||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of available-for-sale securities | (12,147) | (23,208) | (9,872) | |||||||||||||||||
| Proceeds from sales of available-for-sale securities | 1,591 | 2,654 | 2,189 | |||||||||||||||||
| Proceeds from maturities and paydowns of available-for-sale securities | 4,768 | 4,184 | 1,643 | |||||||||||||||||
| Purchases of held-to-maturity securities | (85,519) | (6,778) | (493) | |||||||||||||||||
| Proceeds from maturities and paydowns of held-to-maturity securities | 13,428 | 4,036 | 2,125 | |||||||||||||||||
| Purchases of non-marketable and other equity securities | (365) | (201) | (136) | |||||||||||||||||
| Proceeds from sales and distributions of capital of non-marketable and other equity securities | 666 | 148 | 114 | |||||||||||||||||
| Net increase in loans | (13,726) | (11,927) | (4,775) | |||||||||||||||||
| Purchases of premises and equipment | (113) | (87) | (65) | |||||||||||||||||
| Business acquisitions, net | 1,081 | (27) | (102) | |||||||||||||||||
| Net cash used for investing activities | (90,336) | (31,206) | (9,372) | |||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Net increase in deposits | 78,238 | 40,224 | 12,429 | |||||||||||||||||
| Net increase (decrease) in short-term borrowings | 57 | 3 | (614) | |||||||||||||||||
| Principal payments of long-term debt | — | — | (359) | |||||||||||||||||
| Proceeds from issuance of long-term debt | 1,636 | 495 | — | |||||||||||||||||
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | (80) | (23) | (51) | |||||||||||||||||
| Net proceeds from the issuance of preferred stock | 3,306 | — | 340 | |||||||||||||||||
| Payment of preferred stock dividends | (63) | (17) | — | |||||||||||||||||
| Common stock repurchase | — | (60) | (352) | |||||||||||||||||
| Proceeds from issuance of common stock, ESPP and ESOP | 2,374 | 31 | 25 | |||||||||||||||||
| Net cash provided by financing activities | 85,468 | 40,653 | 11,418 | |||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (3,056) | 10,893 | 3,210 | |||||||||||||||||
| Cash and cash equivalents at beginning of period | 17,675 | 6,782 | 3,572 | |||||||||||||||||
| Cash and cash equivalents at end of period | $ | 14,619 | $ | 17,675 | $ | 6,782 | ||||||||||||||
| Supplemental disclosures: | ||||||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||||||
| Interest | $ | 93 | $ | 84 | $ | 218 | ||||||||||||||
| Income taxes | 739 | 299 | 422 | |||||||||||||||||
| Noncash items during the period: | ||||||||||||||||||||
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | $ | (488) | $ | 394 | $ | 140 | ||||||||||||||
| Distributions of stock from investments | 72 | 12 | 9 | |||||||||||||||||
| Transfers from AFS securities to HTM | 8,953 | — | — | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
102
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. 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,GCB, SVB Private Bank, SVB Capital and SVB Capital. Financial information, resultsSecurities.
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
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 itemsAmong the more significant estimates are those that are subject to such estimates include measurements of fair value, therelate to: 1) ACL for loans and for unfunded credit commitments, 2) valuation of non-marketable and other equity securities, the3) valuation of equity warrant assets, the adequacy of the allowance for loan losses and the allowance for unfunded credit commitments and the recognition and measurement of income tax4) goodwill, intangible assets and liabilities. The following discussion provides additional background on our significantother purchase accounting policies.related adjustments and 5) income taxes.
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"). Weinterest. Before we determine whether we have a controlling financial interest, inwe must evaluate whether the entity is 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,voting interest entity or (c) the right to receive the expected returns of the entity. Generally, we have significanta 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.interest entity ("VIE").
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 VIEsare considered to determine ifhold a controlling financial interest in a VIE when we are the primary beneficiary of a VIE.beneficiary. A primary beneficiary is defined as a variable interest holderthe party that has a controlling financial interest. A controlling financial interest requires both: (a) the power to direct the activities that most significantly impact the VIEsVIE’s economic performance, and (b) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. Generally, the parties that make management and investment decisions, or parties that can unilaterally remove such decision-makers are deemed to have the power to direct the activities of a VIE. When assessing whether we have the obligation to absorb losses or the right to receive benefits from the VIE, we consider all of our economic interests in the VIE, including any fees and other compensation received for providing investment and management services if that compensation is not customary and commensurate with the services provided.
Voting interest entities are entities that (a) have sufficient equity to finance their activities and (b) provide the equity investors power to make significant decisions relating to the entity’s operations. For such entities, we have a controlling financial interest if we hold a majority of voting rights.
103
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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-saleAFS 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/asset and liability management objectives. The accretion of discounts and amortization of premiums over the contractual terms of the underlying securities are included in interest income. We use estimates of future principal prepayments when applying the effective interest method to prepayable securities.
Unrealized gains and losses on available-for-saleAFS securities, net of applicable taxes, are reported in accumulated other comprehensive income, which isAOCI, a separate component of SVBFG's stockholders' equity, until realized.
hold. We consider numerousall factors in determining whether a credit loss exists, andincluding the period over which the debt security is expected to recover. A credit impairment is recognized through a valuation allowance against the security with an offset through earnings. The following listallowance is not meantlimited to be all inclusive. All of the following factors are considered:
Held-to-Maturity Securities
Debt securities purchased in which we havewith the positive intent and ability to hold to its maturity are classified as held-to-maturityHTM securities and are recorded at amortized cost.cost, net of any ACL.
Effective January 1, 2020, we measure ECL on HTM securities on a collective basis by major security type and standard credit rating. Certain securities in our HTM securities 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.
The estimate of ECL on our HTM securities that are not guaranteed by the U.S. government 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, 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 AIR from HTM securities as AIR is reversed or written off when the full collection of the AIR related to a security becomes doubtful. AIR from HTM securities totaled $225 million at December 31, 2021 and $55 million at December 31, 2020 and is excluded from the amortized cost disclosures within our HTM security disclosures in Note 9—“Investment Securities” as it is included and reported separately within "Accrued interest receivable and other assets" in our consolidated balance sheets.
ECL on 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.
Transfers of investment securities into the held-to-maturityHTM category from the available-for-saleAFS 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-maturityHTM 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) cost equity
104
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
method accounting and (iv) the proportional amortization method which is used only for qualified affordable housing projects.
Fair Value Accounting
Our consolidated managed funds arequalify as investment companies under the AICPA Audit and Accounting Guide for Investment Companies (codified in ASC 946) and accordingly, these fundstherefore report their investments at estimated fair value, with unrealized gains and losses resulting from changes in fair value reflected as gains on investment securities, net, a component of noninterest income. The portion of any investment gains or losses inattributable to other limited partners is reflected as net income attributable to noncontrolling interests and adjusts our net income to reflect its percentage ownership. Our consolidated statements of income. Our non-marketable and other securities recorded pursuant to fair value accounting consist of our investments through the following funds:
funds. A summary of our ownership interests in the investments held under fair value accountingsuch funds as of December 31, 20172021 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 | ||||||||
Our direct investments in private companies do not have a readily determinable fair value accounting,value. We measure these investments are carried at their estimated fair value based on financial information obtained as the general partner of the fundcost less impairment, if any, plus or obtainedminus changes resulting from observable price changes in orderly transactions for identical or similar investments from the funds' respective general partner. For direct private company investments, valuationssame issuer. Such changes are based upon consideration ofrecognized through earnings. We consider a range of factors when adjusting the fair value of these investments, 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 equityinvestment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted.
Our investments in public companies, valuationsunconsolidated funds where we do not have the ability to exercise significant influence over their operating and financial policies 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 percent to twenty percent 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.
Gains or losses resulting from changes in the estimated fairnet asset 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.
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 $50 million was attributable to commitment growth and changes in portfolio composition and an increase in the expected future commitments for milestone tranches of Investor Dependent loans, which are tied to company performance or additional funding rounds, resulting in a longer weighted average life of these higher risk segments. Additionally, we recorded an initial provision of $2 million related to Boston Private unfunded commitments in the third quarter of 2021.
Net Deferred Tax Liabilities
Net deferred tax liabilities decreased$173 million as our tax position changed to a net deferred tax asset position of $24 million due primarily to the decrease in the fair value of our AFS securities and the adoption of fair value accounting on loans and debt securities for income tax purposes as a result of the Boston Private acquisition.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $391 million was driven primarily by $60 million of unsettled fixed income investment securities purchases and a $112 million increase in investments payable related to investments in qualified affordable housing projects.
Noncontrolling Interests
Noncontrolling interests totaled $373 million and $213 million at December 31, 2021 and December 31, 2020, respectively. The increase was due to net income attributable to noncontrolling interests of $240 million, partially offset by net capital distributions of $80 million for the year ended December 31, 2021. 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.
84
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.
SVBFG Stockholders’ Equity Method
SVBFG stockholders’ equity totaled $16.2 billion at December 31, 2021, an increase of $8.0 billion, or 97.5 percent, compared to $8.2 billion at December 31, 2020. The increase was driven primarily by a $3.4 billion issuance of common stock, of which $1.1 billion was issued to complete the acquisition of Boston Private, $3.3 billion issuance of preferred stock and $1.8 billion of net income, offset partially by the decrease in AOCI of $632 million. The decrease in AOCI was driven primarily by a $644 million (or $465 million net of tax) decrease in the fair value of our AFS securities portfolio reflective of increases in market interest rates.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Common Stock
On March 22, 2021, to support the continued growth of our balance sheet, we issued and sold 2,000,000 shares of common stock at a price of $500.00 per share. We received net proceeds of $972 million after deducting underwriting discounts and commissions. On April 14, 2021, we issued and sold an additional 300,000 shares of common stock under the full exercise of the underwriter's over-allotment option resulting in additional net proceeds of approximately $146 million after deducting discounts and commissions. On July 1, 2021, we issued 1,887,981 shares of common stock for the acquisition of Boston Private at an exchange ratio of 0.0228 SIVB shares per Boston Private share totaling $1.1 billion. On August 12, 2021, we issued and sold an additional 2,227,000 shares of common stock at an offering price of $564.00 per share, which resulted in net proceeds of $1.2 billion.
Preferred Stock
On February 2, 2021, SVB Financial Group issued 750,000 depositary shares each representing a 1/100th ownership interest in a share of 4.10% Non-Cumulative Perpetual Series B Preferred Stock (''Series B Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series B Preferred Stock is perpetual and has no stated maturity. Dividends are approved by the Board of Directors and, if declared, 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. As of December 31, 2021, our Series B Preferred Stock had a carrying value of $739 million and a liquidation preference of $750 million.
On May 13, 2021, SVB Financial Group issued 1,000,000 depositary shares each representing a 1/100th ownership interest in a share of 4.00% Non-Cumulative Perpetual Series C Preferred Stock (''Series C Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series C Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.000 percent from the original issue date to, but excluding, May 15, 2026, and (ii) for the May 15, 2026 dividend date and during each subsequent five year period, the five-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 five-year maturities) plus 3.202 percent. As of December 31, 2021, our Series C Preferred Stock had a carrying value of $985 million and a liquidation preference of $1.0 billion.
On October 28, 2021, SVB Financial Group issued 1,000,000 depositary shares each representing a 1/100th ownership interest in a share of 4.25% Non-Cumulative Perpetual Series D Preferred Stock (''Series D Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series D Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in
85
arrears, at a rate per annum equal to (i) 4.250 percent from the original issue date to, but excluding, November 15, 2026, and (ii) for the November 15, 2026 dividend date and during each subsequent five year period, the five-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 five-year maturities) plus 3.074 percent. As of December 31, 2021, our Series D Preferred Stock had a carrying value of $989 million and a liquidation preference of $1.0 billion.
On October 28, 2021, SVB Financial Group also issued 600,000 depositary shares each representing a 1/100th ownership interest in a share of 4.70% Series E Preferred Stock ("Series E Preferred Stock”) with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series E Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.700 percent from the original issue date to, but excluding, November 15, 2031, and (ii) for the November 15, 2031 dividend date and during each subsequent ten years 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 five-year maturities) plus 3.064 percent. As of December 31, 2021, our Series E Preferred Stock had a carrying value of $593 million and a liquidation preference of $600 million.
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 as defined under the Federal Reserve’s Regulation Y, respectively, as of December 31, 2021, and 2020. 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 | Required Minimum + Capital Conservation Buffer (1) | Well Capitalized Minimum | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| SVB Financial: | ||||||||||||||||||||||||||||||||||||||
| CET1 risk-based capital ratio (2) (3) | 12.09 | % | 11.04 | % | 4.5 | % | 7.0 | % | N/A | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (3) | 16.08 | 11.89 | 6.0 | 8.5 | 6.0 | |||||||||||||||||||||||||||||||||
| Total risk-based capital ratio (3) | 16.58 | 12.64 | 8.0 | 10.5 | 10.0 | |||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (2) (3) | 7.93 | 7.45 | 4.0 | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to tangible assets ratio (4)(5) | 5.73 | 6.66 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to risk-weighted assets ratio (4)(5) | 11.98 | 11.87 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank: | ||||||||||||||||||||||||||||||||||||||
| CET1 risk-based capital ratio (3) | 14.89 | % | 10.70 | % | 4.5 | % | 7.0 | % | 6.5 | % | ||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (3) | 14.89 | 10.70 | 6.0 | 8.5 | 8.0 | |||||||||||||||||||||||||||||||||
| Total risk-based capital ratio (3) | 15.40 | 11.49 | 8.0 | 10.5 | 10.0 | |||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (3) | 7.24 | 6.43 | 4.0 | N/A | 5.0 | |||||||||||||||||||||||||||||||||
| Tangible common equity to tangible assets ratio (4)(5) | 7.09 | 6.24 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to risk-weighted assets ratio (4)(5) | 15.06 | 11.58 | N/A | 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" CET1 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 ACL 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.
