0000719739 us-gaap:InvestmentAdvisoryManagementAndAdministrativeServiceMember 2019-01-01 2019-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2020
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from __________________ to .__________________
Commission File Number: 000-15637
SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 91-1962278 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
3003 Tasman Drive, Santa Clara, California95054-1191 |
| | |
3003 Tasman Drive, Santa Clara, California | | 95054-1191 |
(Address of principal executive offices) | | (Zip(Address of principal executive offices) (Zip Code) |
(408) (408) 654-7400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒ 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). Yesx☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx☒ Accelerated filer ¨☐
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
☐Smaller reporting company ¨☐
Emerging growth company ¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Title of Each Class | | Trading Symbol | | Name of Exchange on Which Registered |
Common Stock, par value $0.001 per share | | SIVB | | 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 |
At October 31, 2017, 52,740,729April 30, 2020, 51,513,227 shares of the registrant’s common stock ($0.001 par value) were outstanding.
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Glossary of Acronyms that may be used in this Report
AFS— Available-for-Sale
APIC— Additional Paid-in Capital
ASC— Accounting Standards Codification
ASU— Accounting Standards Update
CET— Common Equity Tier
EHOP— Employee Home Ownership Program of the Company
EPS— Earnings Per Share
ERI— Energy and Resource Innovation
ESOP— Employee Stock Ownership Plan of the Company
ESPP— 1999 Employee Stock Purchase Plan of the Company
FASB— Financial Accounting Standards Board
FDIC— Federal Deposit Insurance Corporation
FHLB— Federal Home Loan Bank
FRB— Federal Reserve Bank
FTE— Full-Time Employee
FTP— Funds Transfer Pricing
GAAP— Accounting principles generally accepted in the United States of America
HTM— Held-to-Maturity
IASB— International Accounting Standards Board
IPO— Initial Public Offering
IRS— Internal Revenue Service
IT— Information Technology
LIBOR— London Interbank Offered Rate
M&A— Merger and Acquisition
OTTI— Other Than Temporary Impairment
SEC— Securities and Exchange Commission
SPD-SVB— SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China)
TDR— Troubled Debt Restructuring
UK— United Kingdom
VIE— Variable Interest Entity
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
(Dollars in thousands, except par value and share data) |
| September 30, 2017 |
| December 31, 2016 |
Assets |
|
|
|
|
Cash and cash equivalents |
| $ | 3,555,571 |
|
| $ | 2,545,750 |
|
Available-for-sale securities, at fair value (cost of $12,584,564 and $12,588,783, respectively) |
| 12,603,337 |
|
| 12,620,411 |
|
Held-to-maturity securities, at cost (fair value of $11,023,415 and $8,376,138, respectively) |
| 11,055,006 |
|
| 8,426,998 |
|
Non-marketable and other securities |
| 627,469 |
|
| 622,552 |
|
Total investment securities |
| 24,285,812 |
|
| 21,669,961 |
|
Loans, net of unearned income |
| 22,189,327 |
|
| 19,899,944 |
|
Allowance for loan losses |
| (249,010 | ) |
| (225,366 | ) |
Net loans |
| 21,940,317 |
|
| 19,674,578 |
|
Premises and equipment, net of accumulated depreciation and amortization |
| 122,826 |
|
| 120,683 |
|
Accrued interest receivable and other assets |
| 849,761 |
|
| 672,688 |
|
Total assets |
| $ | 50,754,287 |
|
| $ | 44,683,660 |
|
Liabilities and total equity |
|
|
|
|
Liabilities: |
|
|
|
|
Noninterest-bearing demand deposits |
| $ | 36,862,021 |
|
| $ | 31,975,457 |
|
Interest-bearing deposits |
| 7,950,012 |
|
| 7,004,411 |
|
Total deposits |
| 44,812,033 |
|
| 38,979,868 |
|
Short-term borrowings |
| 4,840 |
|
| 512,668 |
|
Other liabilities |
| 990,498 |
|
| 618,383 |
|
Long-term debt |
| 749,618 |
|
| 795,704 |
|
Total liabilities |
| 46,556,989 |
|
| 40,906,623 |
|
Commitments and contingencies (Note 12 and Note 15) |
|
|
|
|
|
SVBFG stockholders’ equity: |
|
|
|
|
Preferred stock, $0.001 par value, 20,000,000 shares authorized; no shares issued and outstanding |
| — |
|
| — |
|
Common stock, $0.001 par value, 150,000,000 shares authorized; 52,723,654 shares and 52,254,074 shares outstanding, respectively |
| 53 |
|
| 52 |
|
Additional paid-in capital |
| 1,294,499 |
|
| 1,242,741 |
|
Retained earnings |
| 2,749,627 |
|
| 2,376,331 |
|
Accumulated other comprehensive income |
| 15,634 |
|
| 23,430 |
|
Total SVBFG stockholders’ equity |
| 4,059,813 |
|
| 3,642,554 |
|
Noncontrolling interests |
| 137,485 |
|
| 134,483 |
|
Total equity |
| 4,197,298 |
|
| 3,777,037 |
|
Total liabilities and total equity |
| $ | 50,754,287 |
|
| $ | 44,683,660 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Nine months ended September 30, |
(Dollars in thousands, except per share amounts) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Interest income: |
|
|
|
|
|
|
|
|
Loans |
| $ | 268,445 |
|
| $ | 214,227 |
|
| $ | 745,983 |
|
| $ | 617,456 |
|
Investment securities: |
|
|
|
|
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Taxable |
| 109,443 |
|
| 83,468 |
|
| 294,768 |
|
| 261,121 |
|
Non-taxable |
| 1,172 |
|
| 522 |
|
| 2,703 |
|
| 1,693 |
|
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
| 6,211 |
|
| 2,196 |
|
| 16,670 |
|
| 5,793 |
|
Total interest income |
| 385,271 |
|
| 300,413 |
|
| 1,060,124 |
|
| 886,063 |
|
Interest expense: |
|
|
|
|
|
|
|
|
Deposits |
| 2,304 |
|
| 1,535 |
|
| 6,218 |
|
| 3,984 |
|
Borrowings |
| 8,993 |
|
| 9,717 |
|
| 27,243 |
|
| 28,161 |
|
Total interest expense |
| 11,297 |
|
| 11,252 |
|
| 33,461 |
|
| 32,145 |
|
Net interest income |
| 373,974 |
|
| 289,161 |
|
| 1,026,663 |
|
| 853,918 |
|
Provision for credit losses (1) |
| 23,522 |
|
| 20,004 |
|
| 70,062 |
|
| 90,225 |
|
Net interest income after provision for credit losses |
| 350,452 |
|
| 269,157 |
|
| 956,601 |
|
| 763,693 |
|
Noninterest income: |
|
|
|
|
|
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Gains on investment securities, net |
| 15,238 |
|
| 23,178 |
|
| 48,838 |
|
| 41,764 |
|
Gains on equity warrant assets, net (2) |
| 24,922 |
|
| 21,558 |
|
| 42,432 |
|
| 33,253 |
|
Foreign exchange fees |
| 29,671 |
|
| 25,944 |
|
| 82,026 |
|
| 76,998 |
|
Credit card fees |
| 20,270 |
|
| 18,295 |
|
| 56,099 |
|
| 49,226 |
|
Deposit service charges |
| 14,508 |
|
| 13,356 |
|
| 43,046 |
|
| 39,142 |
|
Client investment fees |
| 15,563 |
|
| 7,952 |
|
| 37,571 |
|
| 23,959 |
|
Lending related fees |
| 15,404 |
|
| 8,168 |
|
| 32,874 |
|
| 23,783 |
|
Letters of credit and standby letters of credit fees |
| 7,306 |
|
| 6,811 |
|
| 20,951 |
|
| 18,414 |
|
Other (2) |
| 15,896 |
|
| 18,878 |
|
| 41,128 |
|
| 36,511 |
|
Total noninterest income |
| 158,778 |
|
| 144,140 |
|
| 404,965 |
|
| 343,050 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
Compensation and benefits |
| 153,263 |
|
| 136,568 |
|
| 449,412 |
|
| 374,410 |
|
Professional services |
| 32,987 |
|
| 23,443 |
|
| 86,331 |
|
| 67,959 |
|
Premises and equipment |
| 18,937 |
|
| 16,291 |
|
| 53,753 |
|
| 47,861 |
|
Net occupancy |
| 12,660 |
|
| 9,525 |
|
| 35,437 |
|
| 28,919 |
|
Business development and travel |
| 10,329 |
|
| 8,504 |
|
| 30,913 |
|
| 30,077 |
|
FDIC and state assessments |
| 8,359 |
|
| 7,805 |
|
| 26,354 |
|
| 21,624 |
|
Correspondent bank fees |
| 3,162 |
|
| 3,104 |
|
| 9,770 |
|
| 9,469 |
|
Other |
| 18,064 |
|
| 15,533 |
|
| 54,670 |
|
| 44,292 |
|
Total noninterest expense (1) |
| 257,761 |
|
| 220,773 |
|
| 746,640 |
|
| 624,611 |
|
Income before income tax expense |
| 251,469 |
|
| 192,524 |
|
| 614,926 |
|
| 482,132 |
|
Income tax expense (3) |
| 97,351 |
|
| 76,877 |
|
| 220,412 |
|
| 195,508 |
|
Net income before noncontrolling interests |
| 154,118 |
|
| 115,647 |
|
| 394,514 |
|
| 286,624 |
|
Net income loss attributable to noncontrolling interests |
| (5,498 | ) |
| (4,566 | ) |
| (21,218 | ) |
| (3,405 | ) |
Net income available to common stockholders (3) |
| $ | 148,620 |
|
| $ | 111,081 |
|
| $ | 373,296 |
|
| $ | 283,219 |
|
Earnings per common share—basic (3) |
| $ | 2.82 |
|
| $ | 2.13 |
|
| $ | 7.11 |
|
| $ | 5.46 |
|
Earnings per common share—diluted (3) |
| 2.79 |
|
| 2.12 |
|
| 7.01 |
|
| 5.42 |
|
| |
(1) | Our consolidated statements of income for the three and nine months ended September 30, 2016 were modified from prior period's presentation to conform to the current period's presentation, which reflects our provision for loan losses and provision for unfunded credit commitments together as our “provision for credit losses”. In prior periods, our provision for unfunded credit commitments were reported as a component of noninterest expense. |
| |
(2) | Our consolidated statements of income for the three and nine months ended September 30, 2016 were modified from prior period's presentation to conform to the current period's presentation, which reflects a new line item to separately disclose net gains on equity warrant assets. In prior periods, net gains on equity warrant assets were reported as a component of gains on derivative instruments, net. We removed the line item gains on derivative instruments, net and reclassified all other gains on derivative instruments, net to other noninterest income. |
| |
(3) | Included in income tax expense, net income available to common shareholders, earnings per common share-basic and earnings for common share-diluted, for the three and nine months ended September 30, 2017, are tax benefits recognized associated with the adoption of Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting in the first quarter of 2017. This guidance was adopted on a prospective basis with no change to prior period amounts. |
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | | |
|
| Three months ended September 30, |
| Nine months ended September 30, |
(Dollars in thousands) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Net income before noncontrolling interests |
| $ | 154,118 |
|
| $ | 115,647 |
|
| $ | 394,514 |
|
| $ | 286,624 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Change in cumulative translation gains (losses): |
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses) |
| 1,928 |
|
| (119 | ) |
| 4,463 |
|
| (2,168 | ) |
Related tax (expense) benefit |
| (787 | ) |
| 50 |
|
| (1,821 | ) |
| 885 |
|
Change in unrealized gains (losses) on available-for-sale securities: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) |
| 925 |
|
| (54,204 | ) |
| (12,471 | ) |
| 157,564 |
|
Related tax (expense) benefit |
| (429 | ) |
| 21,932 |
|
| 5,207 |
|
| (64,357 | ) |
Reclassification adjustment for losses (gains) included in net income |
| 101 |
|
| 15 |
|
| (384 | ) |
| (11,567 | ) |
Related tax (benefit) expense |
| (41 | ) |
| (6 | ) |
| 157 |
|
| 4,707 |
|
Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity |
| (1,594 | ) |
| (1,690 | ) |
| (4,931 | ) |
| (6,507 | ) |
Related tax benefit |
| 641 |
|
| 680 |
|
| 1,984 |
|
| 2,618 |
|
Other comprehensive income (loss), net of tax |
| 744 |
|
| (33,342 | ) |
| (7,796 | ) |
| 81,175 |
|
Comprehensive income |
| 154,862 |
|
| 82,305 |
|
| 386,718 |
|
| 367,799 |
|
Comprehensive income attributable to noncontrolling interests |
| (5,498 | ) |
| (4,566 | ) |
| (21,218 | ) |
| (3,405 | ) |
Comprehensive income attributable to SVBFG |
| $ | 149,364 |
|
| $ | 77,739 |
|
| $ | 365,500 |
|
| $ | 364,394 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Common Stock |
| Additional Paid-in Capital |
| Retained Earnings |
| Accumulated Other Comprehensive Income |
| Total SVBFG Stockholders’ Equity |
| Noncontrolling Interests |
| Total Equity |
(Dollars in thousands) |
| Shares |
| Amount |
|
|
|
|
|
|
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 |
| 408,044 |
| | — |
| | 8,661 |
| | — |
| | — |
|
| 8,661 |
|
| — |
|
| 8,661 |
|
Common stock issued under ESOP |
| 43,165 |
| | — |
| | 4,328 |
| | — |
| | — |
|
| 4,328 |
|
| — |
|
| 4,328 |
|
Income tax effect from stock options exercised, vesting of restricted stock and other (1) |
| — |
| | — |
| | (6,300 | ) | | — |
| | — |
|
| (6,300 | ) |
| — |
|
| (6,300 | ) |
Net income |
| — |
| | — |
| | — |
| | 283,219 |
| | — |
|
| 283,219 |
|
| 3,405 |
|
| 286,624 |
|
Capital calls and distributions, net |
| — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
| (8,236 | ) |
| (8,236 | ) |
Net change in unrealized gains and losses on AFS securities, net of tax |
| — |
| | — |
| | — |
| | — |
| | 86,347 |
|
| 86,347 |
|
| — |
|
| 86,347 |
|
Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax |
| — |
| | — |
| | — |
| | — |
| | (3,889 | ) |
| (3,889 | ) |
| — |
|
| (3,889 | ) |
Foreign currency translation adjustments, net of tax |
| — |
| | — |
| | — |
| | — |
| | (1,283 | ) |
| (1,283 | ) |
| — |
|
| (1,283 | ) |
Share-based compensation, net |
| — |
| | — |
| | 23,834 |
| | — |
| | — |
|
| 23,834 |
|
| — |
|
| 23,834 |
|
Balance at September 30, 2016 |
| 52,061,435 |
|
| $ | 52 |
|
| $ | 1,219,555 |
|
| $ | 2,276,865 |
|
| $ | 96,579 |
|
| $ | 3,593,051 |
|
| $ | 130,266 |
|
| $ | 3,723,317 |
|
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 |
| 458,742 |
| | 1 |
| | 14,191 |
| | — |
| | — |
|
| 14,192 |
|
| — |
|
| 14,192 |
|
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 |
| — |
| | — |
| | — |
| | 373,296 |
| | — |
|
| 373,296 |
|
| 21,218 |
|
| 394,514 |
|
Capital calls and distributions, net |
| — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
| (18,216 | ) |
| (18,216 | ) |
Net change in unrealized gains and losses on AFS securities, net of tax |
| — |
| | — |
| | — |
| | — |
| | (7,491 | ) |
| (7,491 | ) |
| — |
|
| (7,491 | ) |
Amortization of unrealized gains on securities transferred from AFS to HTM, net of tax |
| — |
| | — |
| | — |
| | — |
| | (2,947 | ) |
| (2,947 | ) |
| — |
|
| (2,947 | ) |
Foreign currency translation adjustments, net of tax |
| — |
| | — |
| | — |
| | — |
| | 2,642 |
|
| 2,642 |
|
| — |
|
| 2,642 |
|
Share-based compensation, net |
| — |
| | — |
| | 35,473 |
| | — |
| | — |
|
| 35,473 |
|
| — |
|
| 35,473 |
|
Balance at September 30, 2017 |
| 52,723,654 |
|
| $ | 53 |
|
| $ | 1,294,499 |
|
| $ | 2,749,627 |
|
| $ | 15,634 |
|
| $ | 4,059,813 |
|
| $ | 137,485 |
|
| $ | 4,197,298 |
|
| |
(1) | During the first quarter of 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require that all excess tax benefits and tax deficiencies associated with share-based compensation be recognized in income tax expense or benefit in the income statement. Previously, tax effects resulting from changes in the Company's share price subsequent to grant date of share-based compensation awards were recorded through additional paid-in-capital in stockholders' equity at the time of vesting and exercise. This guidance was adopted on a prospective basis with no change to prior period amounts. See Note 1—“Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | | |
|
| Nine months ended September 30, |
(Dollars in thousands) |
| 2017 |
| 2016 |
Cash flows from operating activities: |
|
|
|
|
Net income before noncontrolling interests |
| $ | 394,514 |
|
| $ | 286,624 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
Provision for credit losses |
| 70,062 |
|
| 90,225 |
|
Changes in fair values of equity warrant assets, net of proceeds from exercises |
| (29,666 | ) | | (20,505 | ) |
Changes in fair values of derivatives, net |
| 8,214 |
|
| (4,370 | ) |
Gains on investment securities, net |
| (48,838 | ) |
| (41,764 | ) |
Depreciation and amortization |
| 39,265 |
|
| 35,114 |
|
Amortization of premiums and discounts on investment securities, net |
| 2,609 |
|
| 9,622 |
|
Amortization of share-based compensation |
| 27,739 |
|
| 22,342 |
|
Amortization of deferred loan fees |
| (81,060 | ) |
| (72,807 | ) |
Deferred income tax benefit |
| 2,325 |
|
| (6,839 | ) |
Gain from sale of equity valuation services business | | (2,393 | ) | | — |
|
Excess tax benefit from exercise of stock options and vesting of restricted shares (1) | | (14,399 | ) | | — |
|
Changes in other assets and liabilities: |
|
|
|
|
Accrued interest receivable and payable, net |
| (26,092 | ) |
| 1,169 |
|
Accounts receivable and payable, net |
| 4,120 |
|
| (12,872 | ) |
Income tax receivable and payable, net |
| 30,069 |
|
| 13,181 |
|
Accrued compensation |
| (11,731 | ) |
| (48,740 | ) |
Foreign exchange spot contracts, net |
| 86,911 |
|
| 1,803 |
|
Other, net |
| 16,383 |
|
| 20,821 |
|
Net cash provided by operating activities |
| 468,032 |
|
| 273,004 |
|
Cash flows from investing activities: |
|
|
|
|
Purchases of available-for-sale securities |
| (2,420,741 | ) |
| — |
|
Proceeds from sales of available-for-sale securities |
| 7,311 |
|
| 2,879,409 |
|
Proceeds from maturities and pay downs of available-for-sale securities |
| 2,434,039 |
|
| 1,002,523 |
|
Purchases of held-to-maturity securities |
| (3,812,782 | ) |
| (225,526 | ) |
Proceeds from maturities and pay downs of held-to-maturity securities |
| 1,283,764 |
|
| 1,206,367 |
|
Purchases of non-marketable and other securities |
| (18,713 | ) |
| (41,925 | ) |
Proceeds from sales and distributions of non-marketable and other securities |
| 88,809 |
|
| 54,420 |
|
Net increase in loans |
| (2,263,600 | ) |
| (2,365,640 | ) |
Purchases of premises and equipment |
| (35,470 | ) |
| (37,184 | ) |
Proceeds from sale of equity valuation services business | | 3,000 |
| | — |
|
Net cash (used for) provided by investing activities |
| (4,734,383 | ) |
| 2,472,444 |
|
Cash flows from financing activities: |
|
|
|
|
Net increase (decrease) in deposits |
| 5,832,165 |
|
| (953,360 | ) |
Net decrease in short-term borrowings |
| (507,828 | ) |
| (772,479 | ) |
Principal payments of long-term debt | | (46,235 | ) | | — |
|
(Distributions to noncontrolling interests), net of contributions from noncontrolling interests |
| (18,216 | ) |
| (8,236 | ) |
Tax effect from stock exercises (1) |
| — |
|
| (6,300 | ) |
Proceeds from issuance of common stock, ESPP and ESOP |