Our risk-based capital ratios, tier 1 capital ratios and leverage ratios increased for both SVB Financial and Silicon Valley Bank as of December 31, 2021, compared to December 31, 2020. The increase in capital ratios was driven primarily by increases in our capital, partially offset by increases in our risk-weighted and average assets. The increase in capital for SVB Financial was driven by the issuance of common and preferred stock and net income. The increase in capital for Silicon Valley Bank was driven by a $5.8 billion downstream capital infusion from our bank holding company during the year ended
86
December 31, 2021. The increase in average assets was driven by increases in our fixed income investments and loan portfolios. All of 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, method non-marketable securities consistor 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, these financial measures should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. 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 millions, except ratios) | SVB Financial | |||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
| GAAP SVBFG stockholders’ equity | $ | 16,236 | $ | 8,220 | $ | 6,470 | $ | 5,116 | $ | 4,180 | ||||||||||||||||||||||
| Less: preferred stock | 3,646 | 340 | 340 | — | — | |||||||||||||||||||||||||||
| Less: intangible assets | 535 | 204 | 187 | — | — | |||||||||||||||||||||||||||
| Plus: net deferred taxes on intangible assets | 26 | — | — | — | — | |||||||||||||||||||||||||||
| Tangible common equity | $ | 12,081 | $ | 7,676 | $ | 5,943 | $ | 5,116 | $ | 4,180 | ||||||||||||||||||||||
| GAAP total assets | $ | 211,478 | $ | 115,511 | $ | 71,005 | $ | 56,928 | $ | 51,214 | ||||||||||||||||||||||
| Less: intangible assets | 535 | 204 | 187 | — | — | |||||||||||||||||||||||||||
| Plus: net deferred taxes on intangible assets | 26 | — | — | — | — | |||||||||||||||||||||||||||
| Tangible assets | $ | 210,969 | $ | 115,307 | $ | 70,818 | $ | 56,928 | $ | 51,214 | ||||||||||||||||||||||
| Risk-weighted assets | $ | 100,812 | $ | 64,681 | $ | 46,577 | $ | 38,528 | $ | 32,737 | ||||||||||||||||||||||
| Non-GAAP tangible common equity to tangible assets | 5.73 | % | 6.66 | % | 8.39 | % | 8.99 | % | 8.16 | % | ||||||||||||||||||||||
| Non-GAAP tangible common equity to risk-weighted assets | 11.98 | 11.87 | 12.76 | 13.28 | 12.77 | |||||||||||||||||||||||||||
| Non-GAAP tangible common equity and tangible assets (Dollars in millions, except ratios) | Bank | |||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
| Tangible common equity | $ | 14,795 | $ | 7,069 | $ | 5,034 | $ | 4,555 | $ | 3,763 | ||||||||||||||||||||||
| Tangible assets | $ | 208,576 | $ | 113,303 | $ | 69,564 | $ | 56,047 | $ | 50,384 | ||||||||||||||||||||||
| Risk-weighted assets | $ | 98,214 | $ | 61,023 | $ | 44,502 | $ | 37,104 | $ | 31,403 | ||||||||||||||||||||||
| Non-GAAP tangible common equity to tangible assets | 7.09 | % | 6.24 | % | 7.24 | % | 8.13 | % | 7.47 | % | ||||||||||||||||||||||
| Non-GAAP tangible common equity to risk-weighted assets | 15.06 | 11.58 | 11.31 | 12.28 | 11.98 | |||||||||||||||||||||||||||
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, 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.
87
The following table summarizes our unfunded commercial commitments as of December 31, 2021:
| Amount of Commitments Expiring per Period | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||||||||||||||
| Commercial commitments: | ||||||||||||||||||||||||||||||||
| Loan commitments available for funding | $ | 40,327 | $ | 27,302 | $ | 7,288 | $ | 3,989 | $ | 1,748 | ||||||||||||||||||||||
| Standby letters of credit | 3,612 | 3,492 | 89 | 18 | 13 | |||||||||||||||||||||||||||
| Commercial letters of credit | 77 | 40 | 37 | — | — | |||||||||||||||||||||||||||
| Total unfunded credit commitments | $ | 44,016 | $ | 30,834 | $ | 7,414 | $ | 4,007 | $ | 1,761 | ||||||||||||||||||||||
The following table summarizes our contractual obligations to make future payments as of December 31, 2021:
| Payments Due By Period | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||||||||||||||
| SVBFG contractual obligations: | ||||||||||||||||||||||||||||||||
| Deposits (1) (2) | $ | 189,203 | $ | 189,203 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Borrowings (2) | 2,691 | 121 | 349 | 645 | 1,576 | |||||||||||||||||||||||||||
| Non-cancelable operating leases | 416 | 77 | 139 | 88 | 112 | |||||||||||||||||||||||||||
| Commitments to qualified affordable housing projects | 482 | 173 | 271 | 14 | 24 | |||||||||||||||||||||||||||
| Total obligations attributable to SVBFG | $ | 192,792 | $ | 189,574 | $ | 759 | $ | 747 | $ | 1,712 | ||||||||||||||||||||||
(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 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 $3.0 million of remaining unfunded commitments to venture capital and joint ventures. Ourprivate equity methodfunds. See Note 9—“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 related accounting policies are described as follows:other operating or capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
88
Historically, client deposits have 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. We may also offer more investment alternatives for our off-balance sheet products which may impact deposit levels. At December 31, 2021, our period-end total deposit balances increased to $189.2 billion, compared to $102.0 billion at December 31, 2020.
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, 2021, collateral pledged to the FHLB of San Francisco was comprised primarily of fixed income investment securities and loans and had a carrying value of $7.3 billion, of which $6.3 billion was available to support additional borrowings. As of December 31, 2021, collateral pledged to the discount window at the FRB was comprised of fixed income investment securities and had a carrying value of $0.8 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 $2.1 billion at December 31, 2021. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $5.5 billion at December 31, 2021.
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 2021 and 2020, 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 millions) | 2021 | 2020 | ||||||||||||||||||
| Average cash and cash equivalents | $ | 23,041 | $ | 13,273 | ||||||||||||||||
| Percentage of total average assets | 13.9 | % | 15.5 | % | ||||||||||||||||
| Net cash provided by operating activities | $ | 1,812 | $ | 1,446 | ||||||||||||||||
| Net cash used for investing activities | (90,336) | (31,206) | ||||||||||||||||||
| Net cash provided by financing activities | 85,468 | 40,653 | ||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (3,056) | $ | 10,893 | ||||||||||||||||
Average cash and cash equivalents increased to $23.0 billion in 2021, compared to $13.3 billion for 2020. Average deposits increased $72.9 billion which enabled us to grow our average loan portfolio by $17.3 billion in 2021.
December 31, 2021
Cash provided by operating activities of $1.8 billion in 2021 included net income before noncontrolling interests of $2.1 billion partially offset by $254 million from changes in other assets and liabilities and $7 million from changes from adjustments to reconcile to net income to net cash.
Cash used for investing activities of $90.3 billion in 2021 was driven by $97.7 billion in purchases of fixed income investment securities and a $13.7 billion increase in loan balances, partially offset by $19.8 billion in proceeds from sales, maturities and principal pay downs from our fixed income investment securities portfolio and $1.1 billion in proceeds from the acquisition of Boston Private.
Cash provided by financing activities of $85.5 billion in 2021 reflective primarily of a $78.2 billion increase in deposits, $5.7 billion in capital raised by our preferred orand common stock issuances, and $1.6 billion increase from the issuance of long-term debt.
89
Cash and cash equivalents at December 31, 2021 were $14.6 billion, compared to $17.7 billion at December 31, 2020.
December 31, 2020
Cash provided by operating activities of $1.4 billion in privately-held companies2020 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 $495 million 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.
90
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 EVE 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 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. Although we ceased offering LIBOR-based loans as of December 31, 2021, our simulation results will reflect changes in LIBOR rates until publication rates are fully phased out. 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.
Simulation results presented include a beta assumption that is applied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations about deposit repricing behavior. This model assumes the overall beta for interest-bearing deposits is 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. These repricing assumptions are reflected as changes in interest expense on interest-bearing deposit balances.
91
The acquisition of Boston Private was completed in July 2021. The acquisition added approximately $10 billion of total assets and $9 billion of deposits to the balance sheet. Most of the assets added were fixed and variable rate residential mortgages and commercial loans. Both the EVE and NII sensitivity measures described here are inclusive of the impact of the Boston Private acquisition.
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 bps at December 31, 2021 and December 31, 2020.
| Change in interest rates (bps) (Dollars in millions) | Estimated | Estimated Increase/(Decrease) In EVE | Estimated | Estimated Increase/ (Decrease) In NII | ||||||||||||||||||||||||||||||||||
| EVE | Amount | Percent | NII | Amount | Percent | |||||||||||||||||||||||||||||||||
| December 31, 2021: | ||||||||||||||||||||||||||||||||||||||
| +200 | $ | 14,950 | $ | (5,722) | (27.7) | % | $ | 5,258 | $ | 981 | 22.9 | % | ||||||||||||||||||||||||||
| +100 | 17,799 | (2,873) | (13.9) | 4,745 | 468 | 10.9 | ||||||||||||||||||||||||||||||||
| — | 20,672 | — | — | 4,277 | — | — | ||||||||||||||||||||||||||||||||
| -100 | 21,904 | 1,232 | 6.0 | 4,002 | (275) | (6.4) | ||||||||||||||||||||||||||||||||
| -200 | 21,308 | 636 | 3.1 | 3,911 | (366) | (8.6) | ||||||||||||||||||||||||||||||||
| December 31, 2020: | ||||||||||||||||||||||||||||||||||||||
| +200 | $ | 9,500 | $ | (1,724) | (15.4) | % | $ | 3,063 | $ | 691 | 29.1 | % | ||||||||||||||||||||||||||
| +100 | 10,558 | (666) | (5.9) | 2,729 | 357 | 15.1 | ||||||||||||||||||||||||||||||||
| — | 11,224 | — | — | 2,372 | — | — | ||||||||||||||||||||||||||||||||
| -100 | 11,582 | 358 | 3.2 | 2,310 | (62) | (2.6) | ||||||||||||||||||||||||||||||||
| -200 | 11,534 | 310 | 2.8 | 2,306 | (66) | (2.8) | ||||||||||||||||||||||||||||||||
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-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, 2021 increased $9.5 billion from December 31, 2020, driven by overall balance sheet growth as well as yield curve steepening during the first half of 2021. For the period ended December 31, 2021, compared to December 31, 2020, cash balances decreased by $3.1 billion, fixed income investments in our AFS portfolio decreased by $3.7 billion, while HTM portfolio balances increased by $81.6 billion and loan balances increased by $21.1 billion. Funding for these assets came primarily from growth of $87.2 billion in total deposits, which consisted of a $59.3 billion and $27.9 billion increase in non-interest bearing and interest bearing accounts, respectively. The mix of non-interest bearing to total deposits increased slightly by 2 percent from 65 at December 31, 2020, to 67 percent at December 31, 2021.
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 investment 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.
In March 2021 we purchased interest rate swaps to offset some of the additional EVE sensitivity that has resulted from rapid balance sheet growth. As of December 31, 2021, the estimated change in EVE in an up to 100 bps rate shock would be
92
-15.4 percent without any hedging applied. The addition of pay fixed swaps reduces this exposure to -13.9 percent in the same scenario. The EVE exposures shown in the table above include the impact of our hedging activity.
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 31,2021, NII sensitivity was 10.9 percent in the +100 bps interest rate scenario, compared to 15.1 percent at December 31, 2020. Our NII sensitivity in the +200 bps interest rate shock scenario was 22.9 percent compared to 29.2 percent at December 31, 2020. NII sensitivity in the -100 bps scenario of negative 6.4 percent was higher at December 31, 2021, compared to a negative 2.6 percent at December 31, 2020. The -200 bps scenario currently indicates a higher percentage change in NII of negative 8.6 percent at December 31, 2021, compared to negative 2.8 percent at December 31, 2020. 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, 2021 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 as well as unrealized income associated with more recent hedging activity that has been undertaken to reduce EVE exposure. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition described previously, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at December 31, 2021 increased compared to December 31, 2020 by $1.9 billion, driven primarily by the growth in the balance sheet that has taken place year-to-date. Specifically, a large portion of asset growth has been deployed in the fixed income investment securities portfolio as noted above. As of December 31, 2021, we also held a relatively high cash position which is expected to decrease as excess funds are invested.
A majority of our loans are indexed to Prime and LIBOR. Despite no longer offering LIBOR-based loans as of December 31, 2021, we have begun offering loans based on SOFR and other recognized alternative reference rates. Additionally, despite no longer offering new LIBOR-based loans, our simulation result will reflect changes in LIBOR until the published rates are phased out. In the upward 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 downward rate shock scenarios.
The 12-month NII simulations include repricing assumptions on our interest-bearing deposit products which we holdset 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 voting interestfactor in the up-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 least 20 percentmanagement'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.
93
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Page Number | |||||
Report of Independent Registered Public Accounting Firm (Auditor Firm ID: 185) | |||||
94
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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Boston Private Financial Holdings, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Boston Private Financial Holdings, Inc’s internal control over financial reporting associated with approximately 2% of total consolidated revenue and approximately 4% of total consolidated assets included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Boston Private Financial Holdings, Inc.
Change in Accounting Principle
As discussed in Notes 2 and 10 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
95
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 for certain portfolio segments evaluated on a collective basis
As discussed in Notes 2 and 10 of the consolidated financial statements, the Company’s allowance for credit losses for loans (ALL) and unfunded credit commitments (AUCC) were $422 million and $171 million as of December 31, 2021, 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, 2021 collective ALL and collective AULC for the Global Funds Banking, Investor Dependent, Cash Flow Dependent & Innovation C&I, Premium Wine, and legacy Private Bank portfolio segments 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, 2021 collective ALL and collective AULC estimates, including controls over the:
•periodic review and monitoring of the collective ALL and the collective AULC methodology
96
•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, 2021 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 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, 2021 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, 2022
97
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||||||
| (Dollars in millions, except par value and share data) | 2021 | 2020 | ||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 14,619 | $ | 17,675 | ||||||||||
| Available-for-sale securities, at fair value (cost of $27,370 and $30,245, respectively) | 27,221 | 30,913 | ||||||||||||
| Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $7 and $0 (fair value of $97,227 and $17,217, respectively) | 98,195 | 16,592 | ||||||||||||
| Non-marketable and other equity securities | 2,543 | 1,802 | ||||||||||||
| Total investment securities | 127,959 | 49,307 | ||||||||||||
| Loans, amortized cost | 66,276 | 45,181 | ||||||||||||
| Allowance for credit losses: loans | (422) | (448) | ||||||||||||
| Net loans | 65,854 | 44,733 | ||||||||||||
| Premises and equipment, net of accumulated depreciation and amortization | 270 | 176 | ||||||||||||
| Goodwill | 375 | 143 | ||||||||||||
| Other intangible assets, net | 160 | 61 | ||||||||||||
| Lease right-of-use assets | 313 | 210 | ||||||||||||
| Accrued interest receivable and other assets | 1,928 | 3,206 | ||||||||||||
| Total assets | $ | 211,478 | $ | 115,511 | ||||||||||
| Liabilities and total equity | ||||||||||||||
| Liabilities: | ||||||||||||||
| Noninterest-bearing demand deposits | $ | 125,851 | $ | 66,519 | ||||||||||
| Interest-bearing deposits | 63,352 | 35,463 | ||||||||||||
| Total deposits | 189,203 | 101,982 | ||||||||||||
| Short-term borrowings | 121 | 21 | ||||||||||||
| Lease liabilities | 388 | 259 | ||||||||||||
| Other liabilities | 2,587 | 3,972 | ||||||||||||
| Long-term debt | 2,570 | 844 | ||||||||||||
| Total liabilities | 194,869 | 107,078 | ||||||||||||
| Commitments and contingencies (Note 21 and Note 26) | 0 | 0 | ||||||||||||
| SVBFG stockholders’ equity: | ||||||||||||||
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; 383,500 and 350,000 shares issued and outstanding, respectively | 3,646 | 340 | ||||||||||||
| Common stock, $0.001 par value, 150,000,000 shares authorized; 58,748,469 and 51,888,463 shares issued and outstanding, respectively | — | — | ||||||||||||
| Additional paid-in capital | 5,157 | 1,585 | ||||||||||||
| Retained earnings | 7,442 | 5,672 | ||||||||||||
| Accumulated other comprehensive income | (9) | 623 | ||||||||||||
| Total SVBFG stockholders’ equity | 16,236 | 8,220 | ||||||||||||
| Noncontrolling interests | 373 | 213 | ||||||||||||
| Total equity | 16,609 | 8,433 | ||||||||||||
| Total liabilities and total equity | $ | 211,478 | $ | 115,511 | ||||||||||
See accompanying notes to the consolidated financial statements.
98
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions, except per share amounts) | 2021 | 2020 | 2019 | |||||||||||||||||
| Interest income: | ||||||||||||||||||||
| Loans | $ | 1,966 | $ | 1,520 | $ | 1,599 | ||||||||||||||
| Investment securities: | ||||||||||||||||||||
| Taxable | 1,199 | 635 | 569 | |||||||||||||||||
| Non-taxable | 106 | 61 | 45 | |||||||||||||||||
| Federal funds sold, securities purchased under agreements to resell and other short-term investment securities | 18 | 26 | 97 | |||||||||||||||||
| Total interest income | 3,289 | 2,242 | 2,310 | |||||||||||||||||
| Interest expense: | ||||||||||||||||||||
| Deposits | 62 | 60 | 178 | |||||||||||||||||
| Borrowings | 48 | 25 | 35 | |||||||||||||||||
| Total interest expense | 110 | 85 | 213 | |||||||||||||||||
| Net interest income | 3,179 | 2,157 | 2,097 | |||||||||||||||||
| Provision for credit losses | 123 | 220 | 107 | |||||||||||||||||
| Net interest income after provision for credit losses | 3,056 | 1,937 | 1,990 | |||||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Gains on investment securities, net | 761 | 421 | 135 | |||||||||||||||||
| Gains on equity warrant assets, net | 560 | 237 | 138 | |||||||||||||||||
| Client investment fees | 75 | 132 | 182 | |||||||||||||||||
| Wealth management and trust fees | 44 | — | — | |||||||||||||||||
| Foreign exchange fees | 262 | 179 | 159 | |||||||||||||||||
| Credit card fees | 131 | 98 | 119 | |||||||||||||||||
| Deposit service charges | 112 | 90 | 89 | |||||||||||||||||
| Lending related fees | 76 | 57 | 50 | |||||||||||||||||
| Letters of credit and standby letters of credit fees | 51 | 47 | 43 | |||||||||||||||||
| Investment banking revenue | 459 | 414 | 195 | |||||||||||||||||
| Commissions | 79 | 67 | 56 | |||||||||||||||||
| Other | 128 | 98 | 55 | |||||||||||||||||
| Total noninterest income | 2,738 | 1,840 | 1,221 | |||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||
| Compensation and benefits | 2,015 | 1,318 | 990 | |||||||||||||||||
| Professional services | 392 | 247 | 205 | |||||||||||||||||
| Premises and equipment | 178 | 127 | 97 | |||||||||||||||||
| Net occupancy | 83 | 101 | 69 | |||||||||||||||||
| Business development and travel | 24 | 24 | 69 | |||||||||||||||||
| FDIC and state assessments | 48 | 28 | 18 | |||||||||||||||||
| Merger-related charges | 129 | — | — | |||||||||||||||||
| Other | 201 | 190 | 153 | |||||||||||||||||
| Total noninterest expense | 3,070 | 2,035 | 1,601 | |||||||||||||||||
| Income before income tax expense | 2,724 | 1,742 | 1,610 | |||||||||||||||||
| Income tax expense | 651 | 448 | 425 | |||||||||||||||||
| Net income before noncontrolling interests | 2,073 | 1,294 | 1,185 | |||||||||||||||||
| Net income attributable to noncontrolling interests | (240) | (86) | (48) | |||||||||||||||||
| Preferred stock dividends | (63) | (17) | — | |||||||||||||||||
| Net income available to common stockholders | $ | 1,770 | $ | 1,191 | $ | 1,137 | ||||||||||||||
| Earnings per common share—basic | $ | 31.74 | $ | 23.05 | $ | 21.90 | ||||||||||||||
| Earnings per common share—diluted | 31.25 | 22.87 | 21.73 | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
99
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net income before noncontrolling interests | $ | 2,073 | $ | 1,294 | $ | 1,185 | ||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||
| Change in foreign currency cumulative translation gains and losses: | ||||||||||||||||||||
| Foreign currency translation (losses) gains | (2) | 16 | 3 | |||||||||||||||||
| Related tax benefit (expense) | — | (5) | (1) | |||||||||||||||||
| Change in unrealized gains and losses on available-for-sale securities: | ||||||||||||||||||||
| Unrealized holding (losses) gains | (644) | 606 | 190 | |||||||||||||||||
| Related tax benefit (expense) | 179 | (168) | (53) | |||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income | (31) | (61) | 4 | |||||||||||||||||
| Related tax expense (benefit) | 9 | 17 | (1) | |||||||||||||||||
| Cumulative-effect adjustment for unrealized losses on securities transferred from AFS to HTM | (132) | — | — | |||||||||||||||||
| Related tax benefit | 37 | — | — | |||||||||||||||||
| Amortization of unrealized holding (gains) losses on securities transferred from available-for-sale to held-to-maturity | (1) | 2 | (2) | |||||||||||||||||
| Related tax expense (benefit) | — | (1) | 1 | |||||||||||||||||
| Change in unrealized gains and losses on cash flow hedges: | ||||||||||||||||||||
| Unrealized gains (losses) | — | 232 | (8) | |||||||||||||||||
| Related tax (expense) benefit | — | (64) | 2 | |||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income | (63) | (50) | 5 | |||||||||||||||||
| Related tax expense (benefit) | 17 | 14 | (2) | |||||||||||||||||
| Other comprehensive (loss) income, net of tax | (632) | 538 | 139 | |||||||||||||||||
| Comprehensive income | 1,441 | 1,832 | 1,324 | |||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | (240) | (86) | (48) | |||||||||||||||||
| Comprehensive income attributable to SVBFG | $ | 1,201 | $ | 1,746 | $ | 1,276 | ||||||||||||||
See accompanying notes to the consolidated financial statements.
100
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 millions, except share data) | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | — | 52,586,498 | $ | — | $ | 1,378 | $ | 3,792 | $ | (54) | $ | 5,116 | $ | 149 | $ | 5,265 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities (ASU 2017-08) | — | — | — | — | (1) | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of SVB Securities | — | — | — | — | — | — | — | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 601,319 | — | 25 | — | — | 25 | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 340 | — | — | — | — | — | 340 | — | 340 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,137 | — | 1,137 | 48 | 1,185 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (51) | (51) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 139 | 139 | — | 139 | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 67 | — | — | 67 | — | 67 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (1,532,210) | — | — | (352) | — | (352) | — | (352) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 340 | 51,655,607 | $ | — | $ | 1,470 | $ | 4,576 | $ | 85 | $ | 6,471 | $ | 151 | $ | 6,622 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment for the day one adoption of ASC 326, net of tax | — | — | — | — | (35) | — | (35) | — | (35) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 477,079 | — | 31 | — | — | 31 | — | 31 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,208 | — | 1,208 | 86 | 1,294 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (24) | (24) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 538 | 538 | — | 538 | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 84 | — | — | 84 | — | 84 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (244,223) | — | — | (60) | — | (60) | — | (60) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (17) | — | (17) | — | (17) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 340 | 51,888,463 | $ | — | $ | 1,585 | $ | 5,672 | $ | 623 | $ | 8,220 | $ | 213 | $ | 8,433 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 445,025 | — | 11 | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | — | 4,527,000 | — | 2,363 | — | — | 2,363 | — | 2,363 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for the acquisition of Boston Private | — | 1,887,981 | — | 1,060 | — | — | 1,060 | — | 1,060 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 3,306 | — | — | — | — | — | 3,306 | — | 3,306 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,833 | — | 1,833 | 240 | 2,073 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (80) | (80) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | (632) | (632) | — | (632) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 138 | — | — | 138 | — | 138 | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (63) | — | (63) | — | (63) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 3,646 | 58,748,469 | $ | — | $ | 5,157 | $ | 7,442 | $ | (9) | $ | 16,236 | $ | 373 | $ | 16,609 | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
101
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income before noncontrolling interests | $ | 2,073 | $ | 1,294 | $ | 1,185 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Provision for credit losses | 123 | 220 | 107 | |||||||||||||||||
| Changes in fair value of equity warrant assets, net of proceeds from exercises | (26) | (2) | 2 | |||||||||||||||||
| Changes in fair values of derivatives, net | (4) | (48) | (19) | |||||||||||||||||
| Gains on investment securities, net | (761) | (421) | (135) | |||||||||||||||||
| Distributions of earnings from non-marketable and other equity securities | 201 | 86 | 95 | |||||||||||||||||
| Depreciation and amortization | 151 | 101 | 83 | |||||||||||||||||
| Amortization of premiums and discounts on investment securities, net | 451 | 75 | 16 | |||||||||||||||||
| Amortization of share-based compensation | 136 | 84 | 67 | |||||||||||||||||
| Amortization of deferred loan fees | (269) | (174) | (155) | |||||||||||||||||
| Deferred income tax (benefit) expense | (8) | 7 | (3) | |||||||||||||||||
| Excess tax benefit from exercise of stock options and vesting of restricted shares | (40) | (6) | (10) | |||||||||||||||||
| Losses from the write-off of premises and equipment and right-of-use assets | 39 | 30 | 5 | |||||||||||||||||
| Other losses | — | — | 9 | |||||||||||||||||
| Changes in other assets and liabilities: | ||||||||||||||||||||
| Accrued interest receivable and payable, net | (185) | (26) | (24) | |||||||||||||||||
| Accounts receivable and payable, net | 17 | 19 | (17) | |||||||||||||||||
| Income tax receivable and payable, net | (122) | 98 | (12) | |||||||||||||||||
| Accrued compensation | 332 | 191 | (15) | |||||||||||||||||
| Foreign exchange spot contracts, net | (16) | (21) | 60 | |||||||||||||||||
| Proceeds from termination of interest rate swaps | — | 228 | — | |||||||||||||||||
| Other, net | (280) | (289) | (75) | |||||||||||||||||
| Net cash provided by operating activities | 1,812 | 1,446 | 1,164 | |||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of available-for-sale securities | (12,147) | (23,208) | (9,872) | |||||||||||||||||
| Proceeds from sales of available-for-sale securities | 1,591 | 2,654 | 2,189 | |||||||||||||||||
| Proceeds from maturities and paydowns of available-for-sale securities | 4,768 | 4,184 | 1,643 | |||||||||||||||||
| Purchases of held-to-maturity securities | (85,519) | (6,778) | (493) | |||||||||||||||||
| Proceeds from maturities and paydowns of held-to-maturity securities | 13,428 | 4,036 | 2,125 | |||||||||||||||||
| Purchases of non-marketable and other equity securities | (365) | (201) | (136) | |||||||||||||||||
| Proceeds from sales and distributions of capital of non-marketable and other equity securities | 666 | 148 | 114 | |||||||||||||||||
| Net increase in loans | (13,726) | (11,927) | (4,775) | |||||||||||||||||
| Purchases of premises and equipment | (113) | (87) | (65) | |||||||||||||||||
| Business acquisitions, net | 1,081 | (27) | (102) | |||||||||||||||||
| Net cash used for investing activities | (90,336) | (31,206) | (9,372) | |||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Net increase in deposits | 78,238 | 40,224 | 12,429 | |||||||||||||||||
| Net increase (decrease) in short-term borrowings | 57 | 3 | (614) | |||||||||||||||||
| Principal payments of long-term debt | — | — | (359) | |||||||||||||||||
| Proceeds from issuance of long-term debt | 1,636 | 495 | — | |||||||||||||||||
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | (80) | (23) | (51) | |||||||||||||||||
| Net proceeds from the issuance of preferred stock | 3,306 | — | 340 | |||||||||||||||||
| Payment of preferred stock dividends | (63) | (17) | — | |||||||||||||||||
| Common stock repurchase | — | (60) | (352) | |||||||||||||||||
| Proceeds from issuance of common stock, ESPP and ESOP | 2,374 | 31 | 25 | |||||||||||||||||
| Net cash provided by financing activities | 85,468 | 40,653 | 11,418 | |||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (3,056) | 10,893 | 3,210 | |||||||||||||||||
| Cash and cash equivalents at beginning of period | 17,675 | 6,782 | 3,572 | |||||||||||||||||
| Cash and cash equivalents at end of period | $ | 14,619 | $ | 17,675 | $ | 6,782 | ||||||||||||||
| Supplemental disclosures: | ||||||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||||||
| Interest | $ | 93 | $ | 84 | $ | 218 | ||||||||||||||
| Income taxes | 739 | 299 | 422 | |||||||||||||||||
| Noncash items during the period: | ||||||||||||||||||||
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | $ | (488) | $ | 394 | $ | 140 | ||||||||||||||
| Distributions of stock from investments | 72 | 12 | 9 | |||||||||||||||||
| Transfers from AFS securities to HTM | 8,953 | — | — | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
102
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: GCB, SVB Private Bank, SVB Capital and SVB Securities.