| 16,286 |
|
| 12,989 |
|
Net cash provided by (used for) financing activities |
| 5,276,172 |
|
| (1,727,386 | ) |
Net increase in cash and cash equivalents |
| 1,009,821 |
|
| 1,018,062 |
|
Cash and cash equivalents at beginning of period |
| 2,545,750 |
|
| 1,503,257 |
|
Cash and cash equivalents at end of period |
| $ | 3,555,571 |
|
| $ | 2,521,319 |
|
Supplemental disclosures: |
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest |
| $ | 41,324 |
|
| $ | 39,317 |
|
Income taxes |
| 190,706 |
|
| 186,474 |
|
Noncash items during the period: |
|
|
|
|
Changes in unrealized gains and losses on available-for-sale securities, net of tax |
| $ | (7,491 | ) |
| $ | 86,347 |
|
Distributions of stock from investments |
| 5,360 |
|
| 750 |
|
| |
(1) | During the first quarter of 2017 we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This guidance was adopted on a prospective basis with no change to prior period amounts. See Note 1—“Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
(Dollars in thousands, except par value and share data) |
| March 31, 2020 |
| December 31, 2019 |
Assets: |
|
|
|
|
Cash and cash equivalents |
| $ | 9,561,448 |
|
| $ | 6,781,783 |
|
Available-for-sale securities, at fair value (cost of $12,044,717 and $13,894,348, respectively) |
| 12,648,064 |
|
| 14,014,919 |
|
Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $230 and $0 (fair value of $14,131,154 and $14,115,272, respectively) (1) |
| 13,574,289 |
|
| 13,842,946 |
|
Non-marketable and other equity securities |
| 1,200,595 |
|
| 1,213,829 |
|
Total investment securities |
| 27,422,948 |
|
| 29,071,694 |
|
Loans, amortized cost |
| 35,968,085 |
|
| 33,164,636 |
|
Allowance for credit losses: loans |
| (548,963 | ) |
| (304,924 | ) |
Net loans |
| 35,419,122 |
|
| 32,859,712 |
|
Premises and equipment, net of accumulated depreciation and amortization |
| 154,780 |
|
| 161,876 |
|
Goodwill | | 137,823 |
| | 137,823 |
|
Other intangible assets, net | | 48,072 |
| | 49,417 |
|
Lease right-of-use assets | | 206,392 |
| | 197,365 |
|
Accrued interest receivable and other assets |
| 2,059,055 |
|
| 1,745,233 |
|
Total assets |
| $ | 75,009,640 |
|
| $ | 71,004,903 |
|
Liabilities and total equity: |
|
|
|
|
Liabilities: |
|
|
|
|
Noninterest-bearing demand deposits |
| $ | 42,902,200 |
|
| $ | 40,841,570 |
|
Interest-bearing deposits |
| 19,009,757 |
|
| 20,916,237 |
|
Total deposits |
| 61,911,957 |
|
| 61,757,807 |
|
Short-term borrowings |
| 3,138,162 |
|
| 17,430 |
|
Lease liabilities | | 227,271 |
| | 218,847 |
|
Other liabilities |
| 2,200,953 |
|
| 2,041,752 |
|
Long-term debt |
| 348,076 |
|
| 347,987 |
|
Total liabilities |
| 67,826,419 |
|
| 64,383,823 |
|
Commitments and contingencies (Note 15 and Note 18) |
|
|
|
|
|
SVBFG stockholders’ equity: |
|
|
|
|
Preferred stock, $0.001 par value, 20,000,000 shares authorized; 350,000 shares issued and outstanding |
| 340,138 |
|
| 340,138 |
|
Common stock, $0.001 par value, 150,000,000 shares authorized; 51,490,342 shares and 51,655,607 shares issued and outstanding, respectively |
| 52 |
|
| 52 |
|
Additional paid-in capital |
| 1,489,240 |
|
| 1,470,071 |
|
Retained earnings |
| 4,612,785 |
|
| 4,575,601 |
|
Accumulated other comprehensive income |
| 592,534 |
|
| 84,445 |
|
Total SVBFG stockholders’ equity |
| 7,034,749 |
|
| 6,470,307 |
|
Noncontrolling interests |
| 148,472 |
|
| 150,773 |
|
Total equity |
| 7,183,221 |
|
| 6,621,080 |
|
Total liabilities and total equity |
| $ | 75,009,640 |
|
| $ | 71,004,903 |
|
| |
(1) | Prior to our adoption of Accounting Standard Update (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) on January 1, 2020, the allowance for credit losses (ACL) related to held-to-maturity (HTM) securities was not applicable and is therefore presented as $0 at December 31, 2019. See "Adoption of New Accounting Standards" in Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details. |
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
| | | | | | | | |
|
| Three months ended March 31, |
(Dollars in thousands, except per share amounts) |
| 2020 |
| 2019 |
Interest income: |
|
|
|
|
Loans |
| $ | 382,569 |
|
| $ | 394,144 |
|
Investment securities: |
|
|
|
|
Taxable |
| 154,385 |
|
| 126,717 |
|
Non-taxable |
| 12,824 |
|
| 10,937 |
|
Federal funds sold, securities purchased under agreements to resell and other short-term investment securities |
| 17,624 |
|
| 19,216 |
|
Total interest income |
| 567,402 |
|
| 551,014 |
|
Interest expense: |
|
|
|
|
Deposits |
| 37,398 |
|
| 27,907 |
|
Borrowings |
| 5,867 |
|
| 10,221 |
|
Total interest expense |
| 43,265 |
|
| 38,128 |
|
Net interest income |
| 524,137 |
|
| 512,886 |
|
Provision for credit losses |
| 243,480 |
|
| 28,551 |
|
Net interest income after provision for credit losses |
| 280,657 |
|
| 484,335 |
|
Noninterest income: |
|
|
|
|
Gains on investment securities, net |
| 46,055 |
|
| 29,028 |
|
Gains on equity warrant assets, net |
| 13,395 |
|
| 21,305 |
|
Client investment fees | | 43,393 |
| | 44,482 |
|
Foreign exchange fees |
| 47,505 |
|
| 38,048 |
|
Credit card fees |
| 28,304 |
|
| 27,483 |
|
Deposit service charges |
| 24,589 |
|
| 20,939 |
|
Lending related fees |
| 13,125 |
|
| 13,937 |
|
Letters of credit and standby letters of credit fees |
| 11,542 |
|
| 9,354 |
|
Investment banking revenue | | 46,867 |
| | 49,795 |
|
Commissions | | 16,022 |
| | 14,108 |
|
Other |
| 11,137 |
|
| 11,897 |
|
Total noninterest income |
| 301,934 |
|
| 280,376 |
|
Noninterest expense: |
|
|
|
|
Compensation and benefits |
| 255,586 |
|
| 238,061 |
|
Professional services |
| 38,705 |
|
| 36,986 |
|
Premises and equipment |
| 26,940 |
|
| 21,700 |
|
Net occupancy |
| 18,346 |
|
| 16,048 |
|
Business development and travel |
| 14,071 |
|
| 15,354 |
|
FDIC and state assessments |
| 5,234 |
|
| 3,979 |
|
Other |
| 40,703 |
|
| 33,536 |
|
Total noninterest expense |
| 399,585 |
|
| 365,664 |
|
Income before income tax expense |
| 183,006 |
|
| 399,047 |
|
Income tax expense |
| 49,357 |
|
| 107,435 |
|
Net income before noncontrolling interests |
| 133,649 |
|
| 291,612 |
|
Net loss (income) attributable to noncontrolling interests |
| 1,973 |
|
| (2,880 | ) |
Preferred stock dividends | | (3,369 | ) | | — |
|
Net income available to common stockholders |
| $ | 132,253 |
|
| $ | 288,732 |
|
Earnings per common share—basic |
| $ | 2.56 |
|
| $ | 5.49 |
|
Earnings per common share—diluted |
| 2.55 |
|
| 5.44 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | |
|
| Three months ended March 31, |
(Dollars in thousands) |
| 2020 |
| 2019 |
Net income before noncontrolling interests |
| $ | 133,649 |
|
| $ | 291,612 |
|
Other comprehensive income, net of tax: |
| | | |
Change in foreign currency cumulative translation gains and losses: |
| | | |
Foreign currency translation (losses) gains |
| (9,120 | ) |
| 2,806 |
|
Related tax benefit (expense) |
| 2,556 |
|
| (782 | ) |
Change in unrealized gains and losses on available-for-sale securities: |
| | | |
Unrealized holding gains |
| 543,881 |
|
| 46,836 |
|
Related tax expense |
| (150,746 | ) |
| (13,045 | ) |
Reclassification adjustment for (gains) losses included in net income |
| (61,165 | ) |
| 3,630 |
|
Related tax expense (benefit) |
| 16,953 |
|
| (1,010 | ) |
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity |
| (552 | ) |
| (674 | ) |
Related tax benefit |
| 153 |
|
| 188 |
|
Change in unrealized gains and losses on cash flow hedges: | | | | |
Unrealized gains | | 231,920 |
| | 1,102 |
|
Related tax expense | | (64,281 | ) | | (307 | ) |
Reclassification adjustment for (gains) losses included in net income | | (2,089 | ) | | 3 |
|
Related tax expense (benefit) | | 579 |
| | (1 | ) |
Other comprehensive income, net of tax |
| 508,089 |
|
| 38,746 |
|
Comprehensive income |
| 641,738 |
|
| 330,358 |
|
Comprehensive loss (income) attributable to noncontrolling interests |
| 1,973 |
|
| (2,880 | ) |
Comprehensive income attributable to SVBFG |
| $ | 643,711 |
|
| $ | 327,478 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Preferred Stock | | Common Stock |
| Additional Paid-in Capital |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Total SVBFG Stockholders’ Equity |
| Noncontrolling Interests |
| Total Equity |
(Dollars in thousands) |
| | Shares |
| Amount |
|
|
|
|
|
|
Balance at December 31, 2018 |
| $ | — |
| | 52,586,498 |
| | $ | 53 |
| | $ | 1,378,438 |
| | $ | 3,791,838 |
| | $ | (54,120 | ) |
| $ | 5,116,209 |
|
| $ | 148,634 |
|
| $ | 5,264,843 |
|
Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities, net of tax (ASU 2017-08) (1) |
| — |
| | — |
| | — |
| | — |
| | (583 | ) | | — |
|
| (583 | ) |
| — |
|
| (583 | ) |
Acquisition of SVB Leerink |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
| 5,256 |
|
| 5,256 |
|
Common stock issued under employee benefit plans, net of restricted stock cancellations |
| — |
| | 209,743 |
| | — |
| | (2,936 | ) | | — |
| | — |
|
| (2,936 | ) |
| — |
|
| (2,936 | ) |
Common stock issued under ESOP |
| — |
| | 14,442 |
| | — |
| | 3,506 |
| | — |
| | — |
|
| 3,506 |
|
| — |
|
| 3,506 |
|
Net income |
| — |
| | — |
| | — |
| | — |
| | 288,732 |
| | — |
|
| 288,732 |
|
| 2,880 |
|
| 291,612 |
|
Capital calls and distributions, net |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
| (15,720 | ) |
| (15,720 | ) |
Net change in unrealized gains and losses on AFS securities, net of tax |
| — |
| | — |
| | — |
| | — |
| | — |
| | 36,411 |
|
| 36,411 |
|
| — |
|
| 36,411 |
|
Amortization of unrealized holding gains on securities transferred from AFS to HTM, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | (486 | ) | | (486 | ) | | — |
| | (486 | ) |
Foreign currency translation adjustments, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 2,024 |
| | 2,024 |
| | — |
| | 2,024 |
|
Net change in unrealized gains and losses on cash flow hedges, net of tax
| | — |
| | — |
| | — |
| | — |
| | — |
| | 797 |
| | 797 |
| | — |
| | 797 |
|
Share-based compensation, net | | — |
| | — |
| | — |
| | 15,122 |
| | — |
| | — |
| | 15,122 |
| | — |
| | 15,122 |
|
Common stock repurchases | | — |
| | (488,578 | ) | | (1 | ) | | — |
| | (116,022 | ) | | — |
| | (116,023 | ) | | — |
| | (116,023 | ) |
Balance at March 31, 2019 |
| $ | — |
| | 52,322,105 |
|
| $ | 52 |
|
| $ | 1,394,130 |
|
| $ | 3,963,965 |
|
| $ | (15,374 | ) |
| $ | 5,342,773 |
|
| $ | 141,050 |
|
| $ | 5,483,823 |
|
Balance at December 31, 2019 |
| $ | 340,138 |
| | 51,655,607 |
| | $ | 52 |
| | $ | 1,470,071 |
| | $ | 4,575,601 |
| | $ | 84,445 |
| | $ | 6,470,307 |
| | $ | 150,773 |
| | $ | 6,621,080 |
|
Cumulative adjustment for the day one adoption of ASC 326, net of tax (1) | | — |
| | — |
| | — |
| | — |
| | (35,049 | ) | | — |
| | (35,049 | ) | | — |
| | (35,049 | ) |
Common stock issued under employee benefit plans, net of restricted stock cancellations |
| — |
| | 66,864 |
| | — |
| | (3,031 | ) | | — |
| | — |
|
| (3,031 | ) |
| — |
|
| (3,031 | ) |
Common stock issued under ESOP |
| — |
| | 12,094 |
| | — |
| | 2,447 |
| | — |
| | — |
|
| 2,447 |
|
| — |
|
| 2,447 |
|
Net income (loss) |
| — |
| | — |
| | — |
| | — |
| | 135,622 |
| | — |
|
| 135,622 |
|
| (1,973 | ) |
| 133,649 |
|
Capital calls and distributions, net |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
| (328 | ) |
| (328 | ) |
Net change in unrealized gains and losses on AFS securities, net of tax |
| — |
| | — |
| | — |
| | — |
| | — |
| | 348,923 |
|
| 348,923 |
|
| — |
|
| 348,923 |
|
Amortization of unrealized holding gains on securities transferred from AFS to HTM, net of tax |
| — |
| | — |
| | — |
| | — |
| | — |
| | (399 | ) |
| (399 | ) |
| — |
|
| (399 | ) |
Foreign currency translation adjustments, net of tax |
| — |
| | — |
| | — |
| | — |
| | — |
| | (6,564 | ) |
| (6,564 | ) |
| — |
|
| (6,564 | ) |
Net change in unrealized gains and losses on cash flow hedges, net of tax | | — |
| | — |
| | — |
| | — |
| | — |
| | 166,129 |
| | 166,129 |
| | — |
| | 166,129 |
|
Share-based compensation, net |
| — |
| | — |
| | — |
| | 19,171 |
| | — |
| | — |
|
| 19,171 |
|
| — |
|
| 19,171 |
|
Common stock repurchases | | — |
| | (244,223 | ) | |
|
| | — |
| | (60,020 | ) | | — |
| | (60,020 | ) | | — |
| | (60,020 | ) |
Dividends on preferred stock | | — |
| | — |
| | — |
| | — |
| | (3,369 | ) | | — |
| | (3,369 | ) | | — |
| | (3,369 | ) |
Other, net | | — |
| | — |
| | — |
| | 582 |
| | — |
| | — |
| | 582 |
| | — |
| | 582 |
|
Balance at March 31, 2020 |
| 340,138 |
| | 51,490,342 |
|
| $ | 52 |
|
| $ | 1,489,240 |
|
| $ | 4,612,785 |
|
| $ | 592,534 |
|
| $ | 7,034,749 |
|
| $ | 148,472 |
|
| $ | 7,183,221 |
|
| |
(1) | See "Adoption of New Accounting Standards" in Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details. |
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | | |
|
| Three months ended March 31, |
(Dollars in thousands) |
| 2020 |
| 2019 |
Cash flows from operating activities: |
|
|
|
|
Net income before noncontrolling interests |
| $ | 133,649 |
|
| $ | 291,612 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
Provision for credit losses |
| 243,480 |
|
| 28,551 |
|
Changes in fair values of equity warrant assets, net of proceeds from exercises |
| 18,574 |
| | (10,248 | ) |
Changes in fair values of derivatives, net |
| (63,034 | ) |
| (3,068 | ) |
Gains on investment securities, net |
| (46,055 | ) | | (29,028 | ) |
Distributions of earnings from non-marketable and other equity securities | | 12,346 |
| | 15,619 |
|
Depreciation and amortization |
| 24,824 |
|
| 20,830 |
|
Amortization of premiums and discounts on investment securities, net |
| 13,565 |
|
| 1,606 |
|
Amortization of share-based compensation |
| 19,171 |
|
| 15,122 |
|
Amortization of deferred loan fees |
| (33,016 | ) |
| (35,276 | ) |
Deferred income tax benefit |
| (60,126 | ) |
| (8,834 | ) |
Excess tax benefit from exercise of stock options and vesting of restricted shares | | (2,575 | ) | | (2,804 | ) |
Losses from the write-off of premises and equipment | | — |
| | 52 |
|
Changes in other assets and liabilities: |
|
|
|
|
Accrued interest receivable and payable, net |
| 23,982 |
|
| (3,361 | ) |
Accounts receivable and payable, net |
| (45,311 | ) |
| 30,447 |
|
Income tax receivable and payable, net |
| 66,581 |
|
| 94,552 |
|
Accrued compensation |
| (236,834 | ) |
| (253,769 | ) |
Foreign exchange spot contracts, net |
| (12,583 | ) |
| 169,079 |
|
Proceeds from termination of interest rate swaps | | 180,500 |
| | — |
|
Other, net |
| (69,013 | ) |
| 19,668 |
|
Net cash provided by operating activities |
| 168,125 |
|
| 340,750 |
|
Cash flows from investing activities: |
|
|
|
|
Purchases of available-for-sale securities |
| (1,538,553 | ) |
| (204,328 | ) |
Proceeds from sales of available-for-sale securities |
| 2,654,212 |
|
| 1,171,564 |
|
Proceeds from maturities and paydowns of available-for-sale securities |
| 785,692 |
|
| 116,001 |
|
Purchases of held-to-maturity securities |
| (358,650 | ) |
| — |
|
Proceeds from maturities and paydowns of held-to-maturity securities |
| 646,212 |
|
| 428,433 |
|
Purchases of non-marketable and other equity securities |
| (12,177 | ) |
| (16,165 | ) |
Proceeds from sales and distributions of capital of non-marketable and other equity securities |
| 45,720 |
|
| 19,979 |
|
Net increase in loans |
| (2,796,409 | ) |
| (505,516 | ) |
Purchases of premises and equipment |
| (25,088 | ) |
| (5,504 | ) |
Acquisition of SVB Leerink, net of cash acquired | | — |
| | (100,037 | ) |
Net (cash used) provided by for investing activities |
| (599,041 | ) |
| 904,427 |
|
Cash flows from financing activities: |
|
|
|
|
Net increase in deposits |
| 154,150 |
|
| 2,998,297 |
|
Net increase (decrease) in short-term borrowings |
| 3,120,732 |
|
| (616,957 | ) |
(Distributions to noncontrolling interests), net of contributions from noncontrolling interests |
| (328 | ) |
| (15,720 | ) |
Payment of preferred stock dividend | | (3,369 | ) | | — |
|
Common stock repurchases | | (60,020 | ) | | (116,023 | ) |
Proceeds from issuance of common stock, ESPP and ESOP, net of restricted stock awards |
| (584 | ) |
| 570 |
|
Net cash provided by financing activities |
| 3,210,581 |
|
| 2,250,167 |
|
Net increase in cash and cash equivalents |
| 2,779,665 |
|
| 3,495,344 |
|
Cash and cash equivalents at beginning of period |
| 6,781,783 |
|
| 3,571,539 |
|
Cash and cash equivalents at end of period |
| $ | 9,561,448 |
|
| $ | 7,066,883 |
|
Supplemental disclosures: |
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest |
| $ | 46,145 |
|
| $ | 46,548 |
|
Income taxes |
| 31,988 |
|
| 17,570 |
|
Noncash items during the period: |
|
|
|
|
Changes in unrealized gains and losses on available-for-sale securities, net of tax |
| $ | 348,923 |
|
| $ | 36,411 |
|
Distributions of stock from investments |
| 3,119 |
|
| 1,276 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SVB Financial Group is a diversified financial services company, as well as a bank holding company and a financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a varietydiverse 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 unaudited interim consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG”,“SVBFG," the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group (not including subsidiaries).
The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of results to be expected for any future periods. These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20162019 (“20162019 Form 10-K”).
The accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial StatementsUse of Estimates and Supplementary Data—Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2016 Form 10-K.Assumptions
The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include measurements of fair value, the valuation of non-marketable and other equity securities, the valuation of equity warrant assets and the adequacy of the allowance for loancredit losses for loans and allowance for unfunded credit commitments, and the recognition and measurement of income tax assets and liabilities.commitments.