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. Among the more significant estimates are those that relate to: 1) ACL for loans and for unfunded credit commitments, 2) valuation of non-marketable and other equity securities, 3) valuation of equity warrant assets, 4) goodwill, intangible assets and other purchase accounting related adjustments and 5) income taxes.
Principles of Consolidation and Presentation
Our consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate entities in which we have a controlling financial interest. Before we determine whether we have a controlling financial interest, we must evaluate whether the abilityentity is a voting interest entity or a variable interest entity ("VIE").
VIEs are entities where investors lack sufficient equity at risk for the entity to exercisefinance its activities without additional subordinated financial support 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 are considered to hold a controlling financial interest in a VIE when we are the primary beneficiary. A primary beneficiary is the party that has both: (a) the power to direct the activities that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant influence overto a VIE. Generally, the investees' operatingparties that make management and financial policies through board involvementinvestment decisions, or parties that can unilaterally remove such decision-makers are deemed to have the power to direct the activities of a VIE. When assessing whether we have the obligation to absorb losses or the right to receive benefits from the VIE, we consider all of our economic interests in the VIE, including any fees and other influence,compensation received for providing investment and management services if that compensation is not customary and commensurate with the services provided.
Voting interest entities are accounted for underentities that (a) have sufficient equity to finance their activities and (b) provide the equity method.
investors power to make significant decisions relating to the entity’s operations. For such entities, we have a controlling financial interest if we hold a majority of voting rights.
103
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
All significant intercompany accounts and transactions with consolidated entities have been eliminated.
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 AFS 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 and liability management objectives. The accretion of discounts and amortization of premiums over the contractual terms of the underlying securities are included in interest income. We use estimates of future principal prepayments when applying the effective interest method to prepayable securities.
Unrealized gains and losses on AFS securities, net of applicable taxes, are reported in AOCI, a separate component of SVBFG's stockholders' equity. Impairment losses on AFS securities are recognized through earnings when we intend to sell an AFS security, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost. Additionally, we evaluate whether a credit loss exists for securities that we intend to hold. We consider all factors in determining whether a credit loss exists, including the period over which the debt security is expected to recover. 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 is less than the amortized cost basis.
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 HTM securities and are recorded at amortized cost, net of any ACL.
Effective January 1, 2020, we measure ECL on HTM securities on a collective basis by major security type and standard credit rating. Certain securities in our HTM securities 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.
The estimate of ECL on our HTM securities that are not guaranteed by the U.S. government 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, 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 AIR from HTM securities as AIR is reversed or written off when the full collection of the AIR related to a security becomes doubtful. AIR from HTM securities totaled $225 million at December 31, 2021 and $55 million at December 31, 2020 and is excluded from the amortized cost disclosures within our HTM security disclosures in Note 9—“Investment Securities” as it is included and reported separately within "Accrued interest receivable and other assets" in our consolidated balance sheets.
ECL on 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.
Transfers of investment securities into the HTM category from the AFS 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 HTM 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
104
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
method accounting and (iv) the proportional amortization method which is used only for qualified affordable housing projects.
Fair Value Accounting
Our consolidated managed funds qualify as investment companies and therefore report their investments at estimated fair value, with unrealized gains and losses reflected as gains on investment securities, net, a component of noninterest income. The portion of any investment gains or losses attributable to other limited partners is reflected as net income attributable to noncontrolling interests and adjusts our net income to reflect its percentage ownership. Our consolidated managed funds of funds make investments in venture capital and private equity funds. A summary of our ownership interests in such funds as of December 31, 2021 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 | |||||||
Our direct investments in public portfolio companies are valued based on quoted market prices less a discount if the securities are subject to certain security specific sale restrictions. Gains or losses resulting from changes in the net asset value are recorded as gains on investment securities, net, a component of noninterest income.
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 partnershipsto, 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.
Our investments in whichunconsolidated funds where we hold voting interests of more than 5 percent, or in which wedo not have the ability to exercise significant influence over the partnerships'their operating and financial policies are accounted forvalued using the equity method.
Allowance for Unfunded Credit Commitments
Net Deferred Tax Liabilities
Net deferred tax liabilities decreased$173 million as our tax position changed to a net deferred tax asset position of $24 million due primarily to the decrease in the fair value of our AFS securities and the adoption of fair value accounting on loans and debt securities for income tax purposes as a result of the Boston Private acquisition.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $391 million was driven primarily by $60 million of unsettled fixed income investment securities purchases and a $112 million increase in investments payable related to investments in qualified affordable housing projects.
Noncontrolling Interests
Noncontrolling interests totaled $373 million and $213 million at December 31, 2021 and December 31, 2020, respectively. The increase was due to net income attributable to noncontrolling interests of $240 million, partially offset by net capital distributions of $80 million for the year ended December 31, 2021. 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.
84
Capital Resources
We maintain an adequate capital base to support anticipated asset growth, operating needs, and credit risk-ratingand 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.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $16.2 billion at December 31, 2021, an increase of $8.0 billion, or 97.5 percent, compared to $8.2 billion at December 31, 2020. The increase was driven primarily by a $3.4 billion issuance of common stock, of which $1.1 billion was issued to complete the acquisition of Boston Private, $3.3 billion issuance of preferred stock and $1.8 billion of net income, offset partially by the decrease in AOCI of $632 million. The decrease in AOCI was driven primarily by a $644 million (or $465 million net of tax) decrease in the fair value of our AFS securities portfolio reflective of increases in market interest rates.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Common Stock
On March 22, 2021, to support the continued growth of our balance sheet, we issued and sold 2,000,000 shares of common stock at a price of $500.00 per share. We received net proceeds of $972 million after deducting underwriting discounts and commissions. On April 14, 2021, we issued and sold an additional 300,000 shares of common stock under the full exercise of the underwriter's over-allotment option resulting in additional net proceeds of approximately $146 million after deducting discounts and commissions. On July 1, 2021, we issued 1,887,981 shares of common stock for the acquisition of Boston Private at an exchange ratio of 0.0228 SIVB shares per Boston Private share totaling $1.1 billion. On August 12, 2021, we issued and sold an additional 2,227,000 shares of common stock at an offering price of $564.00 per share, which resulted in net proceeds of $1.2 billion.
Preferred Stock
On February 2, 2021, SVB Financial Group issued 750,000 depositary shares each representing a 1/100th ownership interest in a share of 4.10% Non-Cumulative Perpetual Series B Preferred Stock (''Series B Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series B Preferred Stock is perpetual and has no stated maturity. Dividends are approved by the Board of Directors and, if declared, 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. As of December 31, 2021, our Series B Preferred Stock had a carrying value of $739 million and a liquidation preference of $750 million.
On May 13, 2021, SVB Financial Group issued 1,000,000 depositary shares each representing a 1/100th ownership interest in a share of 4.00% Non-Cumulative Perpetual Series C Preferred Stock (''Series C Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series C Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.000 percent from the original issue date to, but excluding, May 15, 2026, and (ii) for the May 15, 2026 dividend date and during each subsequent five year period, the five-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 five-year maturities) plus 3.202 percent. As of December 31, 2021, our Series C Preferred Stock had a carrying value of $985 million and a liquidation preference of $1.0 billion.
On October 28, 2021, SVB Financial Group issued 1,000,000 depositary shares each representing a 1/100th ownership interest in a share of 4.25% Non-Cumulative Perpetual Series D Preferred Stock (''Series D Preferred Stock'') with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series D Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in
85
arrears, at a rate per annum equal to (i) 4.250 percent from the original issue date to, but excluding, November 15, 2026, and (ii) for the November 15, 2026 dividend date and during each subsequent five year period, the five-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 five-year maturities) plus 3.074 percent. As of December 31, 2021, our Series D Preferred Stock had a carrying value of $989 million and a liquidation preference of $1.0 billion.
On October 28, 2021, SVB Financial Group also issued 600,000 depositary shares each representing a 1/100th ownership interest in a share of 4.70% Series E Preferred Stock ("Series E Preferred Stock”) with a $0.001 par value and a liquidation preference of $100,000 per share, or $1,000 per depositary share. The Series E Preferred Stock is perpetual and has no stated maturity. Dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.700 percent from the original issue date to, but excluding, November 15, 2031, and (ii) for the November 15, 2031 dividend date and during each subsequent ten years 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 five-year maturities) plus 3.064 percent. As of December 31, 2021, our Series E Preferred Stock had a carrying value of $593 million and a liquidation preference of $600 million.
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 as defined under the Federal Reserve’s Regulation Y, respectively, as of December 31, 2021, and 2020. 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 | Required Minimum + Capital Conservation Buffer (1) | Well Capitalized Minimum | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| SVB Financial: | ||||||||||||||||||||||||||||||||||||||
| CET1 risk-based capital ratio (2) (3) | 12.09 | % | 11.04 | % | 4.5 | % | 7.0 | % | N/A | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (3) | 16.08 | 11.89 | 6.0 | 8.5 | 6.0 | |||||||||||||||||||||||||||||||||
| Total risk-based capital ratio (3) | 16.58 | 12.64 | 8.0 | 10.5 | 10.0 | |||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (2) (3) | 7.93 | 7.45 | 4.0 | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to tangible assets ratio (4)(5) | 5.73 | 6.66 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to risk-weighted assets ratio (4)(5) | 11.98 | 11.87 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Bank: | ||||||||||||||||||||||||||||||||||||||
| CET1 risk-based capital ratio (3) | 14.89 | % | 10.70 | % | 4.5 | % | 7.0 | % | 6.5 | % | ||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio (3) | 14.89 | 10.70 | 6.0 | 8.5 | 8.0 | |||||||||||||||||||||||||||||||||
| Total risk-based capital ratio (3) | 15.40 | 11.49 | 8.0 | 10.5 | 10.0 | |||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio (3) | 7.24 | 6.43 | 4.0 | N/A | 5.0 | |||||||||||||||||||||||||||||||||
| Tangible common equity to tangible assets ratio (4)(5) | 7.09 | 6.24 | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||
| Tangible common equity to risk-weighted assets ratio (4)(5) | 15.06 | 11.58 | N/A | 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" CET1 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 ACL 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.
Our risk-based capital ratios, tier 1 capital ratios and leverage ratios increased for both SVB Financial and Silicon Valley Bank as of December 31, 2021, compared to December 31, 2020. The increase in capital ratios was driven primarily by increases in our capital, partially offset by increases in our risk-weighted and average assets. The increase in capital for SVB Financial was driven by the issuance of common and preferred stock and net income. The increase in capital for Silicon Valley Bank was driven by a $5.8 billion downstream capital infusion from our bank holding company during the year ended
86
December 31, 2021. The increase in average assets was driven by increases in our fixed income investments and loan portfolios. All of 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, these financial measures should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. 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 millions, except ratios) | SVB Financial | |||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
| GAAP SVBFG stockholders’ equity | $ | 16,236 | $ | 8,220 | $ | 6,470 | $ | 5,116 | $ | 4,180 | ||||||||||||||||||||||
| Less: preferred stock | 3,646 | 340 | 340 | — | — | |||||||||||||||||||||||||||
| Less: intangible assets | 535 | 204 | 187 | — | — | |||||||||||||||||||||||||||
| Plus: net deferred taxes on intangible assets | 26 | — | — | — | — | |||||||||||||||||||||||||||
| Tangible common equity | $ | 12,081 | $ | 7,676 | $ | 5,943 | $ | 5,116 | $ | 4,180 | ||||||||||||||||||||||
| GAAP total assets | $ | 211,478 | $ | 115,511 | $ | 71,005 | $ | 56,928 | $ | 51,214 | ||||||||||||||||||||||
| Less: intangible assets | 535 | 204 | 187 | — | — | |||||||||||||||||||||||||||
| Plus: net deferred taxes on intangible assets | 26 | — | — | — | — | |||||||||||||||||||||||||||
| Tangible assets | $ | 210,969 | $ | 115,307 | $ | 70,818 | $ | 56,928 | $ | 51,214 | ||||||||||||||||||||||
| Risk-weighted assets | $ | 100,812 | $ | 64,681 | $ | 46,577 | $ | 38,528 | $ | 32,737 | ||||||||||||||||||||||
| Non-GAAP tangible common equity to tangible assets | 5.73 | % | 6.66 | % | 8.39 | % | 8.99 | % | 8.16 | % | ||||||||||||||||||||||
| Non-GAAP tangible common equity to risk-weighted assets | 11.98 | 11.87 | 12.76 | 13.28 | 12.77 | |||||||||||||||||||||||||||
| Non-GAAP tangible common equity and tangible assets (Dollars in millions, except ratios) | Bank | |||||||||||||||||||||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||
| Tangible common equity | $ | 14,795 | $ | 7,069 | $ | 5,034 | $ | 4,555 | $ | 3,763 | ||||||||||||||||||||||
| Tangible assets | $ | 208,576 | $ | 113,303 | $ | 69,564 | $ | 56,047 | $ | 50,384 | ||||||||||||||||||||||
| Risk-weighted assets | $ | 98,214 | $ | 61,023 | $ | 44,502 | $ | 37,104 | $ | 31,403 | ||||||||||||||||||||||
| Non-GAAP tangible common equity to tangible assets | 7.09 | % | 6.24 | % | 7.24 | % | 8.13 | % | 7.47 | % | ||||||||||||||||||||||
| Non-GAAP tangible common equity to risk-weighted assets | 15.06 | 11.58 | 11.31 | 12.28 | 11.98 | |||||||||||||||||||||||||||
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, 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.
87
The following table summarizes our unfunded commercial commitments as of December 31, 2021:
| Amount of Commitments Expiring per Period | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||||||||||||||
| Commercial commitments: | ||||||||||||||||||||||||||||||||
| Loan commitments available for funding | $ | 40,327 | $ | 27,302 | $ | 7,288 | $ | 3,989 | $ | 1,748 | ||||||||||||||||||||||
| Standby letters of credit | 3,612 | 3,492 | 89 | 18 | 13 | |||||||||||||||||||||||||||
| Commercial letters of credit | 77 | 40 | 37 | — | — | |||||||||||||||||||||||||||
| Total unfunded credit commitments | $ | 44,016 | $ | 30,834 | $ | 7,414 | $ | 4,007 | $ | 1,761 | ||||||||||||||||||||||
The following table summarizes our contractual obligations to make future payments as of December 31, 2021:
| Payments Due By Period | ||||||||||||||||||||||||||||||||
| (Dollars in millions) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||||||||||||||||||
| SVBFG contractual obligations: | ||||||||||||||||||||||||||||||||
| Deposits (1) (2) | $ | 189,203 | $ | 189,203 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Borrowings (2) | 2,691 | 121 | 349 | 645 | 1,576 | |||||||||||||||||||||||||||
| Non-cancelable operating leases | 416 | 77 | 139 | 88 | 112 | |||||||||||||||||||||||||||
| Commitments to qualified affordable housing projects | 482 | 173 | 271 | 14 | 24 | |||||||||||||||||||||||||||
| Total obligations attributable to SVBFG | $ | 192,792 | $ | 189,574 | $ | 759 | $ | 747 | $ | 1,712 | ||||||||||||||||||||||
(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 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 $3.0 million of remaining unfunded commitments to venture capital and private equity funds. See Note 9—“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.
88
Historically, client deposits have 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. We may also offer more investment alternatives for our off-balance sheet products which may impact deposit levels. At December 31, 2021, our period-end total deposit balances increased to $189.2 billion, compared to $102.0 billion at December 31, 2020.
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, 2021, collateral pledged to the FHLB of San Francisco was comprised primarily of fixed income investment securities and loans and had a carrying value of $7.3 billion, of which $6.3 billion was available to support additional borrowings. As of December 31, 2021, collateral pledged to the discount window at the FRB was comprised of fixed income investment securities and had a carrying value of $0.8 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 $2.1 billion at December 31, 2021. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $5.5 billion at December 31, 2021.
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 2021 and 2020, 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 millions) | 2021 | 2020 | ||||||||||||||||||
| Average cash and cash equivalents | $ | 23,041 | $ | 13,273 | ||||||||||||||||
| Percentage of total average assets | 13.9 | % | 15.5 | % | ||||||||||||||||
| Net cash provided by operating activities | $ | 1,812 | $ | 1,446 | ||||||||||||||||
| Net cash used for investing activities | (90,336) | (31,206) | ||||||||||||||||||
| Net cash provided by financing activities | 85,468 | 40,653 | ||||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (3,056) | $ | 10,893 | ||||||||||||||||
Average cash and cash equivalents increased to $23.0 billion in 2021, compared to $13.3 billion for 2020. Average deposits increased $72.9 billion which enabled us to grow our average loan portfolio by $17.3 billion in 2021.
December 31, 2021
Cash provided by operating activities of $1.8 billion in 2021 included net income before noncontrolling interests of $2.1 billion partially offset by $254 million from changes in other assets and liabilities and $7 million from changes from adjustments to reconcile to net income to net cash.
Cash used for investing activities of $90.3 billion in 2021 was driven by $97.7 billion in purchases of fixed income investment securities and a $13.7 billion increase in loan balances, partially offset by $19.8 billion in proceeds from sales, maturities and principal pay downs from our fixed income investment securities portfolio and $1.1 billion in proceeds from the acquisition of Boston Private.
Cash provided by financing activities of $85.5 billion in 2021 reflective primarily of a $78.2 billion increase in deposits, $5.7 billion in capital raised by our preferred and common stock issuances, and $1.6 billion increase from the issuance of long-term debt.
89
Cash and cash equivalents at December 31, 2021 were $14.6 billion, compared to $17.7 billion at December 31, 2020.
December 31, 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 $495 million 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.
90
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 EVE 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 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. Although we ceased offering LIBOR-based loans as of December 31, 2021, our simulation results will reflect changes in LIBOR rates until publication rates are fully phased out. 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.
Simulation results presented include a beta assumption that is applied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations about deposit repricing behavior. This model assumes the overall beta for interest-bearing deposits is 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. These repricing assumptions are reflected as changes in interest expense on interest-bearing deposit balances.
91
The acquisition of Boston Private was completed in July 2021. The acquisition added approximately $10 billion of total assets and $9 billion of deposits to the balance sheet. Most of the assets added were fixed and variable rate residential mortgages and commercial loans. Both the EVE and NII sensitivity measures described here are inclusive of the impact of the Boston Private acquisition.
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 bps at December 31, 2021 and December 31, 2020.
| Change in interest rates (bps) (Dollars in millions) | Estimated | Estimated Increase/(Decrease) In EVE | Estimated | Estimated Increase/ (Decrease) In NII | ||||||||||||||||||||||||||||||||||
| EVE | Amount | Percent | NII | Amount | Percent | |||||||||||||||||||||||||||||||||
| December 31, 2021: | ||||||||||||||||||||||||||||||||||||||
| +200 | $ | 14,950 | $ | (5,722) | (27.7) | % | $ | 5,258 | $ | 981 | 22.9 | % | ||||||||||||||||||||||||||
| +100 | 17,799 | (2,873) | (13.9) | 4,745 | 468 | 10.9 | ||||||||||||||||||||||||||||||||
| — | 20,672 | — | — | 4,277 | — | — | ||||||||||||||||||||||||||||||||
| -100 | 21,904 | 1,232 | 6.0 | 4,002 | (275) | (6.4) | ||||||||||||||||||||||||||||||||
| -200 | 21,308 | 636 | 3.1 | 3,911 | (366) | (8.6) | ||||||||||||||||||||||||||||||||
| December 31, 2020: | ||||||||||||||||||||||||||||||||||||||
| +200 | $ | 9,500 | $ | (1,724) | (15.4) | % | $ | 3,063 | $ | 691 | 29.1 | % | ||||||||||||||||||||||||||
| +100 | 10,558 | (666) | (5.9) | 2,729 | 357 | 15.1 | ||||||||||||||||||||||||||||||||
| — | 11,224 | — | — | 2,372 | — | — | ||||||||||||||||||||||||||||||||
| -100 | 11,582 | 358 | 3.2 | 2,310 | (62) | (2.6) | ||||||||||||||||||||||||||||||||
| -200 | 11,534 | 310 | 2.8 | 2,306 | (66) | (2.8) | ||||||||||||||||||||||||||||||||
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-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, 2021 increased $9.5 billion from December 31, 2020, driven by overall balance sheet growth as well as yield curve steepening during the first half of 2021. For the period ended December 31, 2021, compared to December 31, 2020, cash balances decreased by $3.1 billion, fixed income investments in our AFS portfolio decreased by $3.7 billion, while HTM portfolio balances increased by $81.6 billion and loan balances increased by $21.1 billion. Funding for these assets came primarily from growth of $87.2 billion in total deposits, which consisted of a $59.3 billion and $27.9 billion increase in non-interest bearing and interest bearing accounts, respectively. The mix of non-interest bearing to total deposits increased slightly by 2 percent from 65 at December 31, 2020, to 67 percent at December 31, 2021.
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 investment 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.
In March 2021 we purchased interest rate swaps to offset some of the additional EVE sensitivity that has resulted from rapid balance sheet growth. As of December 31, 2021, the estimated change in EVE in an up to 100 bps rate shock would be
92
-15.4 percent without any hedging applied. The addition of pay fixed swaps reduces this exposure to -13.9 percent in the same scenario. The EVE exposures shown in the table above include the impact of our hedging activity.
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 31,2021, NII sensitivity was 10.9 percent in the +100 bps interest rate scenario, compared to 15.1 percent at December 31, 2020. Our NII sensitivity in the +200 bps interest rate shock scenario was 22.9 percent compared to 29.2 percent at December 31, 2020. NII sensitivity in the -100 bps scenario of negative 6.4 percent was higher at December 31, 2021, compared to a negative 2.6 percent at December 31, 2020. The -200 bps scenario currently indicates a higher percentage change in NII of negative 8.6 percent at December 31, 2021, compared to negative 2.8 percent at December 31, 2020. 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, 2021 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 as well as unrealized income associated with more recent hedging activity that has been undertaken to reduce EVE exposure. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition described previously, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at December 31, 2021 increased compared to December 31, 2020 by $1.9 billion, driven primarily by the growth in the balance sheet that has taken place year-to-date. Specifically, a large portion of asset growth has been deployed in the fixed income investment securities portfolio as noted above. As of December 31, 2021, we also held a relatively high cash position which is expected to decrease as excess funds are invested.
A majority of our loans are indexed to Prime and LIBOR. Despite no longer offering LIBOR-based loans as of December 31, 2021, we have begun offering loans based on SOFR and other recognized alternative reference rates. Additionally, despite no longer offering new LIBOR-based loans, our simulation result will reflect changes in LIBOR until the published rates are phased out. In the upward 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 downward 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 up-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.
93
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Page Number | |||||
Report of Independent Registered Public Accounting Firm (Auditor Firm ID: 185) | |||||
94
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, 2021 and 2020, 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, 2021, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Boston Private Financial Holdings, Inc. during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, Boston Private Financial Holdings, Inc’s internal control over financial reporting associated with approximately 2% of total consolidated revenue and approximately 4% of total consolidated assets included in the consolidated financial statements of the Company as of and for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Boston Private Financial Holdings, Inc.
Change in Accounting Principle
As discussed in Notes 2 and 10 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
95
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 for certain portfolio segments evaluated on a collective basis
As discussed in Notes 2 and 10 of the consolidated financial statements, the Company’s allowance for credit losses for loans (ALL) and unfunded credit commitments (AUCC) were $422 million and $171 million as of December 31, 2021, 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, 2021 collective ALL and collective AULC for the Global Funds Banking, Investor Dependent, Cash Flow Dependent & Innovation C&I, Premium Wine, and legacy Private Bank portfolio segments 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, 2021 collective ALL and collective AULC estimates, including controls over the:
•periodic review and monitoring of the collective ALL and the collective AULC methodology
96
•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, 2021 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 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, 2021 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, 2022
97
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||||||
| (Dollars in millions, except par value and share data) | 2021 | 2020 | ||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 14,619 | $ | 17,675 | ||||||||||
| Available-for-sale securities, at fair value (cost of $27,370 and $30,245, respectively) | 27,221 | 30,913 | ||||||||||||
| Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $7 and $0 (fair value of $97,227 and $17,217, respectively) | 98,195 | 16,592 | ||||||||||||
| Non-marketable and other equity securities | 2,543 | 1,802 | ||||||||||||
| Total investment securities | 127,959 | 49,307 | ||||||||||||
| Loans, amortized cost | 66,276 | 45,181 | ||||||||||||
| Allowance for credit losses: loans | (422) | (448) | ||||||||||||
| Net loans | 65,854 | 44,733 | ||||||||||||
| Premises and equipment, net of accumulated depreciation and amortization | 270 | 176 | ||||||||||||
| Goodwill | 375 | 143 | ||||||||||||
| Other intangible assets, net | 160 | 61 | ||||||||||||
| Lease right-of-use assets | 313 | 210 | ||||||||||||
| Accrued interest receivable and other assets | 1,928 | 3,206 | ||||||||||||
| Total assets | $ | 211,478 | $ | 115,511 | ||||||||||
| Liabilities and total equity | ||||||||||||||
| Liabilities: | ||||||||||||||
| Noninterest-bearing demand deposits | $ | 125,851 | $ | 66,519 | ||||||||||
| Interest-bearing deposits | 63,352 | 35,463 | ||||||||||||
| Total deposits | 189,203 | 101,982 | ||||||||||||
| Short-term borrowings | 121 | 21 | ||||||||||||
| Lease liabilities | 388 | 259 | ||||||||||||
| Other liabilities | 2,587 | 3,972 | ||||||||||||
| Long-term debt | 2,570 | 844 | ||||||||||||
| Total liabilities | 194,869 | 107,078 | ||||||||||||
| Commitments and contingencies (Note 21 and Note 26) | 0 | 0 | ||||||||||||
| SVBFG stockholders’ equity: | ||||||||||||||
| Preferred stock, $0.001 par value, 20,000,000 shares authorized; 383,500 and 350,000 shares issued and outstanding, respectively | 3,646 | 340 | ||||||||||||
| Common stock, $0.001 par value, 150,000,000 shares authorized; 58,748,469 and 51,888,463 shares issued and outstanding, respectively | — | — | ||||||||||||
| Additional paid-in capital | 5,157 | 1,585 | ||||||||||||
| Retained earnings | 7,442 | 5,672 | ||||||||||||
| Accumulated other comprehensive income | (9) | 623 | ||||||||||||
| Total SVBFG stockholders’ equity | 16,236 | 8,220 | ||||||||||||
| Noncontrolling interests | 373 | 213 | ||||||||||||
| Total equity | 16,609 | 8,433 | ||||||||||||
| Total liabilities and total equity | $ | 211,478 | $ | 115,511 | ||||||||||
See accompanying notes to the consolidated financial statements.