Principles of Consolidation and Presentation
Our unaudited interim consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate voting entities in which we have control through voting interests or entities through which we have a controlling financial interest in a variable interest entity (“VIE”). We determine whether we have a controlling financial interest in a VIE by determining if we have: (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses or (c) the right to receive the expected returns of the entity. Generally, we have significant variable interests if our commitments to a limited partnership investment represent a significant amount of the total commitments to the entity. We also evaluate the impact of related parties on our determination of variable interests in our consolidation conclusions. We consolidate VIEs in which we are the primary beneficiary based on a controlling financial interest. If we are not the primary beneficiary of a VIE, we record our pro-rata interests or our cost basis in the VIE, as appropriate, based on other accounting guidance within GAAP.our ownership percentage.
VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. We assess VIEs to determine if we are the primary beneficiary of a VIE. A primary beneficiary is defined as a variable interest holder that has a controlling financial interest. A controlling financial interest requires both: (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. Under this analysis, we also evaluate kick-out rights and other participating rights, which could provide us a controlling financial interest. The primary beneficiary of a VIE is required to consolidate the VIE.
We also evaluate fees paid to managers of our limited partnership investments. We exclude those fee arrangements that are not deemed to be variable interests from the analysis of our interests in our investments in VIEs and the determination of a primary beneficiary, if any. Fee arrangements based on terms that are customary and commensurate with the services provided are deemed not to be variable interests and are, therefore, excluded.
All significant intercompany accounts and transactions with consolidated entities have been eliminated. We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide.
Reclassifications
Certain prior period amounts primarily related to the adoption of the Accounting Standard Update (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) ("ASU 2016-13" or "CECL") as mentioned below have been reclassified to conform to current period presentations.
Summary of Significant Accounting Policies
With the exception of the updated accounting policies listed below, the accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data — Note 2 — “Summary of Significant Accounting Policies” under Part II, Item 8 of our 2019 Form 10-K.
Loans
Loans are reported at amortized cost which consists of the principal amount outstanding, net of unearned loan fees. Unearned loan fees reflect unamortized deferred loan origination and commitment fees net of unamortized deferred loan origination costs. In addition to cash loan fees, we often obtain equity warrant assets that give us an option to purchase a position in a client company's stock in consideration for providing credit facilities. The grant date fair values of these equity warrant assets are deemed to be loan fees and are deferred as unearned income and recognized as an adjustment of loan yield through loan interest income. The net amount of unearned loan fees is amortized into loan interest income over the contractual terms of the underlying loans and commitments using the constant effective yield method, adjusted for actual loan prepayment experience, or the straight-line method, as applicable.
Allowance for Credit Losses: Loans
The allowance for credit losses for loans considers credit risk and is adjusted by a provision for expected credit losses ("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.
Portfolio Segments
The estimation of ECL on loans process involves procedures to appropriately consider the unique characteristics of our six loan portfolio segments. Our six portfolio segments are determined by using the following risk dimensions: (i) underwriting methodology, (ii) industry niche and (iii) life stage. The 6 portfolio segments are further disaggregated into 10 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. The following provides additional information regarding our six portfolio segments:
| |
(i) | Investor Dependent - Accelerator (Early-Stage) and Growth (Mid-Stage and Later-Stage) |
Investor Dependent loans are made primarily to technology and life science/healthcare companies in both our Accelerator (Early-Stage) and Growth practices (Mid-Stage and Later-Stage). Investor Dependent loans typically have modest or negative cash flows and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or others, or in some cases, a successful sale to a third party or an IPO. Venture capital firms may provide financing selectively, at reduced amounts, or on less favorable terms, which may have an adverse effect on our borrowers' ability to repay their loans to us. When repayment is dependent upon the next round of venture investment and there is an indication that further investment is unlikely or will not occur, it is often likely that the company would need to be sold to repay the debt in full. If reasonable efforts have not yielded a likely buyer willing to repay all debt at the close of the sale or on commercially viable terms, the account will most likely be deemed to be impaired and charged-off.
We further disaggregate Investor Dependent loans into three subcategories. Early-Stage consists of pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million. Mid-Stage companies consist of growth-stage enterprises with revenues of between $5 million and $15 million or, in the case of biotechnology, pre-revenue clinical-stage companies. Later-Stage consists of companies with revenues of $15 million or more. This disaggregation is based in part on the materially different historical loss rate we
have experienced with each cohort, with historical loss rates being the highest in the Early-Stage segment, and declining in the Mid-Stage and Later-Stage segments, as a function of the relatively higher enterprise value and asset coverage that is created as a company progresses through the various stages of development.
Cash Flow Dependent loans are made primarily to technology and life science/healthcare companies, which include Sponsor Led Buyout lending, and require the borrower to maintain cash flow from operations that is sufficient to service all debt. Borrowers must demonstrate normalized cash flow in excess of all fixed charges associated with operating the business. Sponsor Led Buyout loans are typically used to assist a select group of experienced private equity sponsors with the acquisition of businesses and are larger in size, and repayment is generally dependent upon the cash flows of the acquired company. The acquired companies are typically established, later-stage businesses of scale and characterized by reasonable levels of leverage and loan structures that include meaningful financial covenants. The sponsor's equity contribution is often 50 percent or more of the acquisition price.
(iii) Balance Sheet Dependent
Balance Sheet Dependent loans are made primarily to technology and life science/healthcare companies, which include asset-based loans, and are structured to require constant current asset coverage (i.e., cash, cash equivalents, accounts receivable and, to a much lesser extent, inventory) in an amount that exceeds the outstanding debt. These loans are generally made to companies in our Growth and Corporate Finance practices. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business. As a result of the adoption of CECL and in connection with the revised approach to portfolio disaggregation discussed above, certain loans that were previously considered to be Balance Sheet Dependent have been reclassified as Investor Dependent - Later-Stage.
| |
(iv) | Private Equity/Venture Capital |
The vast majority of our Private Equity/Venture Capital portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds' remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are often secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.
Our Private Bank clients are primarily private equity/venture capital professionals and senior executives in the innovation companies they support. We offer a customized suite of private banking services, including mortgages, home equity lines of credit, restricted stock purchase loans, real estate secured home equity capital call lines of credit and other secured and unsecured lending products, as well as cash and wealth management services. In addition, we provide real estate secured loans to eligible employees through our Employee Home Ownership Program.
| |
(vi) | Premium Wine and Other |
Our Premium Wine clients primarily consist of premium wine producers across the Western United States, primarily in California's Napa Valley, Sonoma County and Central Coast regions, as well as the Pacific Northwest. Our other loan portfolio segment primarily includes our community development loans made as part of our responsibilities under the Community Reinvestment Act.
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 operating performance of the borrower, borrower compliance with loan covenants, underlying collateral values and performance trends, the degree of access to additional capital, the presence of credit enhancements such as third party guarantees (where applicable), the degree to which the borrower is sensitive to external factors and the depth and experience of the borrower's management team. Our policies require a committee of senior management to review, at least quarterly, credit relationships with a credit risk rating of 5 through 9 that exceed specific dollar values.
Expected Credit Loss Measurement
The methodology for estimating the amount of ECL reported in the allowance for credit losses has 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 accrued interest receivable ("AIR") on loans as AIR is reversed or written off when the full collection of the AIR related to a loan becomes doubtful. AIR on loans totaled $111.8 million at March 31, 2020 and $119.1 million at December 31, 2019 and is reported in "Accrued interest receivable and other assets" in our unaudited interim consolidated balance sheets.
While the evaluation process of our allowance for credit losses on loans uses historical and other objective information, the classification of loans and the estimate of the allowance for credit losses for loans rely on the judgment and experience of our management. A committee comprised of senior management evaluates the adequacy of the allowance for credit losses for loans, which includes review of loan portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
Loans That Share Similar Risk Characteristics With Other Loans
We derive an estimated ECL assumption from a non-discounted cash flow approach based on our portfolio segments discussed above. This approach incorporates: (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 judgement. 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 gradually over the remaining contractual lives, 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 relevant qualitative factors that relate to the environment in which the entity operates and are specific to the borrower. These adjustments are based upon our assessment of the risks that may lead to a future loan loss experience different from our historical loan loss experience. These risks are aggregated to become our qualitative allocation. Based on our qualitative assessment estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period and may include, but is not limited to, consideration of the following factors:
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
Changes in the nature and volume of the portfolio and in the terms of loans;
Changes in the experience, ability and depth of lending management and other relevant staff;
Changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans;
Changes in the quality of the institution’s 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; and
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.
Loans That Do Not Share Similar Risk Characteristics
We monitor our loan pools to ensure all assets therein continue to share similar risk characteristics with other financial assets inside the pool. Changes in credit risk, borrower circumstances or the recognition of write-offs may indicate that a loan's risk profile has changed, and the asset should be removed from its current pool. For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ECL is measured as the difference between the amortized cost basis of the loan and 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 allowance for credit losses for unfunded credit commitments which 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 and derive historical lifetime expected loss factors for each portfolio segment similar to our funded loan ECL. The collectively assessed ECL for unfunded credit commitments also includes the same qualitative allocations applied for our funded loan ECL. For unfunded credit commitments related to loans that do not share similar risk characteristics with other loans, where applicable, a separate estimate of ECL will be included in our total allowance for credit losses on unfunded credit commitments. Loan commitments that are determined to be unconditionally cancellable by the Company do not require an allowance for credit losses.
Investment Securities
Available-for-Sale Securities and the Allowance for Credit Losses on Available-for-Sale Securities
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification and meeting our asset/liability management objectives. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of SVBFG's stockholders' equity, until realized.
We analyze available-for-sale securities for impairment related to credit losses each quarter. Market valuations represent the current fair value of a security at a specified point in time and incorporates the risk of timing of interest due and the return of principal over the contractual life of each security. Gains and losses on securities are realized when there is a sale of the security prior to maturity. A credit impairment is recognized through a valuation allowance against the security with an offset through earnings; the allowance is limited to the amount that fair value, calculated as the present value of expected future cash flow discounted at the security’s effective interest rate, is less than the amortized cost basis. We separate the amount of the impairment related to credit losses, if any, and the amount due to all other factors. The credit loss component is recognized in earnings and recorded as an allowance for credit losses for AFS securities.
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 maturity are classified as held-to-maturity securities and are recorded at amortized cost, net of any allowance for credit losses.
We measure ECL on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the exception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ECL. Our municipal bond portfolio primarily consists of highly rated bonds and currently carry ratings no lower than Aa3. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for current conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year. We do not estimate ECL on accrued interest receivable ("AIR") from held-to-maturity securities as AIR is reversed or written off when the full collection of the AIR related to a security becomes doubtful. AIR from held-to-maturity securities totaled $41.5 million at March 31, 2020 and $45.2 million at December 31, 2019 and is reported in "Accrued interest receivable and other assets" in our unaudited interim consolidated balance sheets.
Expected credit loss on municipal bonds that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows and the recorded amortized cost basis of the security.
Adoption of New Accounting Standards
In March 2016, the FASB issued a new accounting standard update (ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718)), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the ASU, an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement in the period when the awards vest or are settled. The guidance also permits an entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We adopted this guidance on January 1, 2017 and elected to estimate the number of awards that are expected to vest which, is consistent with the previous accounting guidance. In addition, we also elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method.
Previously, tax effects resulting from changes in the Company's share price subsequent to grant date of share-based compensation awards were recorded through additional paid-in capital in stockholders' equity at the time of vesting and exercise. The adoption of the amended accounting guidance resulted in a $1.3 million and $14.4 million reduction of income tax expense (that previously would have been reflected as additional paid-in capital), or a benefit of $0.02 and $0.27 per diluted common share, for the three and nine months ended September 30, 2017, respectively. We expect the impact of this amendment will vary period to period depending on the volatility of the Company's stock price and the timing of vesting and/or settlement of awards.
Recent Accounting Pronouncements
In May 2014, the FASB issued a new accounting standard update (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), which provides revenue recognition guidance that is intended to create greater consistency with respect to how and when revenue from contracts with customers is shown in the income statement. The guidance requires that revenue from contracts with customers be recognized when transfer of control over goods or services is passed to customers in the amount of consideration expected to be received. Subsequent Accounting Standard Updates have been issued clarifying the original pronouncement (ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20). The new standard and amendments will be effective January 1, 2018, either on a full retrospective approach or a modified retrospective approach. We plan to adopt the revenue guidance in the first quarter of 2018 using the modified retrospective transition approach applied to contracts which are not completed as of January 1, 2018. Upon adoption, we will recognize the cumulative-effect of adopting this guidance as an adjustment to opening retained earnings. We have conducted a comprehensive scoping exercise to determine the revenue streams that are within the scope of this guidance. The scope of this guidance explicitly excludes net interest income, including interest income earned from our loan and fixed income securities portfolios, as well as certain other noninterest income earned from our lending-, investment- and derivative-related activities. Based on our contract assessments to-date, we have not identified any material changes to the timing or the amounts of our revenue recognition. We expect minor changes in the timing of recognizing fund management fees in noninterest income for a portion of our SVB Capital funds as the fees will be recognized at the time of distribution which typically occurs later in the fund life than had been previously recognized. Based on our preliminary analysis, we expect the cumulative adjustment to retained earnings associated with this change to be from $7 million to $10 million, with an immaterial impact to our net income on an ongoing basis. We continue to evaluate the effect the guidance has on our revenue and the presentation of certain costs associated with our credit card and merchant services and whether these costs are presented in noninterest expense or offset against credit card fees in noninterest income. We currently recognize payment networks costs associated with our credit card and merchant services in noninterest expense. If we determine that the adoption of the guidance results in a change in the presentation of these costs, we estimate that this will result in approximately $10 million to $15 million of annual expenses would be netted against credit card interchange fees and reported in noninterest income instead of other noninterest expense. This change would occur on a prospective basis starting January 1, 2018 and would reduce our non-GAAP core fee income within noninterest income and also reduce noninterest expense with no impact to net income. Furthermore, we continue to evaluate the disaggregation of our significant categories of revenue within the scope of this guidance and plan to expand our qualitative disclosures of our noninterest income within the Consolidated Financial Statements upon adoption in 2018.
In January 2016, the FASB issued a new accounting standard update (ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)), which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. This guidance requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. The adoption of the new standard will result in the elimination of cost method accounting for equity investments and will impact our nonmarketable
and other equity securities that are currently carried at cost. This guidance will be effective on January 1, 2018, and our equity investments measured at cost will be measured at fair value and the difference between cost and fair value at adoption date will be recorded as a cumulative-effect adjustment to opening retained earnings of the fiscal year of adoption for our cost method venture capital and private equity fund investments with readily determinable fair values. The actual adjustment to opening retained earnings will depend upon the fair value of our investments at the adoption date but based on September 30, 2017 and historical values, we expect the transition adjustment to increase capital between $110 million and $120 million on a pre-tax basis. Any subsequent changes in the fair value will be recorded as unrealized gains or losses in our consolidated statements of income. Additionally, for purposes of disclosing the fair value of loans carried at amortized cost, we are evaluating our valuation methods to determine the necessary changes to conform to an “exit price” concept as required by the standard update. Accordingly, the fair value amounts disclosed for such loans may change upon adoption.
In February 2016, the FASB issued a new accounting standard update (ASU 2016-02, Leases (Topic 842)), which will require for all operating leases the recognition of a right-of-use asset and a corresponding lease liability, in the statement of financial position. The lease cost will be allocated over the lease term on a straight-line basis. This guidance will be effective on January 1, 2019, on a modified retrospective basis, with early adoption permitted. We plan to adopt the lease accounting guidance in the first quarter of 2019 and are currently evaluating the impact this guidance will have on our consolidated financial statements by reviewing our existing lease contracts and service contracts that may include embedded leases. We expect to recognize right-of-use assets and related lease liabilities associated predominantly with noncancelable operating leases included in the table of minimum future payments in the amount of $217 million as disclosed in Note 18 of our 2016 Form 10-K.Instruments - Credit Losses
In June 2016, the FASB issued a new accounting standard updateAccounting Standard Update (ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), which amends the incurred loss impairment methodology in current GAAP with a methodology that reflects a current expected credit loss measurement to estimate the allowance for credit losses over the contractual life of the loanfinancial assets (including loans, unfunded credit commitments and HTM securities) and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ThisWhile the CECL model does not apply to available-for-sale debt securities, ASU 2016-13 does require entities to record an allowance for credit losses when recognizing credit losses for available-for-sale securities, rather than reduce the amortized cost of the securities by direct write-offs, which allows for reversal of credit impairments in future periods based on improvements in credit. We adopted the guidance will be effectiveon January 1, 2020, onusing a modified retrospective approach, with earlyapproach. We recognized the cumulative effect of initially applying CECL as an adjustment to the opening balance of retained earnings, net of tax. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
We completed a comprehensive implementation process that included loss forecasting model development, evaluation of technical accounting topics, updates to our allowance for credit loss accounting policies, reporting processes and related internal controls, overall operational readiness for our adoption permitted, but not beforeof CECL as well as parallel runs for CECL alongside our previous allowance process. We provided quarterly updates to senior management and to the Audit and Credit Committees of the Board of Directors throughout the implementation process. For additional details regarding our allowance for credit losses methodology, see Note 7 — “Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Based on our loan, unfunded credit commitment, and HTM security portfolios composition at December 31, 2019, and the then current economic environment, the cumulative effect of the changes to our consolidated balance sheets at January 1, 2019. We currently2020, for the adoption of CECL were as follows:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Balance at December 31, 2019 | | Adjustments Due to Adoption of ASC 326 | | Balance at January 1, 2020 |
Assets: | | | | | | |
Allowance for credit losses: loans | | $ | 304,924 |
| | $ | 25,464 |
| | $ | 330,388 |
|
Allowance for credit losses: held-to-maturity securities | | — |
| | 174 |
| | 174 |
|
Deferred tax assets | | 28,433 |
| | 13,415 |
| | 41,848 |
|
Other liabilities: | | | | | | |
Allowance for credit losses: unfunded credit commitments | | 67,656 |
| | 22,826 |
| | 90,482 |
|
Stockholders' equity: | | | | | | |
Retained earnings, net of tax | | 4,575,601 |
| | (35,049 | ) | | 4,540,552 |
|
Prior to the effective adoption date of CECL, Federal banking regulatory agencies had provided relief for the initial capital decrease at adoption by allowing the impact to be phased-in over three years on a straight-line basis. Subsequent to our adoption of CECL, Federal banking regulatory agencies provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by the Coronavirus Disease 2019 pandemic ("COVID-19") as well as the significant resources required to implement CECL. At the time of the adoption of CECL, we were not expecting to utilize the initial relief provided by the Federal banking regulatory agencies as the initial capital decrease at adoption did not have a working project team in place and subject matter expertsmaterial impact to assist with our review of key interpretive issues and assist in the assessment of our existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required. We are currently evaluatingcapital ratios; however, the impact to our capital from subsequent increases in our allowance for credit losses from the day one adoption impact related to COVID-19 economic factors was deemed significant. As a result, we have elected to use the regulatory capital phase-in under the interim final rule. Refer to the "Capital Resources" section under Part I, Item 2 of this report for additional details.
Additionally, under the prior guidance, will haveour loan portfolio and credit quality disclosures were disaggregated based on client market segments. Upon adoption of CECL, our financial position, results of operationtechnology (software/internet and stockholders’ equity.hardware) and life science/healthcare market segments are disclosed by the portfolio segment that aligns with their respective underwriting methodology and the level at which credit risk is now monitored by management. The primary underwriting method for our technology and life science/healthcare portfolios are classified as investor dependent (early-stage and growth), cash flow dependent or balance sheet dependent, as noted above, and prior period amounts were reclassified for comparability. There are no other material changes to our current market segments.
Other Adopted Accounting Pronouncements
In August 2016,2018, the FASB issued a new accounting standard updateAccounting Standard Update (ASU 2016-15, Statement of Cash FlowsNo. 2018-13, Fair Value Measurement (Topic 230)820): Classification of Certain Cash Receipts and Cash Payments), which clarifiesDisclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement). The ASU primarily modifies certain disclosures with respect to Level 3 fair value measurements. We adopted the guidance on eight specific cash flow issues. This guidance will be effective January 1, 20182020. The adoption did not have an impact on our consolidated financial position or results of operations and did not have a full retrospective approach, with early adoption permitted. Our preliminary evaluation has resultedmaterial impact on the disclosures in the expectation that this guidance will primarily impact the presentation between investing and operating activities within our statements of cash flows related to distributions and net gains from our nonmarketable and other securities portfolio. We are continuing to evaluate any further impact of this guidance to the presentation of our operating, investing and financing activities within our statements of cash flows.