98
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions, except per share amounts) | 2021 | 2020 | 2019 | |||||||||||||||||
| Interest income: | ||||||||||||||||||||
| Loans | $ | 1,966 | $ | 1,520 | $ | 1,599 | ||||||||||||||
| Investment securities: | ||||||||||||||||||||
| Taxable | 1,199 | 635 | 569 | |||||||||||||||||
| Non-taxable | 106 | 61 | 45 | |||||||||||||||||
| Federal funds sold, securities purchased under agreements to resell and other short-term investment securities | 18 | 26 | 97 | |||||||||||||||||
| Total interest income | 3,289 | 2,242 | 2,310 | |||||||||||||||||
| Interest expense: | ||||||||||||||||||||
| Deposits | 62 | 60 | 178 | |||||||||||||||||
| Borrowings | 48 | 25 | 35 | |||||||||||||||||
| Total interest expense | 110 | 85 | 213 | |||||||||||||||||
| Net interest income | 3,179 | 2,157 | 2,097 | |||||||||||||||||
| Provision for credit losses | 123 | 220 | 107 | |||||||||||||||||
| Net interest income after provision for credit losses | 3,056 | 1,937 | 1,990 | |||||||||||||||||
| Noninterest income: | ||||||||||||||||||||
| Gains on investment securities, net | 761 | 421 | 135 | |||||||||||||||||
| Gains on equity warrant assets, net | 560 | 237 | 138 | |||||||||||||||||
| Client investment fees | 75 | 132 | 182 | |||||||||||||||||
| Wealth management and trust fees | 44 | — | — | |||||||||||||||||
| Foreign exchange fees | 262 | 179 | 159 | |||||||||||||||||
| Credit card fees | 131 | 98 | 119 | |||||||||||||||||
| Deposit service charges | 112 | 90 | 89 | |||||||||||||||||
| Lending related fees | 76 | 57 | 50 | |||||||||||||||||
| Letters of credit and standby letters of credit fees | 51 | 47 | 43 | |||||||||||||||||
| Investment banking revenue | 459 | 414 | 195 | |||||||||||||||||
| Commissions | 79 | 67 | 56 | |||||||||||||||||
| Other | 128 | 98 | 55 | |||||||||||||||||
| Total noninterest income | 2,738 | 1,840 | 1,221 | |||||||||||||||||
| Noninterest expense: | ||||||||||||||||||||
| Compensation and benefits | 2,015 | 1,318 | 990 | |||||||||||||||||
| Professional services | 392 | 247 | 205 | |||||||||||||||||
| Premises and equipment | 178 | 127 | 97 | |||||||||||||||||
| Net occupancy | 83 | 101 | 69 | |||||||||||||||||
| Business development and travel | 24 | 24 | 69 | |||||||||||||||||
| FDIC and state assessments | 48 | 28 | 18 | |||||||||||||||||
| Merger-related charges | 129 | — | — | |||||||||||||||||
| Other | 201 | 190 | 153 | |||||||||||||||||
| Total noninterest expense | 3,070 | 2,035 | 1,601 | |||||||||||||||||
| Income before income tax expense | 2,724 | 1,742 | 1,610 | |||||||||||||||||
| Income tax expense | 651 | 448 | 425 | |||||||||||||||||
| Net income before noncontrolling interests | 2,073 | 1,294 | 1,185 | |||||||||||||||||
| Net income attributable to noncontrolling interests | (240) | (86) | (48) | |||||||||||||||||
| Preferred stock dividends | (63) | (17) | — | |||||||||||||||||
| Net income available to common stockholders | $ | 1,770 | $ | 1,191 | $ | 1,137 | ||||||||||||||
| Earnings per common share—basic | $ | 31.74 | $ | 23.05 | $ | 21.90 | ||||||||||||||
| Earnings per common share—diluted | 31.25 | 22.87 | 21.73 | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
99
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Net income before noncontrolling interests | $ | 2,073 | $ | 1,294 | $ | 1,185 | ||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||
| Change in foreign currency cumulative translation gains and losses: | ||||||||||||||||||||
| Foreign currency translation (losses) gains | (2) | 16 | 3 | |||||||||||||||||
| Related tax benefit (expense) | — | (5) | (1) | |||||||||||||||||
| Change in unrealized gains and losses on available-for-sale securities: | ||||||||||||||||||||
| Unrealized holding (losses) gains | (644) | 606 | 190 | |||||||||||||||||
| Related tax benefit (expense) | 179 | (168) | (53) | |||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income | (31) | (61) | 4 | |||||||||||||||||
| Related tax expense (benefit) | 9 | 17 | (1) | |||||||||||||||||
| Cumulative-effect adjustment for unrealized losses on securities transferred from AFS to HTM | (132) | — | — | |||||||||||||||||
| Related tax benefit | 37 | — | — | |||||||||||||||||
| Amortization of unrealized holding (gains) losses on securities transferred from available-for-sale to held-to-maturity | (1) | 2 | (2) | |||||||||||||||||
| Related tax expense (benefit) | — | (1) | 1 | |||||||||||||||||
| Change in unrealized gains and losses on cash flow hedges: | ||||||||||||||||||||
| Unrealized gains (losses) | — | 232 | (8) | |||||||||||||||||
| Related tax (expense) benefit | — | (64) | 2 | |||||||||||||||||
| Reclassification adjustment for (gains) losses included in net income | (63) | (50) | 5 | |||||||||||||||||
| Related tax expense (benefit) | 17 | 14 | (2) | |||||||||||||||||
| Other comprehensive (loss) income, net of tax | (632) | 538 | 139 | |||||||||||||||||
| Comprehensive income | 1,441 | 1,832 | 1,324 | |||||||||||||||||
| Comprehensive income attributable to noncontrolling interests | (240) | (86) | (48) | |||||||||||||||||
| Comprehensive income attributable to SVBFG | $ | 1,201 | $ | 1,746 | $ | 1,276 | ||||||||||||||
See accompanying notes to the consolidated financial statements.
100
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 millions, except share data) | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | — | 52,586,498 | $ | — | $ | 1,378 | $ | 3,792 | $ | (54) | $ | 5,116 | $ | 149 | $ | 5,265 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities (ASU 2017-08) | — | — | — | — | (1) | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of SVB Securities | — | — | — | — | — | — | — | 5 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 601,319 | — | 25 | — | — | 25 | — | 25 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 340 | — | — | — | — | — | 340 | — | 340 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,137 | — | 1,137 | 48 | 1,185 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (51) | (51) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 139 | 139 | — | 139 | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 67 | — | — | 67 | — | 67 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (1,532,210) | — | — | (352) | — | (352) | — | (352) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 340 | 51,655,607 | $ | — | $ | 1,470 | $ | 4,576 | $ | 85 | $ | 6,471 | $ | 151 | $ | 6,622 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment for the day one adoption of ASC 326, net of tax | — | — | — | — | (35) | — | (35) | — | (35) | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 477,079 | — | 31 | — | — | 31 | — | 31 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,208 | — | 1,208 | 86 | 1,294 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (24) | (24) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | 538 | 538 | — | 538 | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 84 | — | — | 84 | — | 84 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchases | — | (244,223) | — | — | (60) | — | (60) | — | (60) | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (17) | — | (17) | — | (17) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 340 | 51,888,463 | $ | — | $ | 1,585 | $ | 5,672 | $ | 623 | $ | 8,220 | $ | 213 | $ | 8,433 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans and ESOP, net of restricted stock cancellations | — | 445,025 | — | 11 | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | — | 4,527,000 | — | 2,363 | — | — | 2,363 | — | 2,363 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for the acquisition of Boston Private | — | 1,887,981 | — | 1,060 | — | — | 1,060 | — | 1,060 | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 3,306 | — | — | — | — | — | 3,306 | — | 3,306 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 1,833 | — | 1,833 | 240 | 2,073 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital calls and distributions, net | — | — | — | — | — | — | — | (80) | (80) | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | (632) | (632) | — | (632) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation, net | — | — | — | 138 | — | — | 138 | — | 138 | |||||||||||||||||||||||||||||||||||||||||||||||
| Dividends on preferred stock | — | — | — | — | (63) | — | (63) | — | (63) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 3,646 | 58,748,469 | $ | — | $ | 5,157 | $ | 7,442 | $ | (9) | $ | 16,236 | $ | 373 | $ | 16,609 | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
101
SVB FINANCIAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income before noncontrolling interests | $ | 2,073 | $ | 1,294 | $ | 1,185 | ||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Provision for credit losses | 123 | 220 | 107 | |||||||||||||||||
| Changes in fair value of equity warrant assets, net of proceeds from exercises | (26) | (2) | 2 | |||||||||||||||||
| Changes in fair values of derivatives, net | (4) | (48) | (19) | |||||||||||||||||
| Gains on investment securities, net | (761) | (421) | (135) | |||||||||||||||||
| Distributions of earnings from non-marketable and other equity securities | 201 | 86 | 95 | |||||||||||||||||
| Depreciation and amortization | 151 | 101 | 83 | |||||||||||||||||
| Amortization of premiums and discounts on investment securities, net | 451 | 75 | 16 | |||||||||||||||||
| Amortization of share-based compensation | 136 | 84 | 67 | |||||||||||||||||
| Amortization of deferred loan fees | (269) | (174) | (155) | |||||||||||||||||
| Deferred income tax (benefit) expense | (8) | 7 | (3) | |||||||||||||||||
| Excess tax benefit from exercise of stock options and vesting of restricted shares | (40) | (6) | (10) | |||||||||||||||||
| Losses from the write-off of premises and equipment and right-of-use assets | 39 | 30 | 5 | |||||||||||||||||
| Other losses | — | — | 9 | |||||||||||||||||
| Changes in other assets and liabilities: | ||||||||||||||||||||
| Accrued interest receivable and payable, net | (185) | (26) | (24) | |||||||||||||||||
| Accounts receivable and payable, net | 17 | 19 | (17) | |||||||||||||||||
| Income tax receivable and payable, net | (122) | 98 | (12) | |||||||||||||||||
| Accrued compensation | 332 | 191 | (15) | |||||||||||||||||
| Foreign exchange spot contracts, net | (16) | (21) | 60 | |||||||||||||||||
| Proceeds from termination of interest rate swaps | — | 228 | — | |||||||||||||||||
| Other, net | (280) | (289) | (75) | |||||||||||||||||
| Net cash provided by operating activities | 1,812 | 1,446 | 1,164 | |||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of available-for-sale securities | (12,147) | (23,208) | (9,872) | |||||||||||||||||
| Proceeds from sales of available-for-sale securities | 1,591 | 2,654 | 2,189 | |||||||||||||||||
| Proceeds from maturities and paydowns of available-for-sale securities | 4,768 | 4,184 | 1,643 | |||||||||||||||||
| Purchases of held-to-maturity securities | (85,519) | (6,778) | (493) | |||||||||||||||||
| Proceeds from maturities and paydowns of held-to-maturity securities | 13,428 | 4,036 | 2,125 | |||||||||||||||||
| Purchases of non-marketable and other equity securities | (365) | (201) | (136) | |||||||||||||||||
| Proceeds from sales and distributions of capital of non-marketable and other equity securities | 666 | 148 | 114 | |||||||||||||||||
| Net increase in loans | (13,726) | (11,927) | (4,775) | |||||||||||||||||
| Purchases of premises and equipment | (113) | (87) | (65) | |||||||||||||||||
| Business acquisitions, net | 1,081 | (27) | (102) | |||||||||||||||||
| Net cash used for investing activities | (90,336) | (31,206) | (9,372) | |||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Net increase in deposits | 78,238 | 40,224 | 12,429 | |||||||||||||||||
| Net increase (decrease) in short-term borrowings | 57 | 3 | (614) | |||||||||||||||||
| Principal payments of long-term debt | — | — | (359) | |||||||||||||||||
| Proceeds from issuance of long-term debt | 1,636 | 495 | — | |||||||||||||||||
| (Distributions to noncontrolling interests), net of contributions from noncontrolling interests | (80) | (23) | (51) | |||||||||||||||||
| Net proceeds from the issuance of preferred stock | 3,306 | — | 340 | |||||||||||||||||
| Payment of preferred stock dividends | (63) | (17) | — | |||||||||||||||||
| Common stock repurchase | — | (60) | (352) | |||||||||||||||||
| Proceeds from issuance of common stock, ESPP and ESOP | 2,374 | 31 | 25 | |||||||||||||||||
| Net cash provided by financing activities | 85,468 | 40,653 | 11,418 | |||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | (3,056) | 10,893 | 3,210 | |||||||||||||||||
| Cash and cash equivalents at beginning of period | 17,675 | 6,782 | 3,572 | |||||||||||||||||
| Cash and cash equivalents at end of period | $ | 14,619 | $ | 17,675 | $ | 6,782 | ||||||||||||||
| Supplemental disclosures: | ||||||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||||||
| Interest | $ | 93 | $ | 84 | $ | 218 | ||||||||||||||
| Income taxes | 739 | 299 | 422 | |||||||||||||||||
| Noncash items during the period: | ||||||||||||||||||||
| Changes in unrealized gains and losses on available-for-sale securities, net of tax | $ | (488) | $ | 394 | $ | 140 | ||||||||||||||
| Distributions of stock from investments | 72 | 12 | 9 | |||||||||||||||||
| Transfers from AFS securities to HTM | 8,953 | — | — | |||||||||||||||||
See accompanying notes to the consolidated financial statements.
102
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: GCB, SVB Private Bank, SVB Capital and SVB Securities.
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. Among the more significant estimates are those that relate to: 1) ACL for loans and for unfunded credit commitments, 2) valuation of non-marketable and other equity securities, 3) valuation of equity warrant assets, 4) goodwill, intangible assets and other purchase accounting related adjustments and 5) income taxes.
Principles of Consolidation and Presentation
Our consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate entities in which we have a controlling financial interest. Before we determine whether we have a controlling financial interest, we must evaluate whether the entity is a voting interest entity or a variable interest entity ("VIE").
VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support 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 are considered to hold a controlling financial interest in a VIE when we are the primary beneficiary. A primary beneficiary is the party that has both: (a) the power to direct the activities that most significantly impact the VIE’s economic performance, and (b) the obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. Generally, the parties that make management and investment decisions, or parties that can unilaterally remove such decision-makers are deemed to have the power to direct the activities of a VIE. When assessing whether we have the obligation to absorb losses or the right to receive benefits from the VIE, we consider all of our economic interests in the VIE, including any fees and other compensation received for providing investment and management services if that compensation is not customary and commensurate with the services provided.
Voting interest entities are entities that (a) have sufficient equity to finance their activities and (b) provide the equity investors power to make significant decisions relating to the entity’s operations. For such entities, we have a controlling financial interest if we hold a majority of voting rights.
103
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
All significant intercompany accounts and transactions with consolidated entities have been eliminated.