Reclassifications
Certain prior period amounts, primarily related to the changesnotes to our income statement presentation of net gains on derivative instruments and provision for unfunded credit commitments have been reclassified to conform to current period presentations.unaudited interim consolidated financial statements.
| |
2. | Stockholders’Stockholders' Equity and EPS |
Accumulated Other Comprehensive Income
The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | |
| | | | Three months ended March 31, |
(Dollars in thousands) | | Income Statement Location | | 2020 | | 2019 |
Reclassification adjustment for (gains) losses on available-for-sale securities included in net income | | Gains on investment securities, net | | $ | (61,165 | ) | | $ | 3,630 |
|
Related tax expense (benefit) | | Income tax expense | | 16,953 |
| | (1,010 | ) |
Reclassification adjustment for (gains) losses on cash flow hedges included in net income | | Net interest income | | (2,089 | ) | | 3 |
|
Related tax expense (benefit) | | Income tax expense | | 579 |
| | (1 | ) |
Total reclassification adjustment for (gains) losses included in net income, net of tax | | | | $ | (45,722 | ) | | $ | 2,622 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | Income Statement Location | | 2017 |
| 2016 | | 2017 | | 2016 |
Reclassification adjustment for losses (gains) included in net income | | Gains on investment securities, net | | $ | 101 |
| | $ | 15 |
| | $ | (384 | ) | | $ | (11,567 | ) |
Related tax (benefit) expense | | Income tax expense | | (41 | ) | | (6 | ) | | 157 |
| | 4,707 |
|
Total reclassification adjustment for losses (gains) included in net income, net of tax | | | | $ | 60 |
| | $ | 9 |
| | $ | (227 | ) | | $ | (6,860 | ) |
The table below summarizes the activity relating to net gains and losses on our cash flow hedges included in accumulated other comprehensive income for the three months ended March 31, 2020 and 2019. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the termination of our cash flow hedges during the three months ended March 31, 2020. Over the next 12 months, we expect that approximately $63.5 million in accumulated other comprehensive income ("AOCI") at March 31, 2020, related to unrealized gains will be reclassified out of AOCI and recognized in net income. |
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Balance, beginning of period, net of tax | | $ | (2,130 | ) | | $ | — |
|
Net increase in fair value, net of tax | | 167,639 |
| | 795 |
|
Net realized (gain) loss reclassified to net income, net of tax | | (1,510 | ) | | 2 |
|
Balance, end of period, net of tax | | $ | 163,999 |
| | $ | 797 |
|
EPS
Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issuable for stock options and restricted stock unitsunit 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 the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars and shares in thousands, except per share amounts) | | 2020 | | 2019 |
Numerator: | | | | |
Net income available to common stockholders | | $ | 132,253 |
| | $ | 288,732 |
|
Denominator: | | | | |
Weighted average common shares outstanding—basic | | 51,565 |
| | 52,587 |
|
Weighted average effect of dilutive securities: | | | | |
Stock options and ESPP | | 217 |
| | 297 |
|
Restricted stock units and awards | | 162 |
| | 225 |
|
Weighted average common shares outstanding—diluted | | 51,944 |
| | 53,109 |
|
Earnings per common share: | | | | |
Basic | | $ | 2.56 |
| | $ | 5.49 |
|
Diluted | | 2.55 |
| | 5.44 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars and shares in thousands, except per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 |
Numerator: | | | | | | | | |
Net income available to common stockholders | | $ | 148,620 |
| | $ | 111,081 |
| | $ | 373,296 |
| | $ | 283,219 |
|
Denominator: | | | | | | | | |
Weighted average common shares outstanding—basic | | 52,705 |
| | 52,046 |
| | 52,530 |
| | 51,842 |
|
Weighted average effect of dilutive securities: | | | | | | | | |
Stock options and ESPP | | 343 |
| | 233 |
| | 381 |
| | 245 |
|
Restricted stock units | | 257 |
| | 134 |
| | 319 |
| | 142 |
|
Weighted average common shares outstanding—diluted | | 53,305 |
| | 52,413 |
| | 53,230 |
| | 52,229 |
|
Earnings per common share: | | | | | | | | |
Basic | | $ | 2.82 |
| | $ | 2.13 |
| | $ | 7.11 |
| | $ | 5.46 |
|
Diluted | | $ | 2.79 |
| | $ | 2.12 |
| | $ | 7.01 |
| | $ | 5.42 |
|
The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation due to the antidilutive effect for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | |
| | Three months ended March 31, |
(Shares in thousands) | | 2020 | | 2019 |
Stock options | | 206 |
| | 91 |
|
Restricted stock units | | 119 |
| | 134 |
|
Total | | 325 |
| | 225 |
|
|
| | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Shares in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Stock options | | 112 |
| | 518 |
| | 61 |
| | 444 |
|
Restricted stock units | | 5 |
| | 120 |
| | 2 |
| | 9 |
|
Total | | 117 |
| | 638 |
| | 63 |
| | 453 |
|
Stock Repurchase ProgramOn October 24, 2019, our Board of Directors authorized a new stock repurchase program that enables us to repurchase up to $350 million of our outstanding common stock. This program expires on October 29, 2020. For the three months ended March 31, 2020, we repurchased 244,223 shares of our outstanding common stock for $60.0 million under the new stock repurchase program. Preferred Stock
On December 9, 2019, the Company issued depositary shares representing an ownership interest in 350,000 shares of Series A Preferred Stock with $0.001 par value and liquidation preference of $1,000 per share, or $25 per depositary share. All preferred shares were issued in the form of depositary shares, with each depositary share representing a 1/40th ownership interest in a share of the preferred stock. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or other obligation of the Company. Dividends are approved by the Board of Directors and, if declared, are payable quarterly, in arrears, at a rate per annum equal to 5.25 percent. The Series A Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after February 15, 2025. Prior to February 15, 2025, the Series A Preferred Stock is redeemable at the Company’s option, in whole and not in part, following any change in laws or regulations that would not allow the Company to treat the full liquidation value of the Series A Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Board of Governors of the Federal Reserve System ("the Federal Reserve"). The redemption amount is computed at the per share liquidation preference plus any declared but unpaid dividends. Redemptions are subject to certain regulatory provisions, including approval of the Federal Reserve.
As of March 31, 2020, there were 350,000 shares issued and outstanding of Series A Preferred Shares, which had a carrying value of $340.1 million and liquidation preference of $350.0 million.
The following table summarizes our preferred stock at March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Series | | Description | | Amount outstanding (in millions) | | Carrying value (in millions) | | Shares issued and outstanding | | Par Value | | Ownership interest per depository share | | Liquidation preference per depository share | | 2020 dividends paid per depository share |
Series A | | 5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock | | $ | 350 |
| | $ | 340.1 |
| | 350,000 | | $ | 0.001 |
| | 1/40th | | $ | 25 |
| | $ | 0.24 |
|
| |
3. | Share-Based Compensation |
For the three and nine months endedSeptember 30, 2017March 31, 2020 and 20162019, we recorded share-based compensation and related tax benefits as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Share-based compensation expense | | $ | 19,171 |
| | $ | 15,122 |
|
Income tax benefit related to share-based compensation expense | | (4,440 | ) | | (3,327 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Share-based compensation expense | | $ | 8,644 |
| | $ | 7,916 |
| | $ | 27,739 |
| | $ | 22,342 |
|
Income tax benefit related to share-based compensation expense | | (3,154 | ) | | (2,881 | ) | | (9,518 | ) | | (7,461 | ) |
Unrecognized Compensation Expense
As of September 30, 2017,March 31, 2020, unrecognized share-based compensation expense was as follows:
|
| | | | | | |
(Dollars in thousands) | | Unrecognized Expense | | Weighted Average Expected Recognition Period - in Years |
Stock options | | $ | 12,668 |
| | 2.35 |
Restricted stock units and awards | | 95,440 |
| | 2.66 |
Total unrecognized share-based compensation expense | | $ | 108,108 |
| | |
|
| | | | | | |
(Dollars in thousands) | | Unrecognized Expense | | Weighted Average Expected Recognition Period - in Years |
Stock options | | $ | 10,935 |
| | 2.72 |
Restricted stock units | | 56,513 |
| | 2.74 |
Total unrecognized share-based compensation expense | | $ | 67,448 |
| | |
Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the ninethree months endedSeptember 30, 2017March 31, 2020:
|
| | | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life - in Years | | Aggregate Intrinsic Value of In-The- Money Options |
Outstanding at December 31, 2019 | | 625,407 |
| | $ | 169.33 |
| | | | |
Granted | | 1,316 |
| | 244.69 |
| | | | |
Exercised | | (50,733 | ) | | 85.32 |
| | | | |
Forfeited | | (2,399 | ) | | 224.87 |
| | | | |
Outstanding at March 31, 2020 | | 573,591 |
| | 176.70 |
| | 3.63 | | $ | 11,973,716 |
|
Vested and expected to vest at March 31, 2020 | | 560,684 |
| | 174.94 |
| | 3.58 | | 11,967,072 |
|
Exercisable at March 31, 2020 | | 310,688 |
| | 131.01 |
| | 2.34 | | 10,376,626 |
|
|
| | | | | | | | | | | | | |
| | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life - in Years | | Aggregate Intrinsic Value of In-The- Money Options |
Outstanding at December 31, 2016 | | 1,010,557 |
| | $ | 87.24 |
| | | | |
Granted | | 113,535 |
| | 178.23 |
| | | | |
Exercised | | (232,370 | ) | | 70.79 |
| | | | |
Forfeited | | (9,491 | ) | | 111.48 |
| | | | |
Outstanding at September 30, 2017 | | 882,231 |
| | 103.02 |
| | 3.80 | | $ | 74,172,891 |
|
Vested and expected to vest at September 30, 2017 | | 857,176 |
| | 101.94 |
| | 3.74 | | 72,987,562 |
|
Exercisable at September 30, 2017 | | 533,847 |
| | 83.46 |
| | 2.73 | | 55,323,524 |
|
The aggregate intrinsic value of outstanding options shown in the table above represents the pre-tax intrinsic value based on our closing stock price of $187.09$151.08 as of September 30, 2017.March 31, 2020. The total intrinsic value of options exercised during the three and nine months ended September 30, 2017March 31, 2020 was $3.8 million and $25.8$8.3 million, compared to $1.5 million and $8.2$7.5 million for the comparable 2016 periods, respectively.2019 period.
The table below provides information for restricted stock units and awards under the 2006 Equity Incentive Plan for the ninethree months endedSeptember 30, 2017March 31, 2020:
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Nonvested at December 31, 2019 | | 847,972 |
| | $ | 236.54 |
|
Granted | | 46,027 |
| | 217.97 |
|
Vested | | (77,900 | ) | | 205.91 |
|
Forfeited | | (19,591 | ) | | 220.12 |
|
Nonvested at March 31, 2020 | | 796,508 |
| | 238.86 |
|
|
| | | | | | | |
| | Shares | | Weighted Average Grant Date Fair Value |
Nonvested at December 31, 2016 | | 670,969 |
| | $ | 106.64 |
|
Granted | | 239,847 |
| | 180.05 |
|
Vested | | (223,561 | ) | | 102.00 |
|
Forfeited | | (38,871 | ) | | 122.77 |
|
Nonvested at September 30, 2017 | | 648,384 |
| | 134.43 |
|
| |
4. | Variable Interest Entities |
Our involvement with VIEs includes our investments in venture capital and private equity funds, debt funds, private and public portfolio companies and our investments in qualified affordable housing projects.
The following table presents the carrying amounts and classification of significant variable interests in consolidated and unconsolidated VIEs as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | (Dollars in thousands) | | Consolidated VIEs | | Unconsolidated VIEs | | Maximum Exposure to Loss in Unconsolidated VIEs | | Consolidated VIEs | | Unconsolidated VIEs | | Maximum Exposure to Loss in Unconsolidated VIEs |
September 30, 2017: | | | | | | | |
March 31, 2020: | | | | | | | |
Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 7,555 |
| | $ | — |
| | $ | — |
| | $ | 9,322 |
| | $ | — |
| | $ | — |
|
Non-marketable and other securities (1) | | 190,129 |
| | 323,284 |
| | 323,284 |
| |
Non-marketable and other equity securities (1) | | | 261,049 |
| | 722,600 |
| | 722,600 |
|
Accrued interest receivable and other assets | | 169 |
| | — |
| | — |
| | 1,374 |
| | — |
| | — |
|
Total assets | | $ | 197,853 |
| | $ | 323,284 |
| | $ | 323,284 |
| | $ | 271,745 |
| | $ | 722,600 |
| | $ | 722,600 |
|
Liabilities: | | | | | | | | | | | | |
Other liabilities (1) | | 445 |
| | 90,974 |
| | — |
| | 1,677 |
| | 348,272 |
| | — |
|
Total liabilities | | $ | 445 |
| | $ | 90,974 |
| | $ | — |
| | $ | 1,677 |
| | $ | 348,272 |
| | $ | — |
|
December 31, 2016: | | | | | | | |
December 31, 2019: | | | | | | | |
Assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 11,469 |
| | $ | — |
| | $ | — |
| | $ | 7,629 |
| | $ | — |
| | $ | — |
|
Non-marketable and other securities (1) | | 196,140 |
| | 314,810 |
| | 314,810 |
| |
Non-marketable and other equity securities (1) | | | 270,057 |
| | 689,360 |
| | 689,360 |
|
Accrued interest receivable and other assets | | 294 |
| | — |
| | — |
| | 1,117 |
| | — |
| | — |
|
Total assets | | $ | 207,903 |
| | $ | 314,810 |
| | $ | 314,810 |
| | $ | 278,803 |
| | $ | 689,360 |
| | $ | 689,360 |
|
Liabilities: | | | | | | | | | | | | |
Other liabilities (1) | | 517 |
| | 58,095 |
| | — |
| | 2,854 |
| | 302,031 |
| | — |
|
Total liabilities | | $ | 517 |
| | $ | 58,095 |
| | $ | — |
| | $ | 2,854 |
| | $ | 302,031 |
| | $ | — |
|
| |
(1) | Included in our unconsolidated non-marketable and other equity securities portfolio at September 30, 2017March 31, 2020 and December 31, 20162019 are investments in qualified affordable housing projects of $148.0$500.8 million and $112.4$458.5 million, respectively, and related other liabilities consisting of unfunded credit commitments of $91.0$348.3 million and $58.1$302.0 million, respectively. |
Non-marketable and other equity securities
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies and investments in qualified affordable housing projects. A majority of these investments are through thirdthird- party funds held by SVB Financial in which we do not have controlling or significant variable interests. These investments represent our unconsolidated VIEs in the table above. Our non-marketable and other equity securities portfolio also includes investments from SVB Capital. SVB Capital is the funds management business of SVB Financial Group, which focuses primarily on venture capital investments. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. We have a controlling and significant variable interest in four4 of these SVB Capital funds and consolidate these funds for financial reporting purposes.
All investments are generally nonredeemable, and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. Subject to applicable regulatory requirements, including the Volcker Rule, we also make commitments to invest in venture capital and private equity funds. For additional details, see Note 12—“Off-Balance15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
The Bank also has variable interests in low income housing tax credit funds, in connection with fulfilling its responsibilities under the Community Reinvestment Act (“CRA”), that are designed to generate a return primarily through the realization of federal tax credits. These investments are typically limited partnerships in which the general partner, other than the Bank, holds the power over significant activities of the VIE; therefore, these investments are not consolidated. For additional information on
our investments in qualified affordable housing projects, see Note 6—“Investment6 — “Investment Securities" of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
As of September 30, 2017,March 31, 2020, our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $197.4$270.1 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $323.3$722.6 million.
| |
5. | Cash and Cash Equivalents |
The following table details our cash and cash equivalents at September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | (Dollars in thousands) | | September 30, 2017 |
| December 31, 2016 | | March 31, 2020 |
| December 31, 2019 |
Cash and due from banks (1) | | $ | 3,490,005 |
| | $ | 2,476,588 |
| | $ | 9,159,690 |
| | $ | 6,492,443 |
|
Securities purchased under agreements to resell (2) | | 62,664 |
| | 64,028 |
| | 401,758 |
| | 289,340 |
|
Other short-term investment securities | | 2,902 |
| | 5,134 |
| |
Total cash and cash equivalents | | $ | 3,555,571 |
| | $ | 2,545,750 |
| | $ | 9,561,448 |
| | $ | 6,781,783 |
|
| |
(1) | At September 30, 2017March 31, 2020 and December 31, 20162019, $1.67.2 billion and $1.13.7 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $1.21.4 billion and $721 million2.1 billion, respectively. |
| |
(2) | At September 30, 2017March 31, 2020 and December 31, 20162019, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair valuesvalues of $64409.8 million an and $66295.3 million, respectively. None of these securities were sold or repledged as of September 30, 2017March 31, 2020 and December 31, 20162019. |
Our investment securities portfolio consists of: (i) an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest-earning investment securities, and (ii) a non-marketable and other equity securities portfolio, which primarily represents investments managed as part of our funds management business.business, investments in qualified affordable housing projects, as well as public equity securities held as a result of equity warrant assets exercised.