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 AFS 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 and liability management objectives. The accretion of discounts and amortization of premiums over the contractual terms of the underlying securities are included in interest income. We use estimates of future principal prepayments when applying the effective interest method to prepayable securities.
Unrealized gains and losses on AFS securities, net of applicable taxes, are reported in AOCI, a separate component of SVBFG's stockholders' equity. Impairment losses on AFS securities are recognized through earnings when we intend to sell an AFS security, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost. Additionally, we evaluate whether a credit loss exists for securities that we intend to hold. We consider all factors in determining whether a credit loss exists, including the period over which the debt security is expected to recover. 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 is less than the amortized cost basis.
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 HTM securities and are recorded at amortized cost, net of any ACL.
Effective January 1, 2020, we measure ECL on HTM securities on a collective basis by major security type and standard credit rating. Certain securities in our HTM securities 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.
The estimate of ECL on our HTM securities that are not guaranteed by the U.S. government 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, 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 AIR from HTM securities as AIR is reversed or written off when the full collection of the AIR related to a security becomes doubtful. AIR from HTM securities totaled $225 million at December 31, 2021 and $55 million at December 31, 2020 and is excluded from the amortized cost disclosures within our HTM security disclosures in Note 9—“Investment Securities” as it is included and reported separately within "Accrued interest receivable and other assets" in our consolidated balance sheets.
ECL on 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.
Transfers of investment securities into the HTM category from the AFS 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 HTM 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
104
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
method accounting and (iv) the proportional amortization method which is used only for qualified affordable housing projects.
Fair Value Accounting
Our consolidated managed funds qualify as investment companies and therefore report their investments at estimated fair value, with unrealized gains and losses reflected as gains on investment securities, net, a component of noninterest income. The portion of any investment gains or losses attributable to other limited partners is reflected as net income attributable to noncontrolling interests and adjusts our net income to reflect its percentage ownership. Our consolidated managed funds of funds make investments in venture capital and private equity funds. A summary of our ownership interests in such funds as of December 31, 2021 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 | |||||||
Our direct investments in public portfolio companies are valued based on quoted market prices less a discount if the securities are subject to certain security specific sale restrictions. Gains or losses resulting from changes in the net asset value are recorded as gains on investment securities, net, a component of noninterest income.
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.
Our investments in unconsolidated funds where we do not have the ability to exercise significant influence over their operating and financial policies are valued using the net asset value as obtained from the general partners of the fund investments because the funds do not have a readily determinable fair value. The general partners of these funds 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 net asset value are recorded as gains on investment securities, net, a component of noninterest income.
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 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, and
•The Bank's joint venture bank in China (SPD-SVB), 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 use the net asset
105
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 CRA, 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
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.
Loan Portfolio Segments and Classes of Financing Receivables
The process to estimate the ECL on loans involves procedures to appropriately consider the unique characteristics of our loan portfolio. Our 8 portfolio segments are determined by using the following risk dimensions: (i) underwriting methodology, (ii) industry niche and (iii) life stage. The 8 portfolio segments are further disaggregated into eleven 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.” Upon completing the acquisition of Boston Private, we evaluated the impact of the acquired loan portfolio on our existing portfolio segments and classes of financing receivables. We have modified both levels of disaggregation to accommodate Boston Private loans. The following provides additional information regarding our portfolio segments and classes of financing receivables:
•Global Fund Banking (segment and class) – The vast majority of our GFB 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 funds managed by certain private equity and venture capital firms.
•Investor Dependent (segment) – Loans are made primarily to technology and life science/healthcare companies. These borrowers typically have modest or negative cash flows and rarely have an 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 other investors, or in some cases, a successful sale to a third party or an IPO. This portfolio segment is further disaggregated into 2 classes of financing receivables:
◦Early-Stage (class) – Loans to pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million.
106
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
◦Growth Stage (class) – Loans to growth-stage enterprises. We consider companies with revenues between $5 million and $15 million, or pre-revenue clinical-stage biotechnology companies, to be Mid-Stage, and companies with revenues in excess of $15 million to be Later Stage.
•Cash Flow Dependent and Innovation C&I (segment) – Loans are made primarily to technology and life science/healthcare companies that are not Investor Dependent, i.e. repayment is not dependent on additional equity financing, a successful sale or an IPO. This portfolio segment consists of 2 classes of financing receivables:
◦Cash Flow Dependent – SLBO (class) – Loans are typically used to assist a select group of private equity sponsors with the acquisition of businesses, are larger in size, and repayment is generally dependent upon the cash flows of the combined entities. 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.
◦Innovation C&I (class) – Other C&I loans in innovation sectors such as technology and life science/healthcare industries. These loans are dependent on either the borrower’s cash flows or balance sheet for repayment. 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. Balance sheet dependent loans 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. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business.
•Private Bank (segment and class) – Loans to our Private Bank clients who are primarily private equity/venture capital professionals and executives in the innovation companies as well as high net worth clients acquired from Boston Private. We offer a customized suite of private banking services, including mortgages, home equity lines of credit, restricted and private stock loans, personal capital call lines of credit, lines of credit against liquid assets and other secured and unsecured 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.
•CRE (segment and class) – Generally acquisition financing loans for commercial properties such as office buildings, retail properties, apartment buildings, and industrial/warehouse space.
•Other C&I (segment and class) – Loans that include working capital and revolving lines of credit, as well as term loans for equipment and fixed assets. These loans are primarily to clients that are not in the technology and life sciences/healthcare industries. Additionally, this portfolio segment contains commercial tax-exempt loans to not-for-profit private schools, colleges, public charter schools and other not-for-profit organizations.
•Premium Wine and Other (segment) – This portfolio segment consists of 2 classes of financing receivables:
◦Premium Wine (class) – Loans to wine producers, vineyards and wine industry or hospitality businesses across the Western United States. A large portion of these loans are secured by real estate collateral such as vineyards and wineries.
◦Other (class) – Primarily construction and land loans for financing new developments as well as financing for improvements to existing buildings. These also include our community development loans made as part of our responsibilities under the CRA.
•PPP (segment and class) – Combined loans issued through the PPP. These loans represent clients across all portfolio segments and are guaranteed by the SBA.
107
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 ACL 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 experience 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 $171 million at December 31, 2021 and $126 million at December 31, 2020 and is excluded from the amortized cost disclosures in Note 10—“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 ACL on loans uses historical and other objective information, the classification of loans and the estimate of the ACL for loans rely on the judgment and experience of our management. A committee comprised of senior management evaluates the appropriateness of the ACL 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) PD, (2) LGD and (3) 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 described underthat 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 allowanceassessment 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;
108
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•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 lossespools 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, ECL 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.
Allowance for Credit Losses: Unfunded Credit Commitments
We maintain a separate ACL 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 provision fortotal ACL on unfunded credit losses.commitments. Loan commitments that are determined to be unconditionally cancellable by the Company do not require an ACL 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.
applied the guidance in an interagency statement issued by bank
109
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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.
Purchased Credit-Deteriorated Loans
Loans acquired where there is evidence of more than insignificant credit deterioration since origination are classified as PCD. We consider various factors in connection with this determination, including past due or nonaccrual status, credit risk rating declines, and any write downs recorded based on the collectability of the asset, among other factors. PCD loans are recorded at their purchase price plus an ECL estimated at the time of acquisition, which represents the amortized cost basis of the asset. The difference between this amortized cost basis and the par value of the loan is the non-credit discount or premium, which is amortized into interest income over the life of the loan. Subsequent increases and decreases in the allowance for credit losses related to purchased loans is recorded as provision expense.
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 | ||||||||
| 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 equipment. 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 no finance lease obligations at December 31, 2021 and December 31, 2020. 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 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 and recordpayments. We use the difference between the minimum rents paid and the straight-line rent asimplicit rate when readily determinable. The operating lease obligations. We had no capitalized lease obligations at December 31, 2017 and 2016.
110
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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, to 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 assessed fair value of that reporting unit with its carrying amount, including goodwill. Should we be required to calculate the fair value of the reporting unit, we would generally apply a discounted cash flow analysis that uses forecasted 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-saleAFS securities, derivative instruments and certain marketable, non-marketable and otherequity 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.
111
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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-saleAFS 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:MBS: Agency-issued mortgage-backed securitiesMBS 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 based on observable price adjustments relative to benchmark market interest rates taking into consideration estimated loan prepayment speeds.
Agency-issued collateralized mortgage obligations:CMO: Agency-issued collateralized mortgage obligationsCMO 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:CMBS: 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.
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.
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:
112
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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 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.
Fee-based Services Revenue Recognition
Refer to Note 14—17—“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
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
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
Cash Flow Hedges
For derivative instruments that are designated and qualify as a cash flow hedge, changes in the fair value of the derivative are recorded in AOCI and recognized in earnings as the hedged item affects earnings. To qualify for hedge accounting, a derivative must be highly effective at reducing exposure to the hedged risk. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "loans" as part of interest income, a component of consolidated net income. We assess hedge effectiveness on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge, any amounts remaining as gain or loss in AOCI are reclassified into earnings in the line item "loans" as part of interest income, a component of consolidated net income.
Fair Value Hedgesvalue hedges
For derivative instruments that are designated and qualify as a fair value hedge, both the gain or loss on the hedging instrument is recordedchanges in the statementfair value of income in the same line item asderivative and the hedged item and is intended to offsetportion of the loss or gain onfair value adjustments associated with the hedged itemportfolio attributable to the hedged risk. Any difference that does arise wouldrisk will be recognized into earnings as they occur. To qualify for hedge accounting, a derivative must be highly effective at reducing the resulthedged risk exposure. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "investment securities" as part of interest income, a component of consolidated net income. We assess hedge ineffectiveness,effectiveness on a quarterly basis to ensure all hedges remain highly effective and impacts earnings.hedge accounting can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge, any remaining fair value basis adjustments are allocated to the individual assets in the portfolio and amortized into earnings over a period consistent with the amortization of other discounts and premiums associated with the respective assets.
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 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.
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 fromafter the grant date fair value of equity warrant assets will beare recognized as increases or decreases to other assets on our balance sheet and as net gains or losses on derivative instruments, 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.
•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 utilizedused 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.
•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.
114
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•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 is classified as non-marketable and other equity securities. Changes in the fair value of the common stock is recorded as gains or losses on investments securities, in noninterest income, a component of consolidated net income. We account for these securities without a readily determinable fair value 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, with changes recorded as gains or losses on investment 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-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
Income Taxes
In March 2016,December 2019, the FASB issued a new accounting standard updateASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718))2019-12), which includes provisions intendedis part of the FASB’s initiative to simplify various aspectsreduce cost and complexity related to how share-based payments are accounted for and presented in the financial statements, including the accounting for income taxes, forfeitures,taxes. ASU 2019-12 eliminates certain exceptions to the general principles of ASC 740, Income Taxes, 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 assimplifies income tax expense or benefitaccounting 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. several areas.We adopted thisthe guidance on January 1, 20172021, on a modified retrospective basis. The adoption did not have a material impact on our financial position, results of operations, cash flows or disclosures.
Summary of Allowance for Loan Losses, Allowance for Unfunded Credit Commitments and electedImpaired Loans Superseded by Recently Adopted Accounting Standards (Applicable to estimate the number of awardsYear Ending December 31, 2019)
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 expectedprobable and incurred but not yet realized. Our evaluation process is designed to vest whichdetermine that the allowance for loan losses is consistent withappropriate at the previous accounting guidance. In addition, we also elected to applybalance sheet date. The process of estimating loan losses is inherently imprecise.
We maintain a systematic process for the amendments related to the presentationevaluation of excess tax benefits on the statementindividual loans and pools of cash flows using the prospective transition method.
115
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
•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 significant categories of revenue withinclients' industry sectors;
•Changes in the scope of this guidance and expand our qualitative disclosuresnature of our noninterest income withinloan portfolio;
•Changes in experience, ability, and depth of lending management and staff;
•Changes in the Consolidated Financial Statements beginning the first quarter of 2018.
•Changes in the eliminationtrend of cost method accounting for equity investments and will impact our nonmarketablethe volume of nonaccrual loans, troubled debt restructurings and other equity securitiesloan modifications;
•Reserve floor for portfolio segments that are currently carried at cost. This guidance will be effectivewould not draw a minimum reserve based on January 1, 2018,the lack of historical loan loss experience;
•Reserve for large funded loan exposure;
•Reserve for performing impaired loan exposure; and
•Other factors as a result,determined by management from time to time.
While the evaluation process of our equity investments measured at cost will be re-measured at fair valueallowance for loan losses uses historical and other objective information, the classification of loans and the difference between costestablishment of the allowance for loan losses rely, to a great extent, on the judgment and fair value will be recorded asexperience of our management.
Allowance for Unfunded Credit Commitments
We record a cumulative-effect adjustmentliability 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 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,credit risk-rating in accordance with this guidance, net unrealized gains includedeach 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 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 accumulated other comprehensive income of approximately $40 million on a pre-tax basisliabilities and the 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 lossesprovision in our consolidated statements of income. Furthermore,provision 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.
losses.
116
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impaired Loans
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 U.S. federal corporate income tax rate inloan, net of previous charge-offs and payments collected, we recognize impairment through the TCJ Act (or portion thereof) is recorded. The ASU is effectiveallowance for periods beginning after December 15, 2018 with early adoption is permitted. We have elected to early adopt ASU 2018-02 in the first quarter of 2018 and expect to reclassify approximately $0.3 million from accumulated other comprehensive income to retained earnings withinloan losses as determined by our consolidated statements of stockholders' equity in the first quarter of 2018.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.Business Combination
Boston Private
On July 1, 2021, we acquired, by merger, 100 percent of the voting equity interests of Boston Private Financial Holdings, Inc., the parent company of Boston Private Bank & Trust Company. The acquisition of Boston Private accelerates SVB’s private bank and wealth management offering, strengthening SVB’s overall platform and ability to fully meet the financial needs of its clients. The acquisition was accounted for as a business combination and accordingly, the results of Boston Private's operations have been included in the Company's consolidated financial statements from the date of acquisition.
We acquired Boston Private for $1.2 billion comprised of $2.10 in cash and 0.0228 shares of SVB common stock for each Boston Private share. For the transaction, we issued approximately 1.9 million shares of SVB common stock and registered an additional 99,000 shares of SVB common stock issuable upon the exercise, vesting or settlement of converted legacy Boston Private equity awards.