Available-for-Sale Securities
The major components of our available-for-sale investment securities portfolio at September 30, 2017March 31, 2020 and December 31, 20162019 are as follows:
| | | | September 30, 2017 | | March 31, 2020 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Carrying Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Carrying Value |
Available-for-sale securities, at fair value: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 7,488,126 |
| | $ | 14,048 |
| | $ | (3,834 | ) | | $ | 7,498,340 |
| | $ | 3,745,238 |
| | $ | 298,602 |
| | $ | — |
| | $ | 4,043,840 |
|
U.S. agency debentures | | 1,668,403 |
| | 9,759 |
| | (1,993 | ) | | 1,676,169 |
| | 100,000 |
| | 1,687 |
| | — |
| | 101,687 |
|
Foreign government debt securities | | | 22,169 |
| | 1 |
| | (18 | ) | | 22,152 |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | | 4,758,167 |
| | 185,347 |
| | (2 | ) | | 4,943,512 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 3,024,649 |
| | 4,998 |
| | (16,952 | ) | | 3,012,695 |
| | 1,409,673 |
| | 56,002 |
| | — |
| | 1,465,675 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 394,567 |
| | 1,442 |
| | (129 | ) | | 395,880 |
| |
Equity securities | | 8,819 |
| | 11,893 |
| | (459 | ) | | 20,253 |
| |
Agency-issued commercial mortgage-backed securities | | | 2,009,470 |
| | 61,728 |
| | — |
| | 2,071,198 |
|
Total available-for-sale securities | | $ | 12,584,564 |
| | $ | 42,140 |
| | $ | (23,367 | ) | | $ | 12,603,337 |
| | $ | 12,044,717 |
| | $ | 603,367 |
| | $ | (20 | ) | | $ | 12,648,064 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Carrying Value |
Available-for-sale securities, at fair value: | | | | | | | | |
U.S. Treasury securities | | $ | 6,815,874 |
| | $ | 82,267 |
| | $ | (4,131 | ) | | $ | 6,894,010 |
|
U.S. agency debentures | | 100,000 |
| | — |
| | (453 | ) | | 99,547 |
|
Foreign government debt securities | | 9,037 |
| | 1 |
| | — |
| | 9,038 |
|
Residential mortgage-backed securities: | | | | | | | | |
Agency-issued mortgage-backed securities | | 4,109,372 |
| | 39,438 |
| | (19 | ) | | 4,148,791 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 1,520,414 |
| | 17,929 |
| | — |
| | 1,538,343 |
|
Agency-issued commercial mortgage-backed securities | | 1,339,651 |
| | 1,078 |
| | (15,539 | ) | | 1,325,190 |
|
Total available-for-sale securities | | $ | 13,894,348 |
| | $ | 140,713 |
| | $ | (20,142 | ) | | $ | 14,014,919 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Carrying Value |
Available-for-sale securities, at fair value: | | | | | | | | |
U.S. Treasury securities | | $ | 8,880,358 |
| | $ | 30,323 |
| | $ | (1,190 | ) | | $ | 8,909,491 |
|
U.S. agency debentures | | 2,065,535 |
| | 14,443 |
| | (1,603 | ) | | 2,078,375 |
|
Residential mortgage-backed securities: | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 1,163,017 |
| | 3,046 |
| | (13,398 | ) | | 1,152,665 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 474,238 |
| | 685 |
| | (640 | ) | | 474,283 |
|
Equity securities | | 5,635 |
| | 748 |
| | (786 | ) | | 5,597 |
|
Total available-for-sale securities | | $ | 12,588,783 |
| | $ | 49,245 |
| | $ | (17,617 | ) | | $ | 12,620,411 |
|
The following table summarizes sale activity of available-for-sale securities during the three months ended March 31, 2020 and 2019 as recorded in the line item “Gains on investment securities, net," a component of noninterest income: |
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
Sales proceeds | | $ | 2,654,212 |
| | $ | 1,171,564 |
|
Net realized gains and losses: | | | | |
Gross realized gains | | 61,165 |
| | — |
|
Gross realized losses | | — |
| | (3,630 | ) |
Net realized gains (losses) | | $ | 61,165 |
| | $ | (3,630 | ) |
The following tables summarize our unrealized losses on our available-for-sale securities portfolioin an unrealized loss position for which an allowance for credit losses has not been recorded and summarized into categories of less than 12 months, or 12 months or longer, as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses |
Available-for-sale securities: | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 2,824,370 |
| | $ | (3,834 | ) | | $ | — |
| | $ | — |
| | $ | 2,824,370 |
| | $ | (3,834 | ) |
U.S. agency debentures | | 562,392 |
| | (1,993 | ) | | — |
| | — |
| | 562,392 |
| | (1,993 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 1,505,319 |
| | (7,389 | ) | | 415,200 |
| | (9,563 | ) | | 1,920,519 |
| | (16,952 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | 6,651 |
| | (1 | ) | | 62,508 |
| | (128 | ) | | 69,159 |
| | (129 | ) |
Equity securities | | 1,787 |
| | (459 | ) | | — |
| | — |
| | 1,787 |
| | (459 | ) |
Total temporarily impaired securities (1) | | $ | 4,900,519 |
| | $ | (13,676 | ) | | $ | 477,708 |
| | $ | (9,691 | ) | | $ | 5,378,227 |
| | $ | (23,367 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | Less than 12 months | | 12 months or longer (1) | | Total |
(Dollars in thousands) | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses |
Available-for-sale securities: | | | | | | | | | | | | |
Foreign government debt securities | | 13,292 |
| | (18 | ) | | — |
| | — |
| | 13,292 |
| | (18 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 626 |
| | (2 | ) | | — |
| | — |
| | 626 |
| | (2 | ) |
Total available-for-sale securities (1) | | $ | 13,918 |
| | $ | (20 | ) | | $ | — |
| | $ | — |
| | $ | 13,918 |
| | $ | (20 | ) |
| |
(1) | As of September 30, 2017March 31, 2020, we identified a total of 2022 investments that were in unrealized loss positions, of which 63 investments totaling $477.7 million with unrealized losses of $9.7 million have beenand neither position was in an impairedunrealized loss position for a period of time greater than 12 months. Based on our analysis of the securities in an unrealized loss position as of March 31, 2020, the decline in value is unrelated to credit loss and is related to changes in market interest rates since purchase and therefore changes in value for securities are included in other comprehensive income. Market valuations and credit loss analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis. As of September 30, 2017March 31, 2020, we do not intend to sell any of our impaired securities in an unrealized loss position prior to recovery of our adjustedamortized cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjustedamortized cost basis. Based on our analysis as of September 30, 2017, we deem all impairments to be temporary, and therefore changes in value for our temporarily impaired securities asNone of the same date are includedinvestments in other comprehensive income. Market valuations and impairment analyses on assets in theour available-for-sale securities portfolio are reviewed and monitored on a quarterly basis.were past due as of March 31, 2020. |
| | | | December 31, 2016 | | December 31, 2019 |
| | Less than 12 months | | 12 months or longer | | Total | | Less than 12 months | | 12 months or longer (1) | | Total |
(Dollars in thousands) | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 879,255 |
| | $ | (1,190 | ) | | $ | — |
| | $ | — |
| | $ | 879,255 |
| | $ | (1,190 | ) | | $ | 971,572 |
| | $ | (3,996 | ) | | $ | 449,850 |
| | $ | (135 | ) | | $ | 1,421,422 |
| | $ | (4,131 | ) |
U.S. agency debentures | | 513,198 |
| | (1,603 | ) | | — |
| | — |
| | 513,198 |
| | (1,603 | ) | | 99,547 |
| | (453 | ) | | — |
| | — |
| | 99,547 |
| | (453 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 635,566 |
| | (6,704 | ) | | 227,480 |
| | (6,694 | ) | | 863,046 |
| | (13,398 | ) | |
Agency-issued collateralized mortgage obligations—variable rate | | 258,325 |
| | (613 | ) | | 6,068 |
| | (27 | ) | | 264,393 |
| | (640 | ) | |
Equity securities | | 3,693 |
| | (786 | ) | | — |
| | — |
| | 3,693 |
| | (786 | ) | |
Total temporarily impaired securities (1) | | $ | 2,290,037 |
| | $ | (10,896 | ) | | $ | 233,548 |
| | $ | (6,721 | ) | | $ | 2,523,585 |
| | $ | (17,617 | ) | |
Agency-issued mortgage-backed securities | | | 4,014 |
| | (19 | ) | | — |
| | — |
| | 4,014 |
| | (19 | ) |
Agency-issued commercial mortgage-backed securities | | | 1,027,232 |
| | (15,539 | ) | | — |
| | — |
| | 1,027,232 |
| | (15,539 | ) |
Total available-for-sale securities (1) | | | $ | 2,102,365 |
| | $ | (20,007 | ) | | $ | 449,850 |
| | $ | (135 | ) | | $ | 2,552,215 |
| | $ | (20,142 | ) |
| |
(1) | As of December 31, 20162019, we identified a total of 17458 investments that were in unrealized loss positions, of which 2012 investments totaling $233.5 million0.4 billion with unrealized losses of $6.70.1 million have been in an impairedunrealized loss position for a period of time greater than 12 months. |
The following table summarizes thefixed income securities, carried at fair value, classified as available-for-sale as of September 30, 2017March 31, 2020 by the remaining contractual principal maturities. For U.S. Treasury securities, and U.S. agency debentures and foreign government debt securities, the expected maturity is the actual contractual maturity of the notes. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments.
|
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
U.S. Treasury securities | | $ | 4,043,840 |
| | $ | 110,935 |
| | $ | 1,626,096 |
| | $ | 2,306,809 |
| | $ | — |
|
U.S. agency debentures | | 101,687 |
| | — |
| | — |
| | 101,687 |
| | — |
|
Foreign government debt securities | | 22,152 |
| | 22,152 |
| | — |
| | — |
| | — |
|
Residential mortgage-backed securities: | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 4,943,512 |
| | — |
| | — |
| | — |
| | 4,943,512 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 1,465,675 |
| | — |
| | 1,094 |
| | — |
| | 1,464,581 |
|
Agency-issued commercial mortgage-backed securities | | 2,071,198 |
| | — |
| | — |
| | 803,536 |
| | 1,267,662 |
|
Total | | $ | 12,648,064 |
| | $ | 133,087 |
| | $ | 1,627,190 |
| | $ | 3,212,032 |
| | $ | 7,675,755 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
(Dollars in thousands) | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
U.S. Treasury securities | | $ | 7,498,340 |
| | $ | 2,592,486 |
| | $ | 4,905,854 |
| | $ | — |
| | $ | — |
|
U.S. agency debentures | | 1,676,169 |
| | 314,852 |
| | 1,361,317 |
| | — |
| | — |
|
Residential mortgage-backed securities: | | | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 3,012,695 |
| | — |
| | — |
| | 487,285 |
| | 2,525,410 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 395,880 |
| | — |
| | — |
| | — |
| | 395,880 |
|
Total | | $ | 12,583,084 |
| | $ | 2,907,338 |
| | $ | 6,267,171 |
| | $ | 487,285 |
| | $ | 2,921,290 |
|
Held-to-Maturity Securities
The components of our held-to-maturity investment securities portfolio at September 30, 2017March 31, 2020 and December 31, 20162019 are as follows:
| | | | September 30, 2017 | | March 31, 2020 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Allowance for Credit Losses (2) |
Held-to-maturity securities, at cost: | | | | | | | | | | | | | | | | | | |
U.S. agency debentures (1) | | $ | 660,193 |
| | $ | 6,775 |
| | $ | (1,080 | ) | | $ | 665,888 |
| | $ | 453,353 |
| | $ | 14,799 |
| | $ | — |
| | $ | 468,152 |
| | $ | — |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 5,164,701 |
| | 15,764 |
| | (17,116 | ) | | 5,163,349 |
| | 6,662,878 |
| | 310,896 |
| | (90 | ) | | 6,973,684 |
| | — |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 3,025,421 |
| | 707 |
| | (27,268 | ) | | 2,998,860 |
| |
Agency-issued collateralized mortgage obligations —fixed rate | | | 1,482,205 |
| | 30,323 |
| | (4 | ) | | 1,512,524 |
| | — |
|
Agency-issued collateralized mortgage obligations—variable rate | | 269,495 |
| | 704 |
| | (37 | ) | | 270,162 |
| | 170,774 |
| | — |
| | (1,652 | ) | | 169,122 |
| | — |
|
Agency-issued commercial mortgage-backed securities | | 1,554,220 |
| | 2,025 |
| | (11,697 | ) | | 1,544,548 |
| | 2,644,968 |
| | 98,806 |
| | (512 | ) | | 2,743,262 |
| | — |
|
Municipal bonds and notes | | 380,976 |
| | 1,506 |
| | (1,874 | ) | | 380,608 |
| | 2,160,341 |
| | 105,860 |
| | (1,791 | ) | | 2,264,410 |
| | 230 |
|
Total held-to-maturity securities | | $ | 11,055,006 |
| | $ | 27,481 |
| | $ | (59,072 | ) | | $ | 11,023,415 |
| | $ | 13,574,519 |
| | $ | 560,684 |
| | $ | (4,049 | ) | | $ | 14,131,154 |
| | $ | 230 |
|
| |
(1) | Consists of pools of Small Business Investment Company debentures issued and guaranteed by the U.S. Small Business Administration, an independent agency of the United States. |
(2) Refer to Note 1 - "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements (unaudited)" under Part i, Item 1 of this report for more information on our credit loss methodology.
| | | | December 31, 2016 | | December 31, 2019 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Held-to-maturity securities, at cost: | | | | | | | | | |
Held-to-maturity securities, at amortized cost: | | | | | | | | | |
U.S. agency debentures (1) | | $ | 622,445 |
| | $ | 7,840 |
| | $ | (1,198 | ) | | $ | 629,087 |
| | $ | 518,728 |
| | $ | 6,640 |
| | $ | (668 | ) | | $ | 524,700 |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 2,896,179 |
| | 6,919 |
| | (24,526 | ) | | 2,878,572 |
| | 6,992,009 |
| | 142,209 |
| | (2,066 | ) | | 7,132,152 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 3,362,598 |
| | 788 |
| | (31,274 | ) | | 3,332,112 |
| | 1,608,032 |
| | 592 |
| | (8,502 | ) | | 1,600,122 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 312,665 |
| | 176 |
| | (1,339 | ) | | 311,502 |
| | 178,611 |
| | 94 |
| | (259 | ) | | 178,446 |
|
Agency-issued commercial mortgage-backed securities | | 1,151,363 |
| | 1,237 |
| | (7,638 | ) | | 1,144,962 |
| | 2,759,615 |
| | 56,914 |
| | (4,508 | ) | | 2,812,021 |
|
Municipal bonds and notes | | 81,748 |
| | 8 |
| | (1,853 | ) | | 79,903 |
| | 1,785,951 |
| | 83,314 |
| | (1,434 | ) | | 1,867,831 |
|
Total held-to-maturity securities | | $ | 8,426,998 |
| | $ | 16,968 |
| | $ | (67,828 | ) | | $ | 8,376,138 |
| | $ | 13,842,946 |
| | $ | 289,763 |
| | $ | (17,437 | ) | | $ | 14,115,272 |
|
| |
(1) | Consists of pools of Small Business Investment Company debentures issued and guaranteed by the U.S. Small Business Administration, an independent agency of the United States. |
Allowance for Credit Losses for HTM Securities
The following tables summarizetable summarizes the activity relating to our unrealizedallowance for credit losses onfor HTM securities for the three months ended March 31, 2020:
|
| | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 | | Beginning Balance December 31, 2019 | | Day One Impact of adopting ASC 326 | | Provision for Credit Losses | | Ending Balance March 31, 2020 |
(Dollars in thousands) | | | | |
Municipal bonds and notes | | $ | — |
| | $ | 174 |
| | $ | 56 |
| | $ | 230 |
|
Total allowance for credit losses | | $ | — |
| | $ | 174 |
| | $ | 56 |
| | $ | 230 |
|
Credit Quality Indicators
On a quarterly basis, management monitors the credit quality for HTM securities through the use of standard credit ratings. The following table summarizes our held-to-maturityamortized cost of HTM securities portfolio into categories of less than 12 months and 12 months or longer as of September 30, 2017 and Decemberaggregated by credit quality indicator at March 31, 2016:2020:
|
| | | | |
(Dollars in thousands) | | March 31, 2020 |
Municipal bonds and notes: | | |
Aaa | | $ | 1,458,546 |
|
Aa1 | | 477,068 |
|
Aa2 | | 223,357 |
|
Aa3 | | 1,370 |
|
Total | | $ | 2,160,341 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses |
Held-to-maturity securities: | | | | | | | | | | | | |
U.S. agency debentures | | $ | 101,211 |
| | $ | (1,080 | ) | | $ | — |
| | $ | — |
| | $ | 101,211 |
| | $ | (1,080 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 3,071,006 |
| | (16,251 | ) | | 25,004 |
| | (865 | ) | | 3,096,010 |
| | (17,116 | ) |
Agency-issued collateralized mortgage obligations—fixed rate | | 2,661,682 |
| | (21,842 | ) | | 235,320 |
| | (5,426 | ) | | 2,897,002 |
| | (27,268 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | — |
| | — |
| | 10,321 |
| | (37 | ) | | 10,321 |
| | (37 | ) |
Agency-issued commercial mortgage-backed securities | | 1,210,351 |
| | (10,615 | ) | | 82,151 |
| | (1,082 | ) | | 1,292,502 |
| | (11,697 | ) |
Municipal bonds and notes | | 111,207 |
| | (896 | ) | | 29,606 |
| | (978 | ) | | 140,813 |
| | (1,874 | ) |
Total temporarily impaired securities (1) | | $ | 7,155,457 |
| | $ | (50,684 | ) | | $ | 382,402 |
| | $ | (8,388 | ) | | $ | 7,537,859 |
| | $ | (59,072 | ) |
| |
(1) | As of September 30, 2017, we identified a total of 547 investments that were in unrealized loss positions, of which 84 investments totaling $382.4 million with unrealized losses of $8.4 million have been in an impaired position for a period of time greater than 12 months. As of September 30, 2017, we do not intend to sell any of our impaired securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis, which is consistent with our classification of these securities. Based on our analysis as of September 30, 2017, we deem all impairments to be temporary. Market valuations and impairment analyses on assets in the held-to-maturity securities portfolio are reviewed and monitored on a quarterly basis.
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses | | Fair Value of Investments | | Unrealized Losses |
Held-to-maturity securities: | | | | | | | | | | | | |
U.S. agency debentures | | $ | 118,721 |
| | $ | (1,198 | ) | | $ | — |
| | $ | — |
| | $ | 118,721 |
| | $ | (1,198 | ) |
Residential mortgage-backed securities: | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 1,801,861 |
| | (23,558 | ) | | 21,917 |
| | (968 | ) | | 1,823,778 |
| | (24,526 | ) |
Agency-issued collateralized mortgage obligations—fixed rate | | 2,729,889 |
| | (25,723 | ) | | 228,220 |
| | (5,551 | ) | | 2,958,109 |
| | (31,274 | ) |
Agency-issued collateralized mortgage obligations—variable rate | | 251,012 |
| | (1,339 | ) | | — |
| | — |
| | 251,012 |
| | (1,339 | ) |
Agency-issued commercial mortgage-backed securities | | 999,440 |
| | (7,494 | ) | | 14,934 |
| | (144 | ) | | 1,014,374 |
| | (7,638 | ) |
Municipal bonds and notes | | 42,267 |
| | (877 | ) | | 30,586 |
| | (976 | ) | | 72,853 |
| | (1,853 | ) |
Total temporarily impaired securities (1) | | $ | 5,943,190 |
| | $ | (60,189 | ) | | $ | 295,657 |
| | $ | (7,639 | ) | | $ | 6,238,847 |
| | $ | (67,828 | ) |
| |
(1) | As of December 31, 2016, we identified a total of 462 investments that were in unrealized loss positions, of which 85 investments totaling $295.7 million with unrealized losses of $7.6 million have been in an impaired position for a period of time greater than 12 months.
|
The following table summarizes the remaining contractual principal maturities on fixed income investment securities classified as held-to-maturity as of September 30, 2017.March 31, 2020. For U.S. agency debentures, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as held-to-maturity 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
(Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
U.S. agency debentures | | $ | 453,353 |
| | $ | 468,152 |
| | $ | 2,622 |
| | $ | 2,673 |
| | $ | 142,990 |
| | $ | 146,270 |
| | $ | 307,741 |
| | $ | 319,209 |
| | $ | — |
| | $ | — |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 6,662,878 |
| | 6,973,684 |
| | 11,853 |
| | 11,983 |
| | 50,777 |
| | 51,678 |
| | 685,374 |
| | 702,253 |
| | 5,914,874 |
| | 6,207,770 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 1,482,205 |
| | 1,512,524 |
| | — |
| | — |
| | — |
| | — |
| | 661,217 |
| | 674,788 |
| | 820,988 |
| | 837,736 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 170,774 |
| | 169,122 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 170,774 |
| | 169,122 |
|
Agency-issued commercial mortgage-backed securities | | 2,644,968 |
| | 2,743,262 |
| | — |
| | — |
| | — |
| | — |
| | 102,565 |
| | 118,381 |
| | 2,542,403 |
| | 2,624,881 |
|
Municipal bonds and notes | | 2,160,341 |
| | 2,264,410 |
| | 30,719 |
| | 30,757 |
| | 134,007 |
| | 136,572 |
| | 441,995 |
| | 462,836 |
| | 1,553,620 |
| | 1,634,245 |
|
Total | | $ | 13,574,519 |
| | $ | 14,131,154 |
| | $ | 45,194 |
| | $ | 45,413 |
| | $ | 327,774 |
| | $ | 334,520 |
| | $ | 2,198,892 |
| | $ | 2,277,467 |
| | $ | 11,002,659 |
| | $ | 11,473,754 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
(Dollars in thousands) | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
U.S. agency debentures | | $ | 660,193 |
| | $ | 665,888 |
| | $ | — |
| | $ | — |
| | $ | 102,581 |
| | $ | 103,398 |
| | $ | 557,612 |
| | $ | 562,490 |
| | $ | — |
| | $ | — |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 5,164,701 |
| | 5,163,349 |
| | 738 |
| | 731 |
| | 255,275 |
| | 255,128 |
| | 61,538 |
| | 61,270 |
| | 4,847,150 |
| | 4,846,220 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 3,025,421 |
| | 2,998,860 |
| | — |
| | — |
| | — |
| | — |
| | 437,865 |
| | 431,500 |
| | 2,587,556 |
| | 2,567,360 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 269,495 |
| | 270,162 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 269,495 |
| | 270,162 |
|
Agency-issued commercial mortgage-backed securities | | 1,554,220 |
| | 1,544,548 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,554,220 |
| | 1,544,548 |
|
Municipal bonds and notes | | 380,976 |
| | 380,608 |
| | 7,560 |
| | 7,540 |
| | 71,631 |
| | 71,529 |
| | 159,509 |
| | 159,377 |
| | 142,276 |
| | 142,162 |
|
Total | | $ | 11,055,006 |
| | $ | 11,023,415 |
| | $ | 8,298 |
| | $ | 8,271 |
| | $ | 429,487 |
| | $ | 430,055 |
| | $ | 1,216,524 |
| | $ | 1,214,637 |
| | $ | 9,400,697 |
| | $ | 9,370,452 |
|
Non-marketable and Other Equity Securities
The major components of our non-marketable and other investmentequity securities portfolio at September 30, 2017March 31, 2020 and December 31, 20162019 are as follows:
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Non-marketable and other securities: | | | | |
Non-marketable securities (fair value accounting): | | | | |
Venture capital and private equity fund investments (1) | | $ | 128,768 |
| | $ | 141,649 |
|
Other venture capital investments (2) | | 1,897 |
| | 2,040 |
|
Other securities (fair value accounting) (3) | | 392 |
| | 753 |
|
Non-marketable securities (equity method accounting) (4): | | | | |
Venture capital and private equity fund investments | | 87,218 |
| | 82,823 |
|
Debt funds | | 17,889 |
| | 17,020 |
|
Other investments | | 113,478 |
| | 123,514 |
|
Non-marketable securities (cost method accounting): | | | | |
Venture capital and private equity fund investments (5) | | 102,956 |
| | 114,606 |
|
Other investments | | 26,835 |
| | 27,700 |
|
Investments in qualified affordable housing projects, net (6) | | 148,036 |
| | 112,447 |
|
Total non-marketable and other securities | | $ | 627,469 |
| | $ | 622,552 |
|
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Non-marketable and other equity securities: | | | | |
Non-marketable securities (fair value accounting): | | | | |
Consolidated venture capital and private equity fund investments (1) | | $ | 85,336 |
| | $ | 87,180 |
|
Unconsolidated venture capital and private equity fund investments (2) | | 171,930 |
| | 178,217 |
|
Other investments without a readily determinable fair value (3) | | 52,666 |
| | 55,255 |
|
Other equity securities in public companies (fair value accounting) (4) | | 26,899 |
| | 59,200 |
|
Non-marketable securities (equity method accounting) (5): | | | | |
Venture capital and private equity fund investments | | 206,495 |
| | 215,367 |
|
Debt funds | | 6,910 |
| | 7,271 |
|
Other investments | | 149,557 |
| | 152,863 |
|
Investments in qualified affordable housing projects, net (6) | | 500,802 |
| | 458,476 |
|
Total non-marketable and other equity securities | | $ | 1,200,595 |
| | $ | 1,213,829 |
|
| |
(1) | The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and our ownership percentage of each fund at September 30, 2017March 31, 2020 and December 31, 20162019 (fair value accounting): |
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
Strategic Investors Fund, LP | | $ | 5,337 |
| | 12.6 | % | | $ | 5,729 |
| | 12.6 | % |
Capital Preferred Return Fund, LP | | 44,696 |
| | 20.0 |
| | 45,341 |
| | 20.0 |
|
Growth Partners, LP | | 35,169 |
| | 33.0 |
| | 35,976 |
| | 33.0 |
|
CP I, LP | | 134 |
| | 10.7 |
| | 134 |
| | 10.7 |
|
Total consolidated venture capital and private equity fund investments | | $ | 85,336 |
| | | | $ | 87,180 |
| | |
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
Strategic Investors Fund, LP | | $ | 15,624 |
| | 12.6 | % | | $ | 18,459 |
| | 12.6 | % |
Capital Preferred Return Fund, LP | | 55,685 |
| | 20.0 |
| | 57,627 |
| | 20.0 |
|
Growth Partners, LP | | 57,459 |
| | 33.0 |
| | 59,718 |
| | 33.0 |
|
Other private equity fund (i) | | — |
| | — |
| | 5,845 |
| | 58.2 |
|
Total venture capital and private equity fund investments | | $ | 128,768 |
| | | | $ | 141,649 |
| | |
| |
(i) | At December 31, 2016, we had a direct ownership interest of 41.5 percent in the other private equity fund and an indirect ownership interest of 12.6 percent through our ownership interest of Growth Partners, LP and an indirect ownership interest of 4.1 percent through our ownership interest of Capital Preferred Return Fund, LP. On January 3, 2017, the other private equity fund was closed resulting in an immaterial impact on the Company's financial statements for the nine months ended September 30, 2017.
|
| |
(2) | The following table shows the amounts of other venture capital investments held by the following consolidated funds and our ownership percentage at September 30, 2017 and December 31, 2016 (faircarrying value accounting): |
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
CP I, LP | | $ | 1,897 |
| | 10.7 | % | | $ | 2,040 |
| | 10.7 | % |
Total other venture capital investments | | $ | 1,897 |
| | | | $ | 2,040 |
| | |
| |
(3) | Investments classified as other securities (fair value accounting) represent direct equityrepresents investments in public companies held by our consolidated funds. |
| |
(4) | The following table shows the carrying value196 and our ownership percentage of each investment at September 30, 2017 and December 31, 2016 (equity method accounting):
|
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
Venture capital and private equity fund investments: | | | | | | | | |
Strategic Investors Fund II, LP | | $ | 6,084 |
| | 8.6 | % | | $ | 7,720 |
| | 8.6 | % |
Strategic Investors Fund III, LP | | 19,292 |
| | 5.9 |
| | 20,449 |
| | 5.9 |
|
Strategic Investors Fund IV, LP | | 25,507 |
| | 5.0 |
| | 24,530 |
| | 5.0 |
|
Strategic Investors Fund V funds | | 14,987 |
| | Various |
| | 12,029 |
| | Various |
|
CP II, LP (i) | | 6,704 |
| | 5.1 |
| | 7,798 |
| | 5.1 |
|
Other venture capital and private equity fund investments | | 14,644 |
| | Various |
| | 10,297 |
| | Various |
|
Total venture capital and private equity fund investments | | $ | 87,218 |
| | | | $ | 82,823 |
| | |
Debt funds: | | | | | | | | |
Gold Hill Capital 2008, LP (ii) | | $ | 15,381 |
| | 15.5 | % | | $ | 13,557 |
| | 15.5 | % |
Other debt funds | | 2,508 |
| | Various |
| | 3,463 |
| | Various |
|
Total debt funds | | $ | 17,889 |
| | | | $ | 17,020 |
| | |
Other investments: | | | | | | | | |
SPD Silicon Valley Bank Co., Ltd. | | $ | 75,511 |
| | 50.0 | % | | $ | 75,296 |
| | 50.0 | % |
Other investments | | 37,967 |
| | Various |
| | 48,218 |
| | Various |
|
Total other investments | | $ | 113,478 |
| | | | $ | 123,514 |
| | |
| |
(i) | Our ownership includes direct ownership of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP.
|
| |
(ii) | Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent.
|
| |
(5) | Represents investments in 237 and 252205 funds (primarily venture capital funds) at September 30, 2017March 31, 2020 and December 31, 20162019, 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. The carrying value, and estimated fair value, of theseWe carry our unconsolidated venture capital and private equity fund investments (cost method accounting) was $103.0 million and $206.5 million, respectively, as of September 30, 2017. The carrying value, and estimatedat fair value based on the fund investments' net asset values per share as obtained from the general partners of these venture capitalthe investments. For each fund investment, we adjust the net asset value per share for differences between our measurement date and private equitythe date of the fund investments (cost method accounting) was $114.6 million and $221.7 million, respectively, as of investment’s net asset value by using the most recently available financial information from the investee general partner, for example December 31 2016.st for our March 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
|
| |
(3) | These investments include direct equity investments in private companies. The carrying value is based on the price at which the investment was acquired plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted. |
The following table shows the changes to the carrying amount of other investments without a readily determinable fair value for the three months endedMarch 31, 2020:
|
| | | | | | | | |
(Dollars in thousands) | | Three months ended March 31, 2020 | | Cumulative Adjustments |
Measurement alternative: | | | | |
Carrying value at March 31, 2020 | | $ | 52,666 |
| | |
Carrying value adjustments: | | | | |
Impairment | | $ | — |
| | $ | (460 | ) |
Upward changes for observable prices | | 12 |
| | 1,948 |
|
Downward changes for observable prices | | (3,012 | ) | | (7,629 | ) |
| |
(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 equity securities measured at fair value are recognized through net income. |
| |
(5) | The following table shows the carrying value and our ownership percentage of each investment at March 31, 2020 and December 31, 2019 (equity method accounting): |
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | Ownership % | | Amount | | Ownership % |
Venture capital and private equity fund investments: | | | | | | | | |
Strategic Investors Fund II, LP | | $ | 3,277 |
| | 8.6 | % | | $ | 3,612 |
| | 8.6 | % |
Strategic Investors Fund III, LP | | 14,487 |
| | 5.9 |
| | 15,668 |
| | 5.9 |
|
Strategic Investors Fund IV, LP | | 25,037 |
| | 5.0 |
| | 27,064 |
| | 5.0 |
|
Strategic Investors Fund V funds | | 44,815 |
| | Various |
| | 46,830 |
| | Various |
|
CP II, LP (i) | | 5,103 |
| | 5.1 |
| | 5,907 |
| | 5.1 |
|
Other venture capital and private equity fund investments | | 113,776 |
| | Various |
| | 116,286 |
| | Various |
|
Total venture capital and private equity fund investments | | $ | 206,495 |
| | | | $ | 215,367 |
| | |
Debt funds: | | | | | | | | |
Gold Hill Capital 2008, LP (ii) | | $ | 5,255 |
| | 15.5 | % | | $ | 5,525 |
| | 15.5 | % |
Other debt funds | | 1,655 |
| | Various |
| | 1,746 |
| | Various |
|
Total debt funds | | $ | 6,910 |
| | | | $ | 7,271 |
| | |
Other investments: | | | | | | | | |
SPD Silicon Valley Bank Co., Ltd. | | $ | 73,453 |
| | 50.0 | % | | $ | 74,190 |
| | 50.0 | % |
Other investments | | 76,104 |
| | Various |
| | 78,673 |
| | Various |
|
Total other investments | | $ | 149,557 |
| | | | $ | 152,863 |
| | |
| |
(i) | Our ownership includes direct ownership interest of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP. |
| |
(ii) | Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent. |
| |
(6) | The following table presents the balances of our investments in qualified affordable housing projects and related unfunded commitments included as a component of “other“Other liabilities” on our consolidated balance sheets at September 30, 2017March 31, 2020 and December 31, 20162019: |
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
Investments in qualified affordable housing projects, net | | $ | 148,036 |
| | $ | 112,447 |
| | $ | 500,802 |
| | $ | 458,476 |
|
Other liabilities | | 90,974 |
| | 58,095 |
| | 348,272 |
| | 302,031 |
|
The following table presents other information relating to our investments in qualified affordable housing projects for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 |
| 2016 | | 2017 | | 2016 | | 2020 |
| 2019 |
Tax credits and other tax benefits recognized | | $ | 4,539 |
| | $ | 3,995 |
| | $ | 13,199 |
| | $ | 12,127 |
| | $ | 11,759 |
| | $ | 9,257 |
|
Amortization expense included in provision for income taxes (i) | | 3,533 |
| | 2,556 |
| | 10,154 |
| | 9,746 |
| | 11,471 |
| | 7,636 |
|
| |
(i) | All investments are amortized using the proportional amortization method and amortization expense is included in the provision for income taxes. |
The following table presents the components ofnet gains and losses (realizedon non-marketable and unrealized) on investmentother equity securities for the three and nine months ended September 30, 2017March 31, 2020 and 2016: |
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Gross gains on investment securities: | | | | | | | | |
Available-for-sale securities, at fair value (1) | | $ | 38 |
| | $ | 84 |
| | $ | 1,131 |
| | $ | 14,238 |
|
Non-marketable securities (fair value accounting): | | | | | | | | |
Venture capital and private equity fund investments | | 5,308 |
| | 6,030 |
| | 24,788 |
| | 16,377 |
|
Other venture capital investments | | — |
| | 4 |
| | — |
| | 17 |
|
Other securities (fair value accounting) | | 569 |
| | 271 |
| | 841 |
| | 639 |
|
Non-marketable securities (equity method accounting): | | | | | | | | |
Venture capital and private equity fund investments | | 4,542 |
| | 5,679 |
| | 11,245 |
| | 9,351 |
|
Debt funds | | 4,222 |
| | 295 |
| | 5,388 |
| | 1,259 |
|
Other investments | | 215 |
| | 7,487 |
| | 1,736 |
| | 11,528 |
|
Non-marketable securities (cost method accounting): | | | | | | | | |
Venture capital and private equity fund investments | | 4,956 |
| | 6,328 |
| | 14,985 |
| | 14,180 |
|
Other investments | | 2 |
| | 150 |
| | 3,611 |
| | 163 |
|
Total gross gains on investment securities | | 19,852 |
| | 26,328 |
| | 63,725 |
| | 67,752 |
|
Gross losses on investment securities: | | | | | | | | |
Available-for-sale securities, at fair value (1) | | (139 | ) | | (99 | ) | | (747 | ) | | (2,671 | ) |
Non-marketable securities (fair value accounting): | | | | | | | | |
Venture capital and private equity fund investments | | (835 | ) | | (2,122 | ) | | (4,139 | ) | | (15,958 | ) |
Other venture capital investments | | — |
| | — |
| | (143 | ) | | (38 | ) |
Other securities (fair value accounting) | | (182 | ) | | (100 | ) | | (561 | ) | | (507 | ) |
Non-marketable securities (equity method accounting): | | | | | | | | |
Venture capital and private equity fund investments | | (223 | ) | | (444 | ) | | (535 | ) | | (4,465 | ) |
Debt funds | | (1,777 | ) | | (129 | ) | | (2,692 | ) | | (458 | ) |
Other investments | | (1,148 | ) | | (205 | ) | | (4,899 | ) | | (1,161 | ) |
Non-marketable securities (cost method accounting): | | | | | | | | |
Venture capital and private equity fund investments (2) | | (259 | ) | | (51 | ) | | (914 | ) | | (492 | ) |
Other investments | | (51 | ) | | — |
| | (257 | ) | | (238 | ) |
Total gross losses on investment securities | | (4,614 | ) | | (3,150 | ) | | (14,887 | ) | | (25,988 | ) |
Gains on investment securities, net | | $ | 15,238 |
| | $ | 23,178 |
| | $ | 48,838 |
| | $ | 41,764 |
|
2019 as recorded in the line item “Gains on investment securities, net," a component of noninterest income: |
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Net gains (losses) on non-marketable and other equity securities: | | | | |
Non-marketable securities (fair value accounting): | | | | |
Consolidated venture capital and private equity fund investments | | $ | 3,113 |
| | $ | 3,289 |
|
Unconsolidated venture capital and private equity fund investments | | 1,252 |
| | 8,006 |
|
Other investments without a readily determinable fair value | | (2,943 | ) | | 5,005 |
|
Other equity securities in public companies (fair value accounting) | | (7,504 | ) | | 11,803 |
|
Non-marketable securities (equity method accounting): | | | | |
Venture capital and private equity fund investments | | (8,046 | ) | | 2,789 |
|
Debt funds | | (362 | ) | | — |
|
Other investments | | (620 | ) | | 1,766 |
|
Total net (losses) gains on non-marketable and other equity securities | | $ | (15,110 | ) | | $ | 32,658 |
|
Less: realized net (losses) gains on sales of non-marketable and other equity securities | | (49 | ) | | 9,835 |
|
Net (losses) gains on non-marketable and other equity securities still held | | $ | (15,061 | ) | | $ | 22,823 |
|
| |
(1) | Includes realized gains (losses) on sales of available-for-sale equity securities that are recognized in the income statement. Unrealized gains (losses) on available-for-sale fixed income and equity securities are recognized in other comprehensive income. The cost basis of available-for-sale securities sold is determined on a specific identification basis. |
| |
(2) | For the three months ended September 30, 2017 and 2016, includes OTTI losses of $0.3 million from the declines in value for 8 of the 237 investments and $0.1 million from the declines in value for 5 of the 255 investments, respectively. For the nine months ended September 30, 2017 and 2016, includes OTTI losses of $0.9 million for the declines in value for 21 of the 237 investments and $0.5 million for the declines in value for 21 of the 255 investments. We concluded that any declines in value for the remaining investments were temporary, and as such, no OTTI was required to be recognized.
|
| |
7. | Loans Allowance for Loan Losses and Allowance for Credit Losses: Loans and Unfunded Credit Commitments |
We serve a variety of commercial clients in the technology, life science/healthcare, private equity/venture capital and premium wine industries. Our technology clients generally tend to be in the industries of hardware (semiconductors,(such as semiconductors, communications, data, storage, and electronics), software/internet (such as infrastructure software, applications, software services, digital content and advertising technology), and energy and resource innovation (“ERI”). Because of the diverse nature of ERI products and services, for our loan-related reporting purposes, ERI-related loans are reported under our hardware, software/internet, life science/healthcare and other commercial loan categories, as applicable. Our life science/healthcare clients primarily tend to be in the industries of biotechnology, medical devices, healthcare information technology and healthcare services. Loans to our technology, life science/healthcare and ERI clients are reported under the Investor Dependent, Cash Flow Dependent and Balance Sheet Dependent risk-based segments below. Loans made to private equity/venture capital firm clients typically enable them to fund investments prior to their receipt
of funds from capital calls. Loans to the premium wine industry focus on vineyards and wineries that produce grapes and wines of high quality.
In addition to commercial loans, we make consumer loans through SVB Private Bank and provide real estate secured loans to eligible employees through our EHOP. Our private banking clients are primarily private equity/venture capital professionals and executive leaders in the innovation companies they support. These products and services include real estate secured home equity lines of credit, which may be used to finance real estate investments and loans used to purchase, renovate or refinance personal residences. These products and services also include restricted stock purchase loans and capital call lines of credit.
We also provide community development loans made as part of our responsibilities under the Community Reinvestment Act. These loans are included within “Construction“construction loans” below and are primarily secured by real estate.
CECL Adoption
On January 1, 2020, we adopted the new credit loss guidance, CECL, and all related amendments. Our loan portfolio was pooled into six portfolio segments that share similar risk characteristics and represent the level at which we developed our systematic methodology to determine our allowance for credit losses. Further, our portfolio segments were disaggregated and grouped into ten classes of financing receivable that represent the level at which we monitor and assess credit risk, which we refer to as "risk-based segments". As such, our funded loans and credit quality disclosures below are presented at the risk-based segment level of disaggregation. The comparative information below has been reclassified to conform to current period presentations. However, the financial results continue to be reported under the accounting standards in effect for those periods. Certain prior period credit quality disclosures related to impaired loans and our individually and collectively evaluated loan portfolio have been superseded with the current guidance and have not been included below, please refer to Note 10 - “Loans, Allowance for Loan Losses and Allowance for Unfunded Credit Commitments" under Part II, Item 8 of our 2019 Form 10-K for additional prior period information.
Refer to Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the adoption of CECL.