The following table summarizes the allocation of the purchase price to the net assets of Boston Private as of July 1, 2021:
| July 1, 2021 | ||||||||
| Cash paid | $ | 174 | ||||||
| Share-based consideration | 1,050 | |||||||
| Replacement equity awards | 10 | |||||||
| Total purchase consideration | $ | 1,234 | ||||||
| Fair value of net assets acquired | 1,033 | |||||||
| Goodwill | $ | 201 | ||||||
117
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated fair value of assets acquired and liabilities assumed upon the finalization of the purchase:
| (Dollars in million) | July 1, 2021 | |||||||
| Assets acquired: | ||||||||
| Cash and cash equivalents | $ | 1,290 | ||||||
| Investment securities | 1,429 | |||||||
| Loans | 7,217 | |||||||
| Premises and equipment | 39 | |||||||
| Intangible assets | 104 | |||||||
| Right-of-use assets | 107 | |||||||
| Other assets | 284 | |||||||
| Total assets acquired | 10,470 | |||||||
| Liabilities assumed: | ||||||||
| Deposits | 8,983 | |||||||
| Borrowings | 132 | |||||||
| Lease liabilities | 103 | |||||||
| Other liabilities | 219 | |||||||
| Total liabilities assumed | 9,437 | |||||||
| Fair value of net assets acquired | $ | 1,033 | ||||||
The Company recognized identifiable intangible assets of $104 million and goodwill of $201 million as a result of the acquisition. Intangible assets of $104 million are subject to amortization over their estimated useful lives. The goodwill recorded includes expected revenue-generating synergies driven by the broadening of our product suite and strength of the combined platform, providing our teams with expanded capabilities, technology and scalability to meet the increasing needs of our Private Bank clients. Goodwill amounts have been allocated to the SVB Private Bank reporting segment and will not be deductible for tax purposes.
The following table summarizes the fair value and estimated useful lives of the other intangible assets at the date of acquisition:
| (Dollars in millions) | Estimated Fair Value | Weighted Average Estimated Useful Life - in Years | ||||||||||||
| Other intangible assets: | ||||||||||||||
| Customer relationships | $ | 85 | 20 | |||||||||||
| Other | 19 | 6 | ||||||||||||
| Total other intangible assets | $ | 104 | ||||||||||||
Of the $7.2 billion net loans acquired, $1.4 billion exhibited credit deterioration on the date of purchase. The following table provides a summary of these PCD loans at acquisition:
| (Dollars in millions) | July 1, 2021 | |||||||
| Par value of PCD loans | $ | 1,368 | ||||||
| PCD ACL at acquisition | (22) | |||||||
| Non-credit premium on PCD loans | 43 | |||||||
| Purchase price of PCD loans | $ | 1,389 | ||||||
Due to the various conversions of Boston Private systems since the date of acquisition, as well as other streamlining and continuing integration of Boston Private's operating activities into those of the Company, reporting for revenue and net income of the former Boston Private operations for the period subsequent to the acquisition is impracticable.
Supplementary pro forma financial information related to the acquisition is not included because the impact to the Company's consolidated statements of income is not material.
118
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Direct expenses related to the acquisition of Boston Private were expensed as incurred and were $22 million for twelve months ended December 31, 2021. All expenses were included in merger-related charges, a component of noninterest expense, with the exception of $6 million attributable to the three months ended March 31, 2021, which were recorded in professional services.
MoffettNathanson LLC
On December 10, 2021, we acquired 100 percent of the voting equity interests of MoffettNathanson LLC, a New York-based independent sell-side research firm known for its coverage of high-growth, disruptive companies in the Media, Communications and Technology sectors. The acquisition enables SVB’s investment banking business, SVB Securities, to expand its research coverage to include companies in both the healthcare and technology industries. The acquisition was accounted for as a business combination and accordingly, the results of MoffettNathanson LLC operations have been included in the Company's consolidated financial statements from the date of acquisition.
Supplementary pro forma financial and purchase information related to the acquisition is not included because the impact to the Company's consolidated financial statements is not material.
4.Stockholders' Equity and EPS
Accumulated Other Comprehensive (Loss) Income
The following table summarizes the items reclassified out of accumulated other comprehensive incomeAOCI into the Consolidated Statements of Income for 2017, 20162021, 2020 and 20152019:
| Year ended December 31, | ||||||||||||||||||||||||||
| (Dollars in millions) | Income Statement Location | 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Reclassification adjustment for (gains) losses on AFS securities included in net income | Gains on investment securities, net | $ | (31) | $ | (61) | $ | 4 | |||||||||||||||||||
| Related tax expense (benefit) | Income tax expense | 9 | 17 | (1) | ||||||||||||||||||||||
| Reclassification adjustment for (gains) losses on cash flow hedges included in net income | Net interest income | (63) | (50) | 5 | ||||||||||||||||||||||
| Related tax expense (benefit) | Income tax expense | 17 | 14 | (2) | ||||||||||||||||||||||
| Total reclassification adjustment for (gains) losses included in net income, net of tax | $ | (68) | $ | (80) | $ | 6 | ||||||||||||||||||||
The table below summarizes the activity relating to net gains and losses on our cash flow hedges included in AOCI for 2021, 2020 and 2019. Refer to Note 16—“Derivative Financial Instruments” for additional information regarding the termination of our cash flow hedges during the quarter ended March 31, 2020. Over the next 12 months, we expect that approximately $56 million in AOCI at December 31, 2021, related to our cash flow hedges will be reclassified out of AOCI and recognized in net income.
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2019 | |||||||||||||||||
| Balance, beginning of period, net of tax | $ | 130 | $ | (2) | $ | — | ||||||||||||||
| Net (decrease) increase in fair value, net of tax | (1) | 168 | (6) | |||||||||||||||||
| Net realized (gain) loss reclassified to net income, net of tax | (46) | (36) | 4 | |||||||||||||||||
| Balance, end of period, net of tax | $ | 83 | $ | 130 | $ | (2) | ||||||||||||||
119
| 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 | ) | ||||||
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 20162021, 2020 and 2015:2019:
| Year ended December 31, | ||||||||||||||||||||
| (Dollars in millions except per share amounts, shares in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net income available to common stockholders | $ | 1,770 | $ | 1,191 | $ | 1,137 | ||||||||||||||
| Denominator: | ||||||||||||||||||||
| Weighted average common shares outstanding—basic | 55,763 | 51,685 | 51,915 | |||||||||||||||||
| Weighted average effect of dilutive securities: | ||||||||||||||||||||
| Stock options and ESPP | 283 | 151 | 227 | |||||||||||||||||
| Restricted stock units | 592 | 248 | 169 | |||||||||||||||||
| Weighted average common shares outstanding—diluted | 56,638 | 52,084 | 52,311 | |||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||
| Basic | $ | 31.74 | $ | 23.05 | $ | 21.90 | ||||||||||||||
| Diluted | $ | 31.25 | $ | 22.87 | $ | 21.73 | ||||||||||||||
| 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, 20162021, 2020 and 2015:2019:
| Year ended December 31, | ||||||||||||||||||||
| (Shares in thousands) | 2021 | 2020 | 2019 | |||||||||||||||||
| Stock options | 37 | 279 | 167 | |||||||||||||||||
| Restricted stock units | 2 | 10 | 250 | |||||||||||||||||
| Total | 39 | 289 | 417 | |||||||||||||||||
Common Stock
On March 22, 2021, to support the continued growth of our balance sheet, we issued and sold 2,000,000 shares of common stock at a price of $500.00 per share. We received net proceeds of $972 million after deducting underwriting discounts and commissions.
On April 14, 2021, the Company issued and sold 300,000 additional shares of common stock under the full exercise of the underwriters' over-allotment option from our March 22, 2021 underwritten public offering. We received additional net proceeds of $146 million after deducting underwriting discounts and commissions.
On July 1, 2021, the Company issued 1,887,981 shares of common stock for the acquisition of Boston Private at an exchange ratio of 0.0228 SIVB shares per Boston Private share.
On August 12, 2021, the Company issued and sold 2,227,000 shares of common stock at a price of $564.00 per share. We received net proceeds of $1.2 billion after deducting underwriting discounts and commissions.
Preferred Stock
On December 9, 2019, the Company issued 5.25% Non-Cumulative Perpetual Series A Preferred Stock (''Series A Preferred Stock''). The public offering consisted of 14,000,000 depositary shares, each representing a 1/40th ownership interest in shares of the 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 is redeemable at the Company’s option, subject to all applicable regulatory approvals, on or after February 15, 2025.
On February 2, 2021, the Company issued 4.10% Non-Cumulative Perpetual Series B Preferred Stock (''Series B Preferred Stock''). The public offering consisted of 750,000 depositary shares, each representing a 1/100th ownership interest in shares of Series B Preferred Stock with $0.001 par value and liquidation preferences of $100,000 per share, or $1,000 per depositary
120
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 May 13, 2021, the Company issued 4.00% Non-Cumulative Perpetual Series C Preferred Stock (''Series C Preferred Stock''). The public offering consisted of 1,000,000 depositary shares, each representing a 1/100th ownership interest in shares of Series C 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) 4.000 percent from the original issue date to, but excluding, May 15, 2026, and (ii) for the May 15, 2026 dividend date and during each subsequent five-year period, the five-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 five-year maturities) plus 3.202 percent.
On October 28, 2021, the Company issued 4.25% Non-Cumulative Perpetual Series D Preferred Stock (''Series D Preferred Stock''). The public offering for Series D Preferred Stock consisted of 1,000,000 depositary shares, each representing a 1/100th ownership interest in shares of Series D Preferred Stock with $0.001 par value and liquidation preferences of $100,000 per share, or $1,000 per depositary share. Series D Preferred Stock dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.250 percent from the original issue date of the Series D Preferred Stock to, but excluding, November 15, 2026, and (ii) for the November 15, 2026 dividend date and during each subsequent five-year period, the five-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 five-year maturities) plus 3.074 percent.
On October 28, 2021, the Company also issued 4.70% Non-Cumulative Perpetual Series E Preferred Stock (''Series E Preferred Stock''). The public offering for Series E Preferred Stock consisted of 600,000 depositary shares, each representing a 1/100th ownership interest in shares of Series E Preferred Stock with $0.001 par value and liquidation preferences of $100,000 per share, or $1,000 per depositary share. Series E Preferred Stock dividends, if approved and declared by the Board of Directors, are payable quarterly, in arrears, at a rate per annum equal to (i) 4.700 percent from the original issue date of the Series E Preferred Stock to, but excluding, November 15, 2031, and (ii) for the November 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 five-year maturities) plus 3.064 percent
The following table summarizes our preferred stock at December 31, 2021:
| 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 | 2021 dividends paid per depositary share | ||||||||||||||||||||||||||||||||||||||||||
| Series A | 5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | $ | 350 | $ | 340 | 350,000 | $ | 0.001 | 1/40th | $ | 25 | $ | 1.31 | |||||||||||||||||||||||||||||||||||||
| Series B | 4.100% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | 750 | 739 | 7,500 | 0.001 | 1/100th | 1,000 | 32.23 | ||||||||||||||||||||||||||||||||||||||||||
| Series C | 4.000% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | 1,000 | 985 | 10,000 | 0.001 | 1/100th | 1,000 | 20.22 | ||||||||||||||||||||||||||||||||||||||||||
| Series D | 4.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | 1,000 | 989 | 10,000 | 0.001 | 1/100th | 1,000 | — | ||||||||||||||||||||||||||||||||||||||||||
| Series E | 4.700% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | 600 | 593 | 6,000 | 0.001 | 1/100th | 1,000 | — | ||||||||||||||||||||||||||||||||||||||||||
121
SVB FINANCIAL GROUP AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Share-Based Compensation |
Share-based compensation expense was recorded net of estimated forfeitures for 2017, 20162021, 2020 and 2015,2019, such that expense was recorded only for those share-based awards that are expected to vest. In 2017, 20162021, 2020 and 2015,2019, 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 millions) | (Dollars in millions) | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||
| Share-based compensation expense | $ | 36,900 | $ | 35,494 | $ | 32,239 | Share-based compensation expense | $ | 136 | $ | 84 | $ | 67 | |||||||||||||||||||
| Income tax benefit related to share-based compensation expense | (12,845 | ) | (12,505 | ) | (11,395 | ) | Income tax benefit related to share-based compensation expense | (35) | (20) | (16) | ||||||||||||||||||||||
| Capitalized compensation costs | 1,071 | 5,580 | 2,226 | Capitalized compensation costs | 1 | 1 | 2 | |||||||||||||||||||||||||
Equity Incentive PlanPlans
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.
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 optionsexceptions, awards granted under the plan 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, additional time-based vesting follow the passageend of time,the performance period, and require continued employment or other service through the vesting period.date. 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. A select number of awards granted to certain employees will continue to vest in accordance with the normal vesting schedule in the event that the employee retires (upon meeting certain age and service criteria) at least six months after the grant date and prior to the end of the vesting period, subject to certain conditions. For accounting purposes, the requisite service period for these awards is reduced on an individual basis, as necessary, to reflect the employee’s individual retirement eligibility date.
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 122,882110,886 shares and received $18.2$41 million in cash under the ESPP in 2017.2021. At December 31, 2017,2021, a total of 1,614,3991,059,586 shares of our common stock were still available for future issuance under the ESPP.
Unrecognized Compensation Expense
As of December 31, 2017,2021, unrecognized share-based compensation expense was as follows:
122
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| (Dollars in thousands) | Unrecognized Expense | Weighted Average Expected Recognition Period - in Years | ||||||||||||||||||
| (Dollars in millions) | (Dollars in millions) | Unrecognized Expense | Weighted Average Expected Recognition Period - in Years | |||||||||||||||||
| Stock options | $ | 9,630 | 2.59 | Stock options | $ | 18 | 2.23 | |||||||||||||
| Restricted stock units | 50,530 | 2.59 | ||||||||||||||||||
| Restricted stock awards/units | Restricted stock awards/units | 192 | 2.62 | |||||||||||||||||
| Total unrecognized share-based compensation expense | $ | 60,160 | Total unrecognized share-based compensation expense | $ | 210 | |||||||||||||||