The composition of loans net of unearned income of $141 million and $125 million at September 30, 2017amortized cost basis broken out by risk-based segment at March 31, 2020 and December 31, 2016, respectively,2019 is presented in the following table:
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Commercial loans: | | | | |
Software/internet | | $ | 5,793,637 |
| | $ | 5,627,031 |
|
Hardware | | 1,113,509 |
| | 1,180,398 |
|
Private equity/venture capital | | 9,623,824 |
| | 7,691,148 |
|
Life science/healthcare | | 1,725,728 |
| | 1,853,004 |
|
Premium wine | | 211,716 |
| | 200,156 |
|
Other | | 384,039 |
| | 393,551 |
|
Total commercial loans | | 18,852,453 |
| | 16,945,288 |
|
Real estate secured loans: | | | | |
Premium wine (1) | | 712,400 |
| | 678,166 |
|
Consumer loans (2) | | 2,206,501 |
| | 1,926,968 |
|
Other | | 42,504 |
| | 43,487 |
|
Total real estate secured loans | | 2,961,405 |
| | 2,648,621 |
|
Construction loans | | 75,242 |
| | 64,671 |
|
Consumer loans | | 300,227 |
| | 241,364 |
|
Total loans, net of unearned income (3) | | $ | 22,189,327 |
| | $ | 19,899,944 |
|
| |
(1) | Included in our premium wine portfolio are gross construction loans of $104 million and $110 million at September 30, 2017 and December 31, 2016, respectively.
|
| |
(2) | Consumer loans secured by real estate at September 30, 2017 and December 31, 2016 were comprised of the following:
|
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Loans for personal residence | | $ | 1,908,319 |
| | $ | 1,655,349 |
|
Loans to eligible employees | | 232,707 |
| | 199,291 |
|
Home equity lines of credit | | 65,475 |
| | 72,328 |
|
Consumer loans secured by real estate | | $ | 2,206,501 |
| | $ | 1,926,968 |
|
| |
(3) | Included within our total loan portfolio are credit card loans of $273 million and $224 million at September 30, 2017 and December 31, 2016, respectively.
|
Credit Quality
The composition of loans, net of unearned income of $141 million and $125 million at September 30, 2017 and December 31, 2016, respectively, broken out by portfolio segment and class of financing receivable, is as follows:
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Commercial loans: | | | | |
Software/internet | | $ | 5,793,637 |
| | $ | 5,627,031 |
|
Hardware | | 1,113,509 |
| | 1,180,398 |
|
Private equity/venture capital | | 9,623,824 |
| | 7,691,148 |
|
Life science/healthcare | | 1,725,728 |
| | 1,853,004 |
|
Premium wine | | 924,116 |
| | 878,322 |
|
Other | | 501,785 |
| | 501,709 |
|
Total commercial loans | | 19,682,599 |
| | 17,731,612 |
|
Consumer loans: | | | | |
Real estate secured loans | | 2,206,501 |
| | 1,926,968 |
|
Other consumer loans | | 300,227 |
| | 241,364 |
|
Total consumer loans | | 2,506,728 |
| | 2,168,332 |
|
Total loans, net of unearned income | | $ | 22,189,327 |
| | $ | 19,899,944 |
|
The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | Greater Than 90 Days Past Due | | Total Past Due | | Current | | Loans Past Due 90 Days or More Still Accruing Interest |
September 30, 2017: | | | | | | | | | | | | |
Commercial loans: | | | | | | | | | | | | |
Software/internet | | $ | 45,943 |
| | $ | 3,725 |
| | $ | 138 |
| | $ | 49,806 |
| | $ | 5,686,655 |
| | $ | 138 |
|
Hardware | | 273 |
| | 44 |
| | 626 |
| | 943 |
| | 1,080,341 |
| | 626 |
|
Private equity/venture capital | | 35,628 |
| | 34,369 |
| | — |
| | 69,997 |
| | 9,563,613 |
| | — |
|
Life science/healthcare | | 20,956 |
| | — |
| | — |
| | 20,956 |
| | 1,729,909 |
| | — |
|
Premium wine | | 3,521 |
| | 640 |
| | — |
| | 4,161 |
| | 916,451 |
| | — |
|
Other | | 7 |
| | 210 |
| | — |
| | 217 |
| | 512,891 |
| | — |
|
Total commercial loans | | 106,328 |
| | 38,988 |
| | 764 |
| | 146,080 |
| | 19,489,860 |
| | 764 |
|
Consumer loans: | | | | | | | | | | | | |
Real estate secured loans | | 1,748 |
| | 850 |
| | — |
| | 2,598 |
| | 2,199,978 |
| | — |
|
Other consumer loans | | 4,540 |
| | — |
| | — |
| | 4,540 |
| | 293,301 |
| | — |
|
Total consumer loans | | 6,288 |
| | 850 |
| | — |
| | 7,138 |
| | 2,493,279 |
| | — |
|
Total gross loans excluding impaired loans | | 112,616 |
| | 39,838 |
| | 764 |
| | 153,218 |
| | 21,983,139 |
| | 764 |
|
Impaired loans | | 591 |
| | 311 |
| | 26,456 |
| | 27,358 |
| | 166,114 |
| | — |
|
Total gross loans | | $ | 113,207 |
| | $ | 40,149 |
| | $ | 27,220 |
| | $ | 180,576 |
| | $ | 22,149,253 |
| | $ | 764 |
|
December 31, 2016: | | | | | | | | | | | | |
Commercial loans: | | | | | | | | | | | | |
Software/internet
| | $ | 37,087 |
| | $ | 1,162 |
| | $ | 6 |
| | $ | 38,255 |
| | $ | 5,507,575 |
| | $ | 6 |
|
Hardware | | 5,591 |
| | 36 |
| | 27 |
| | 5,654 |
| | 1,118,065 |
| | 27 |
|
Private equity/venture capital | | 689 |
| | — |
| | — |
| | 689 |
| | 7,747,222 |
| | — |
|
Life science/healthcare | | 283 |
| | 551 |
| | — |
| | 834 |
| | 1,827,490 |
| | — |
|
Premium wine | | 1,003 |
| | 4 |
| | — |
| | 1,007 |
| | 876,185 |
| | — |
|
Other | | 34 |
| | 300 |
| | — |
| | 334 |
| | 504,021 |
| | — |
|
Total commercial loans | | 44,687 |
| | 2,053 |
| | 33 |
| | 46,773 |
| | 17,580,558 |
| | 33 |
|
Consumer loans: | | | | | | | | | | | | |
Real estate secured loans | | 850 |
| | — |
| | — |
| | 850 |
| | 1,923,266 |
| | — |
|
Other consumer loans | | 1,402 |
| | — |
| | — |
| | 1,402 |
| | 237,353 |
| | — |
|
Total consumer loans | | 2,252 |
| | — |
| | — |
| | 2,252 |
| | 2,160,619 |
| | — |
|
Total gross loans excluding impaired loans | | 46,939 |
| | 2,053 |
| | 33 |
| | 49,025 |
| | 19,741,177 |
| | 33 |
|
Impaired loans | | 34,636 |
| | 3,451 |
| | 11,180 |
| | 49,267 |
| | 185,193 |
| | — |
|
Total gross loans | | $ | 81,575 |
| | $ | 5,504 |
| | $ | 11,213 |
| | $ | 98,292 |
| | $ | 19,926,370 |
| | $ | 33 |
|
The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by portfolio segment and class of financing receivable as of September 30, 2017 and December 31, 2016:
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Impaired loans for which there is a related allowance for loan losses | | Impaired loans for which there is no related allowance for loan losses | | Total carrying value of impaired loans | | Total unpaid principal of impaired loans |
September 30, 2017: | | | | | | | | |
Commercial loans: | | | | | | | | |
Software/internet
| | $ | 92,584 |
| | $ | 22,278 |
| | $ | 114,862 |
| | $ | 130,324 |
|
Hardware | | 39,728 |
| | 1,012 |
| | 40,740 |
| | 48,061 |
|
Private equity/venture capital | | 1,318 |
| | — |
| | 1,318 |
| | 1,321 |
|
Life science/healthcare | | 22,762 |
| | 5,573 |
| | 28,335 |
| | 33,481 |
|
Premium wine | | 4,677 |
| | — |
| | 4,677 |
| | 4,702 |
|
Other | | 298 |
| | — |
| | 298 |
| | 487 |
|
Total commercial loans | | 161,367 |
| | 28,863 |
| | 190,230 |
| | 218,376 |
|
Consumer loans: | | | | | | | | |
Real estate secured loans | | — |
| | 1,301 |
| | 1,301 |
| | 1,379 |
|
Other consumer loans | | 1,941 |
| | — |
| | 1,941 |
| | 2,036 |
|
Total consumer loans | | 1,941 |
| | 1,301 |
| | 3,242 |
| | 3,415 |
|
Total | | $ | 163,308 |
| | $ | 30,164 |
| | $ | 193,472 |
| | $ | 221,791 |
|
December 31, 2016: | | | | | | | | |
Commercial loans: | | | | | | | | |
Software/internet
| | $ | 121,658 |
| | $ | 1,090 |
| | $ | 122,748 |
| | $ | 129,648 |
|
Hardware | | 65,395 |
| | — |
| | 65,395 |
| | 70,683 |
|
Private equity/venture capital | | — |
| | — |
| | — |
| | — |
|
Life science/healthcare | | 38,361 |
| | — |
| | 38,361 |
| | 41,130 |
|
Premium wine | | 3,187 |
| | — |
| | 3,187 |
| | 3,187 |
|
Other | | 867 |
| | — |
| | 867 |
| | 867 |
|
Total commercial loans | | 229,468 |
| | 1,090 |
| | 230,558 |
| | 245,515 |
|
Consumer loans: | | | | | | | | |
Real estate secured loans | | 1,504 |
| | — |
| | 1,504 |
| | 2,779 |
|
Other consumer loans | | 2,398 |
| | — |
| | 2,398 |
| | 2,398 |
|
Total consumer loans | | 3,902 |
| | — |
| | 3,902 |
| | 5,177 |
|
Total | | $ | 233,370 |
| | $ | 1,090 |
| | $ | 234,460 |
| | $ | 250,692 |
|
The following tables summarize our average impaired loans and interest income on impaired loans, broken out by portfolio segment and class of financing receivable for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
Three months ended September 30, | | Average impaired loans | | Interest income on impaired loans |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Commercial loans: | | | | | | | | |
Software/internet
| | $ | 121,290 |
| | $ | 61,481 |
| | $ | 767 |
| | $ | 70 |
|
Hardware | | 35,932 |
| | 45,353 |
| | 419 |
| | 761 |
|
Private equity/venture capital | | 644 |
| | — |
| | 3 |
| | — |
|
Life science/healthcare | | 25,796 |
| | 55,558 |
| | 21 |
| | 128 |
|
Premium wine | | 3,625 |
| | 1,291 |
| | 39 |
| | 19 |
|
Other | | 348 |
| | 3,768 |
| | — |
| | 6 |
|
Total commercial loans | | 187,635 |
| | 167,451 |
| | 1,249 |
| | 984 |
|
Consumer loans: | | | | | | | | |
Real estate secured loans | | 1,306 |
| | 584 |
| | 24 |
| | — |
|
Other consumer loans | | 1,966 |
| | 1,324 |
| | — |
| | 6 |
|
Total consumer loans | | 3,272 |
| | 1,908 |
| | 24 |
| | 6 |
|
Total average impaired loans | | $ | 190,907 |
| | $ | 169,359 |
| | $ | 1,273 |
| | $ | 990 |
|
|
| | | | | | | | | | | | | | | | |
Nine months ended September 30, | | Average impaired loans | | Interest income on impaired loans |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Commercial loans: | | | | | | | | |
Software/internet | | $ | 122,527 |
| | $ | 84,005 |
| | $ | 1,646 |
| | $ | 133 |
|
Hardware | | 33,271 |
| | 31,000 |
| | 518 |
| | 1,467 |
|
Private equity/venture capital | | 443 |
| | — |
| | 8 |
| | — |
|
Life science/healthcare | | 33,590 |
| | 42,857 |
| | 60 |
| | 128 |
|
Premium wine | | 3,353 |
| | 1,834 |
| | 115 |
| | 54 |
|
Other | | 706 |
| | 4,369 |
| | — |
| | 21 |
|
Total commercial loans | | 193,890 |
| | 164,065 |
| | 2,347 |
| | 1,803 |
|
Consumer loans: | | | | | | | | |
Real estate secured loans | | 1,385 |
| | 282 |
| | 24 |
| | — |
|
Other consumer loans | | 1,931 |
| | 715 |
| | — |
| | 17 |
|
Total consumer loans | | 3,316 |
| | 997 |
| | 24 |
| | 17 |
|
Total average impaired loans | | $ | 197,206 |
| | $ | 165,062 |
| | $ | 2,371 |
| | $ | 1,820 |
|
The following tables summarize the activity relating to our allowance for loan losses for the three and nine months ended September 30, 2017 and 2016, broken out by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2017 | | Beginning Balance June 30, 2017 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance September 30, 2017 |
(Dollars in thousands) | | | | | | |
Commercial loans: | | | | | | | | | | | | |
Software/internet
| | $ | 92,937 |
| | $ | (8,791 | ) | | $ | 426 |
| | $ | 7,241 |
| | $ | 199 |
| | $ | 92,012 |
|
Hardware | | 27,800 |
| | (2,453 | ) | | 115 |
| | 5,681 |
| | 156 |
| | 31,299 |
|
Private equity/venture capital | | 66,785 |
| | — |
| | — |
| | 10,142 |
| | 279 |
| | 77,206 |
|
Life science/healthcare | | 27,730 |
| | (1,083 | ) | | 63 |
| | (1,621 | ) | | (45 | ) | | 25,044 |
|
Premium wine | | 3,133 |
| | — |
| | — |
| | 362 |
| | 10 |
| | 3,505 |
|
Other | | 4,135 |
| | — |
| | 947 |
| | (931 | ) | | (26 | ) | | 4,125 |
|
Total commercial loans | | 222,520 |
| | (12,327 | ) | | 1,551 |
| | 20,874 |
| | 573 |
| | 233,191 |
|
Total consumer loans | | 13,976 |
| | (11 | ) | | 277 |
| | 1,535 |
| | 42 |
| | 15,819 |
|
Total allowance for loan losses | | $ | 236,496 |
| | $ | (12,338 | ) | | $ | 1,828 |
| | $ | 22,409 |
| | $ | 615 |
| | $ | 249,010 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2016 | | Beginning Balance June 30, 2016 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance September 30, 2016 |
(Dollars in thousands) | | | | | | |
Commercial loans: | | | | | | | | | | | | |
Software/internet | | $ | 104,229 |
| | $ | (16,526 | ) | | $ | 305 |
| | $ | 8,591 |
| | $ | (261 | ) | | $ | 96,338 |
|
Hardware | | 23,871 |
| | (3,058 | ) | | 1,080 |
| | 11,048 |
| | (336 | ) | | 32,605 |
|
Private equity/venture capital | | 49,807 |
| | — |
| | — |
| | 2,203 |
| | (67 | ) | | 51,943 |
|
Life science/healthcare | | 41,852 |
| | (28 | ) | | 361 |
| | (5,298 | ) | | 161 |
| | 37,048 |
|
Premium wine | | 4,810 |
| | — |
| | — |
| | 288 |
| | (9 | ) | | 5,089 |
|
Other | | 9,480 |
| | (5,004 | ) | | 207 |
| | 142 |
| | (4 | ) | | 4,821 |
|
Total commercial loans | | 234,049 |
| | (24,616 | ) | | 1,953 |
| | 16,974 |
| | (516 | ) | | 227,844 |
|
Total consumer loans | | 10,674 |
| | — |
| | 131 |
| | 1,976 |
| | (60 | ) | | 12,721 |
|
Total allowance for loan losses | | $ | 244,723 |
| | $ | (24,616 | ) | | $ | 2,084 |
| | $ | 18,950 |
| | $ | (576 | ) | | $ | 240,565 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2017 | | Beginning Balance December 31, 2016 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance September 30, 2017 |
(Dollars in thousands) | | | | | | |
Commercial loans: | | | | | | | | | | | | |
Software/internet | | $ | 97,388 |
| | $ | (36,172 | ) | | $ | 2,833 |
| | $ | 27,487 |
| | $ | 476 |
| | $ | 92,012 |
|
Hardware | | 31,166 |
| | (6,726 | ) | | 459 |
| | 6,075 |
| | 325 |
| | 31,299 |
|
Private equity/venture capital | | 50,299 |
| | — |
| | — |
| | 26,111 |
| | 796 |
| | 77,206 |
|
Life science/healthcare | | 25,446 |
| | (7,493 | ) | | 107 |
| | 6,906 |
| | 78 |
| | 25,044 |
|
Premium wine | | 4,115 |
| | — |
| | — |
| | (567 | ) | | (43 | ) | | 3,505 |
|
Other | | 4,768 |
| | (1,047 | ) | | 1,424 |
| | (1,005 | ) | | (15 | ) | | 4,125 |
|
Total commercial loans | | 213,182 |
| | (51,438 | ) | | 4,823 |
| | 65,007 |
| | 1,617 |
| | 233,191 |
|
Consumer loans | | 12,184 |
| | (11 | ) | | 1,332 |
| | 2,266 |
| | 48 |
| | 15,819 |
|
Total allowance for loan losses | | $ | 225,366 |
| | $ | (51,449 | ) | | $ | 6,155 |
| | $ | 67,273 |
| | $ | 1,665 |
| | $ | 249,010 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended September 30, 2016 | | Beginning Balance December 31, 2015 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Loan Losses | | Foreign Currency Translation Adjustments | | Ending Balance September 30, 2016 |
(Dollars in thousands) | | | | | | |
Commercial loans: | | | | | | | | | | | | |
Software/internet | | $ | 103,045 |
| | $ | (56,742 | ) | | $ | 4,525 |
| | $ | 46,438 |
| | $ | (928 | ) | | $ | 96,338 |
|
Hardware | | 23,085 |
| | (6,559 | ) | | 1,502 |
| | 15,010 |
| | (433 | ) | | 32,605 |
|
Private equity/venture capital | | 35,282 |
| | — |
| | — |
| | 17,008 |
| | (347 | ) | | 51,943 |
|
Life science/healthcare | | 36,576 |
| | (3,029 | ) | | 1,037 |
| | 3,252 |
| | (788 | ) | | 37,048 |
|
Premium wine | | 5,205 |
| | — |
| | — |
| | (138 | ) | | 22 |
| | 5,089 |
|
Other | | 4,252 |
| | (5,034 | ) | | 880 |
| | 4,573 |
| | 150 |
| | 4,821 |
|
Total commercial loans | | 207,445 |
| | (71,364 | ) | | 7,944 |
| | 86,143 |
| | (2,324 | ) | | 227,844 |
|
Consumer loans | | 10,168 |
| | (102 | ) | | 214 |
| | 2,481 |
| | (40 | ) | | 12,721 |
|
Total allowance for loan losses | | $ | 217,613 |
| | $ | (71,466 | ) | | $ | 8,158 |
| | $ | 88,624 |
| | $ | (2,364 | ) | | $ | 240,565 |
|
The following table summarizes the activity relating to our allowance for unfunded credit commitments for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 |
| 2016 | | 2017 | | 2016 |
Beginning balance | | $ | 47,000 |
| | $ | 34,889 |
| | $ | 45,265 |
| | $ | 34,415 |
|
Provision for unfunded credit commitments | | 1,113 |
| | 1,054 |
| | 2,789 |
| | 1,601 |
|
Foreign currency translation adjustments | | 59 |
| | (19 | ) | | 118 |
| | (92 | ) |
Ending balance (1) | | $ | 48,172 |
| | $ | 35,924 |
| | $ | 48,172 |
|
| $ | 35,924 |
|
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Private equity/venture capital | | $ | 18,868,875 |
| | $ | 17,696,794 |
|
Investor dependent: | | | | |
Early stage | | 1,806,011 |
| | 1,624,221 |
|
Mid stage | | 1,399,209 |
| | 1,047,398 |
|
Later stage | | 2,031,490 |
| | 1,663,576 |
|
Total investor dependent | | 5,236,710 |
| | 4,335,195 |
|
Cash flow dependent: | | | | |
Sponsor led buyout | | 2,121,007 |
| | 2,185,497 |
|
Other | | 2,756,295 |
| | 2,238,741 |
|
Total cash flow dependent | | 4,877,302 |
| | 4,424,238 |
|
Private bank (4) | | 3,669,295 |
| | 3,492,269 |
|
Balance sheet dependent | | 1,850,941 |
| | 1,286,153 |
|
Premium wine (4) | | 1,056,927 |
| | 1,062,264 |
|
Other (4) | | 408,035 |
| | 867,723 |
|
Total loans (1) (2) (3) | | $ | 35,968,085 |
| | $ | 33,164,636 |
|
Allowance for credit losses | | (548,963 | ) | | (304,924 | ) |
Net loans | | $ | 35,419,122 |
| | $ | 32,859,712 |
|
| |
(1) | See Note 12—“Off-Balance Sheet Arrangements, GuaranteesTotal loans at amortized cost is net of unearned income of $169 million and Other Commitments”$163 million at March 31, 2020 and December 31, 2019, respectively.
|
| |
(2) | Included within our total loan portfolio are credit card loans of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1$339 million and $395 million at March 31, 2020 and December 31, 2019, respectively. |
| |
(3) | Included within our total loan portfolio are construction loans of this report for additional disclosures related to our commitments to extend credit.$174 million and $183 million at March 31, 2020 and December 31, 2019, respectively. |
The following table summarizes the allowance for loan losses individually(4) Our total loans secured by real estate at amortized cost at March 31, 2020 and collectively evaluated for impairment as of September 30, 2017 and December 31, 2016, broken out by portfolio segment:2019 were comprised of the following: |
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Real estate secured loans: | | | | |
Private bank: | | | | |
Loans for personal residence | | $ | 2,644,842 |
| | $ | 2,829,880 |
|
Loans to eligible employees | | 416,287 |
| | 401,396 |
|
Home equity lines of credit | | 61,749 |
| | 55,461 |
|
Other | | 26,591 |
| | 38,880 |
|
Total private bank loans secured by real estate | | $ | 3,149,469 |
| | $ | 3,325,617 |
|
Premium wine | | 762,460 |
| | 820,730 |
|
Total real estate secured loans | | $ | 3,911,929 |
| | $ | 4,146,347 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | Individually Evaluated for Impairment | | Collectively Evaluated for Impairment |
(Dollars in thousands) | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans | | Allowance for loan losses | | Recorded investment in loans |
Commercial loans: | | | | | | | | | | | | | | | | |
Software/internet | | $ | 26,981 |
| | $ | 114,862 |
| | $ | 65,031 |
| | $ | 5,678,775 |
| | $ | 28,245 |
| | $ | 122,748 |
| | $ | 69,143 |
| | $ | 5,504,283 |
|
Hardware | | 11,179 |
| | 40,740 |
| | 20,120 |
| | 1,072,769 |
| | 9,995 |
| | 65,395 |
| | 21,171 |
| | 1,115,003 |
|
Private equity/venture capital | | 536 |
| | 1,318 |
| | 76,670 |
| | 9,622,506 |
| | — |
| | — |
| | 50,299 |
| | 7,691,148 |
|
Life science/healthcare | | 9,843 |
| | 28,335 |
| | 15,201 |
| | 1,697,393 |
| | 8,709 |
| | 38,361 |
| | 16,737 |
| | 1,814,643 |
|
Premium wine | | 456 |
| | 4,677 |
| | 3,049 |
| | 919,439 |
| | 520 |
| | 3,187 |
| | 3,595 |
| | 875,135 |
|
Other | | 145 |
| | 298 |
| | 3,980 |
| | 501,487 |
| | 233 |
| | 867 |
| | 4,535 |
| | 500,842 |
|
Total commercial loans | | 49,140 |
| | 190,230 |
| | 184,051 |
| | 19,492,369 |
| | 47,702 |
| | 230,558 |
| | 165,480 |
| | 17,501,054 |
|
Total consumer loans | | 1,710 |
| | 3,242 |
| | 14,109 |
| | 2,503,486 |
| | 1,123 |
| | 3,902 |
| | 11,061 |
| | 2,164,430 |
|
Total | | $ | 50,850 |
| | $ | 193,472 |
| | $ | 198,160 |
| | $ | 21,995,855 |
| | $ | 48,825 |
| | $ | 234,460 |
| | $ | 176,541 |
| | $ | 19,665,484 |
|
Credit Quality Indicators
For each individual client, we establish an internal credit risk rating for that loan, which is used for assessing and monitoring credit risk as well as performance of the loan and the overall portfolio. Our internal credit risk ratings are also used to summarize the risk of loss due to failure by an individual borrower to repay the loan. For our internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk-rated 1 through 4 are performing loans and translate to an internal rating of “Pass”,“Pass,” with loans risk-rated 1 being cash secured. Loans risk-rated 5 through 7 are performing loans,loans; however, we consider them as demonstrating higher risk, which requires more frequent review of the individual exposures; these translate to an internal rating of “Performing (Criticized)“Criticized.”. When a significant payment delay occurs on a criticized loan, the loan is impaired. The loan is also considered for nonaccrual status if full repayment is determined to be improbable. All of our nonaccrual loans are risk-rated 8 or 9 and are classified under the nonperforming impaired category. (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2016 Form 10-K). Loans
rated 10 are charged-off and are not included as part of our loan portfolio balance. We review our credit quality indicators for performance and appropriateness of risk ratings as part of our evaluation process for our allowance for loan losses.credit losses for loans.
The following table summarizes the credit quality indicators, broken out by portfoliorisk-based segment, and class of financing receivables as of September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Pass | | Performing (Criticized) | | Performing Impaired (Criticized) | | Nonperforming Impaired (Nonaccrual) | | Total |
September 30, 2017: | | | | | | | | | | |
Commercial loans: | | | | | | | | | | |
Software/internet | | $ | 5,304,675 |
| | $ | 431,786 |
| | $ | 40,965 |
| | $ | 73,897 |
| | $ | 5,851,323 |
|
Hardware | | 1,015,947 |
| | 65,337 |
| | 21,886 |
| | 18,854 |
| | 1,122,024 |
|
Private equity/venture capital | | 9,633,609 |
| | 1 |
| | 308 |
| | 1,010 |
| | 9,634,928 |
|
Life science/healthcare | | 1,604,160 |
| | 146,705 |
| | 1,400 |
| | 26,935 |
| | 1,779,200 |
|
Premium wine | | 877,235 |
| | 43,377 |
| | 4,241 |
| | 436 |
| | 925,289 |
|
Other | | 493,856 |
| | 19,252 |
| | — |
| | 298 |
| | 513,406 |
|
Total commercial loans | | 18,929,482 |
| | 706,458 |
| | 68,800 |
| | 121,430 |
| | 19,826,170 |
|
Consumer loans: | | | | | | | | | | |
Real estate secured loans | | 2,188,397 |
| | 14,179 |
| | — |
| | 1,301 |
| | 2,203,877 |
|
Other consumer loans | | 297,388 |
| | 453 |
| | — |
| | 1,941 |
| | 299,782 |
|
Total consumer loans | | 2,485,785 |
| | 14,632 |
| | — |
| | 3,242 |
| | 2,503,659 |
|
Total gross loans | | $ | 21,415,267 |
| | $ | 721,090 |
| | $ | 68,800 |
| | $ | 124,672 |
| | $ | 22,329,829 |
|
December 31, 2016: | | | | | | | | | | |
Commercial loans: | | | | | | | | | | |
Software/internet | | $ | 4,924,923 |
| | $ | 620,907 |
| | $ | 46,143 |
| | $ | 76,605 |
| | $ | 5,668,578 |
|
Hardware | | 985,889 |
| | 137,830 |
| | 58,814 |
| | 6,581 |
| | 1,189,114 |
|
Private equity/venture capital | | 7,747,317 |
| | 594 |
| | — |
| | — |
| | 7,747,911 |
|
Life science/healthcare | | 1,707,499 |
| | 120,825 |
| | 6,578 |
| | 31,783 |
| | 1,866,685 |
|
Premium wine | | 865,354 |
| | 11,838 |
| | 2,696 |
| | 491 |
| | 880,379 |
|
Other | | 480,845 |
| | 23,510 |
| | 464 |
| | 403 |
| | 505,222 |
|
Total commercial loans | | 16,711,827 |
| | 915,504 |
| | 114,695 |
| | 115,863 |
| | 17,857,889 |
|
Consumer loans: | | | | | | | | | | |
Real estate secured loans | | 1,914,512 |
| | 9,604 |
| | — |
| | 1,504 |
| | 1,925,620 |
|
Other consumer loans | | 238,256 |
| | 499 |
| | 786 |
| | 1,612 |
| | 241,153 |
|
Total consumer loans | | 2,152,768 |
| | 10,103 |
| | 786 |
| | 3,116 |
| | 2,166,773 |
|
Total gross loans | | $ | 18,864,595 |
| | $ | 925,607 |
| | $ | 115,481 |
| | $ | 118,979 |
| | $ | 20,024,662 |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Pass | | Criticized | | Nonperforming (Nonaccrual) | | Total |
March 31, 2020: | | | | | | | | |
Private equity/venture capital | | $ | 18,868,764 |
| | $ | 111 |
| | $ | — |
| | $ | 18,868,875 |
|
Investor dependent: | | | | | | | | |
Early stage | | 1,588,307 |
| | 199,290 |
| | 18,414 |
| | 1,806,011 |
|
Mid stage | | 1,224,481 |
| | 162,548 |
| | 12,180 |
| | 1,399,209 |
|
Later stage | | 1,786,063 |
| | 230,984 |
| | 14,443 |
| | 2,031,490 |
|
Total investor dependent | | 4,598,851 |
| | 592,822 |
| | 45,037 |
| | 5,236,710 |
|
Cash flow dependent: | | | | | | | | |
Sponsor led buyout | | 1,952,061 |
| | 168,946 |
| | — |
| | 2,121,007 |
|
Other | | 2,590,162 |
| | 166,120 |
| | 13 |
| | 2,756,295 |
|
Total cash flow dependent | | 4,542,223 |
| | 335,066 |
| | 13 |
| | 4,877,302 |
|
Private bank | | 3,639,776 |
| | 24,662 |
| | 4,857 |
| | 3,669,295 |
|
Balance sheet dependent | | 1,725,273 |
| | 125,668 |
| | — |
| | 1,850,941 |
|
Premium wine | | 999,373 |
| | 56,854 |
| | 700 |
| | 1,056,927 |
|
Other | | 407,943 |
| | 92 |
| | — |
| | 408,035 |
|
Total loans (1) | | $ | 34,782,203 |
| | $ | 1,135,275 |
| | $ | 50,607 |
| | $ | 35,968,085 |
|
December 31, 2019: | | | | | | | | |
Private equity/venture capital | | $ | 17,708,550 |
| | $ | 4,247 |
| | $ | — |
| | $ | 17,712,797 |
|
Investor dependent | | | | | | | | |
Early stage | | 1,436,022 |
| | 206,310 |
| | 11,093 |
| | 1,653,425 |
|
Mid stage | | 924,002 |
| | 125,451 |
| | 17,330 |
| | 1,066,783 |
|
Later stage | | 1,490,561 |
| | 201,819 |
| | 6,296 |
| | 1,698,676 |
|
Total investor dependent | | 3,850,585 |
| | 533,580 |
| | 34,719 |
| | 4,418,884 |
|
Cash flow dependent | | | | | | | | |
Sponsor led buyout | | 2,039,847 |
| | 118,588 |
| | 44,585 |
| | 2,203,020 |
|
Other | | 2,141,766 |
| | 93,400 |
| | 17,681 |
| | 2,252,847 |
|
Total cash flow dependent | | 4,181,613 |
| | 211,988 |
| | 62,266 |
| | 4,455,867 |
|
Private bank | | 3,472,138 |
| | 11,601 |
| | 5,480 |
| | 3,489,219 |
|
Balance sheet dependent | | 1,231,961 |
| | 65,343 |
| | — |
| | 1,297,304 |
|
Premium wine | | 1,026,973 |
| | 36,335 |
| | 204 |
| | 1,063,512 |
|
Other | | 890,059 |
| | 62 |
| | — |
| | 890,121 |
|
Total loans (1) | | $ | 32,361,879 |
| | $ | 863,156 |
| | $ | 102,669 |
| | $ | 33,327,704 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
The following table summarizes the credit quality indicators, broken out by risk-based segments and vintage year, as of March 31, 2020:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans by Origination Year | | | | | | |
(Dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term Loans | | Total |
Private equity/venture capital: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 167,852 |
| | $ | 249,214 |
| | $ | 92,652 |
| | $ | 41,912 |
| | $ | 3,990 |
| | $ | 18,241 |
| | $ | 18,294,903 |
| | $ | — |
| | $ | 18,868,764 |
|
Criticized | | 35 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 76 |
| | — |
| | 111 |
|
Nonperforming | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total private equity/venture capital | | $ | 167,887 |
| | $ | 249,214 |
| | $ | 92,652 |
| | $ | 41,912 |
| | $ | 3,990 |
| | $ | 18,241 |
| | $ | 18,294,979 |
| | $ | — |
| | $ | 18,868,875 |
|
Investor dependent: | | | | | | | | | | | | | | | | | | |
Early stage: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 348,538 |
| | $ | 764,930 |
| | $ | 260,849 |
| | $ | 86,592 |
| | $ | 12,760 |
| | $ | 3,460 |
| | $ | 111,178 |
| | $ | — |
| | $ | 1,588,307 |
|
Criticized | | 8,754 |
| | 83,587 |
| | 56,641 |
| | 21,632 |
| | 5,396 |
| | 5,868 |
| | 17,412 |
| | — |
| | 199,290 |
|
Nonperforming | | — |
| | 4,995 |
| | 8,875 |
| | 3,337 |
| | — |
| | — |
| | 1,207 |
| | — |
| | 18,414 |
|
Total early stage | | $ | 357,292 |
| | $ | 853,512 |
| | $ | 326,365 |
| | $ | 111,561 |
| | $ | 18,156 |
| | $ | 9,328 |
| | $ | 129,797 |
| | $ | — |
| | $ | 1,806,011 |
|
Mid stage: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 304,548 |
| | $ | 375,482 |
| | $ | 267,047 |
| | $ | 77,566 |
| | $ | 10,772 |
| | $ | 3,278 |
| | $ | 185,788 |
| | $ | — |
| | $ | 1,224,481 |
|
Criticized | | 9,107 |
| | 54,142 |
| | 45,109 |
| | 14,991 |
| | 11,232 |
| | 5,024 |
| | 22,943 |
| | — |
| | 162,548 |
|
Nonperforming | | — |
| | — |
| | 5,586 |
| | 6,342 |
| | — |
| | — |
| | 252 |
| | — |
| | 12,180 |
|
Total mid stage | | $ | 313,655 |
| | $ | 429,624 |
| | $ | 317,742 |
| | $ | 98,899 |
| | $ | 22,004 |
| | $ | 8,302 |
| | $ | 208,983 |
| | $ | — |
| | $ | 1,399,209 |
|
Later stage: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 220,075 |
| | $ | 696,219 |
| | $ | 259,592 |
| | $ | 104,208 |
| | $ | 76 |
| | $ | 13,203 |
| | $ | 492,690 |
| | $ | — |
| | $ | 1,786,063 |
|
Criticized | | 20,335 |
| | 64,324 |
| | 67,783 |
| | 24,105 |
| | — |
| | 1,901 |
| | 52,536 |
| | — |
| | 230,984 |
|
Nonperforming | | — |
| | 1,521 |
| | 5,820 |
| | 4,153 |
| | — |
| | — |
| | 2,949 |
| | — |
| | 14,443 |
|
Total later stage | | $ | 240,410 |
| | $ | 762,064 |
| | $ | 333,195 |
| | $ | 132,466 |
| | $ | 76 |
| | $ | 15,104 |
| | $ | 548,175 |
| | $ | — |
| | $ | 2,031,490 |
|
Total investor dependent | | $ | 911,357 |
| | $ | 2,045,200 |
| | $ | 977,302 |
| | $ | 342,926 |
| | $ | 40,236 |
| | $ | 32,734 |
| | $ | 886,955 |
| | $ | — |
| | $ | 5,236,710 |
|
Cash flow dependent: | | | | | | | | | | | | | | | | | | |
Sponsor led buyout: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 204,305 |
| | $ | 756,752 |
| | $ | 436,654 |
| | $ | 276,232 |
| | $ | 68,412 |
| | $ | 19,703 |
| | $ | 190,003 |
| | $ | — |
| | $ | 1,952,061 |
|
Criticized | | — |
| | 29,696 |
| | 85,125 |
| | 32,173 |
| | 11,979 |
| | — |
| | 9,973 |
| | — |
| | 168,946 |
|
Nonperforming | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total sponsor led buyout | | $ | 204,305 |
| | $ | 786,448 |
| | $ | 521,779 |
| | $ | 308,405 |
| | $ | 80,391 |
| | $ | 19,703 |
| | $ | 199,976 |
| | $ | — |
| | $ | 2,121,007 |
|
Other | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 232,375 |
| | $ | 710,823 |
| | $ | 235,585 |
| | $ | 122,748 |
| | $ | 43,198 |
| | $ | 542 |
| | $ | 1,244,891 |
| | $ | — |
| | $ | 2,590,162 |
|
Criticized | | 4 |
| | 16,649 |
| | 40,183 |
| | 5,226 |
| | 63 |
| | — |
| | 103,995 |
| | — |
| | 166,120 |
|
Nonperforming | | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | 13 |
|
Total other | | $ | 232,379 |
| | $ | 727,472 |
| | $ | 275,770 |
| | $ | 127,974 |
| | $ | 43,261 |
| | $ | 542 |
| | $ | 1,348,897 |
| | $ | — |
| | $ | 2,756,295 |
|
Total cash flow dependent | | $ | 436,684 |
| | $ | 1,513,920 |
| | $ | 797,549 |
| | $ | 436,379 |
| | $ | 123,652 |
| | $ | 20,245 |
| | $ | 1,548,873 |
| | $ | — |
| | $ | 4,877,302 |
|
Private bank: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 200,593 |
| | $ | 1,106,485 |
| | $ | 477,055 |
| | $ | 472,672 |
| | $ | 439,552 |
| | $ | 603,906 |
| | $ | 276,109 |
| | $ | 63,404 |
| | $ | 3,639,776 |
|
Criticized | | — |
| | 7,381 |
| | — |
| | 2,416 |
| | 2,502 |
| | 11,756 |
| | 607 |
| | — |
| | 24,662 |
|
Nonperforming | | — |
| | — |
| | — |
| | 1,588 |
| | — |
| | 1,181 |
| | 2,088 |
| | — |
| | 4,857 |
|
Total private bank | | $ | 200,593 |
| | $ | 1,113,866 |
| | $ | 477,055 |
| | $ | 476,676 |
| | $ | 442,054 |
| | $ | 616,843 |
| | $ | 278,804 |
| | $ | 63,404 |
| | $ | 3,669,295 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance sheet dependent: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 136,803 |
| | $ | 215,264 |
| | $ | 228,831 |
| | $ | 48,144 |
| | $ | 13,280 |
| | $ | — |
| | $ | 1,082,951 |
| | $ | — |
| | $ | 1,725,273 |
|
Criticized | | — |
| | 14,458 |
| | 3,107 |
| | 15,970 |
| | — |
| | — |
| | 92,133 |
| | — |
| | 125,668 |
|
Nonperforming | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total balance sheet dependent | | $ | 136,803 |
| | $ | 229,722 |
| | $ | 231,938 |
| | $ | 64,114 |
| | $ | 13,280 |
| | $ | — |
| | $ | 1,175,084 |
| | $ | — |
| | $ | 1,850,941 |
|
Premium wine: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 51,487 |
| | $ | 238,792 |
| | $ | 95,464 |
| | $ | 93,055 |
| | $ | 84,186 |
| | $ | 226,031 |
| | $ | 210,358 |
| | $ | — |
| | $ | 999,373 |
|
Criticized | | — |
| | 8,437 |
| | 14,371 |
| | 361 |
| | 5,005 |
| | 6,055 |
| | 22,625 |
| | — |
| | 56,854 |
|
Nonperforming | | — |
| | — |
| | — |
| | — |
| | 687 |
| | — |
| | 13 |
| | — |
| | 700 |
|
Total Premium wine | | $ | 51,487 |
| | $ | 247,229 |
| | $ | 109,835 |
| | $ | 93,416 |
| | $ | 89,878 |
| | $ | 232,086 |
| | $ | 232,996 |
| | $ | — |
| | $ | 1,056,927 |
|
Other: | | | | | | | | | | | | | | | | | | |
Risk rating: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 15,595 |
| | $ | 211,972 |
| | $ | 60,016 |
| | $ | 30,963 |
| | $ | 60,151 |
| | $ | 29,246 |
| | $ | — |
| | $ | — |
| | $ | 407,943 |
|
Criticized | | 13 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 79 |
| | — |
| | 92 |
|
Nonperforming | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total other | | $ | 15,608 |
| | $ | 211,972 |
| | $ | 60,016 |
| | $ | 30,963 |
| | $ | 60,151 |
| | $ | 29,246 |
| | $ | 79 |
| | $ | — |
| | $ | 408,035 |
|
Total loans | | $ | 1,920,419 |
| | $ | 5,611,123 |
| | $ | 2,746,347 |
| | $ | 1,486,386 |
| | $ | 773,241 |
| | $ | 949,395 |
| | $ | 22,417,770 |
| | $ | 63,404 |
| | $ | 35,968,085 |
|
At March 31, 2020, the economic forecasts used in the estimate of our allowance for credit losses for loans was significantly impacted by the economic uncertainty and volatility caused by the COVID-19 pandemic. We utilize Moody's Analytics to source the economic forecasts for the reserve model. The forecasts utilized were those released between March 27, 2020 through March 31, 2020, which Moody's has communicated were designed to reflect the onset of the pandemic and the resulting economic decline. We utilize a probability weighted approach across several forecasts, the average of which represents a significant economic shock for the second and third quarters of 2020 followed by a slow, sustained improvement.
The following tables summarize the activity relating to our allowance for credit losses for loans for the three months ended March 31, 2020 and 2019, broken out by risk-based segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 | | Beginning Balance December 31, 2019 | | Impact of adopting ASC 326 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Credit Losses | | Foreign Currency Translation Adjustments | | Ending Balance March 31, 2020 |
(Dollars in thousands) | | | | | | | |
Private equity/venture capital | | $ | 107,285 |
| | $ | (69,888 | ) | | $ | — |
| | $ | — |
| | $ | 19,557 |
| | $ | (180 | ) | | $ | 56,774 |
|
Investor dependent: | | | | | | | | | | | | | | |
Early stage | | 26,245 |
| | 39,911 |
| | (10,183 | ) | | 1,573 |
| | 70,214 |
| | (571 | ) | | 127,189 |
|
Mid stage | | 15,936 |
| | 6,963 |
| | (9,332 | ) | | 3,337 |
| | 35,145 |
| | (87 | ) | | 51,962 |
|
Later stage | | 40,189 |
| | 24,750 |
| | (13,984 | ) | | — |
| | 46,038 |
| | (443 | ) | | 96,550 |
|
Total investor dependent | | 82,370 |
| | 71,624 |
| | (33,499 | ) | | 4,910 |
| | 151,397 |
| | (1,101 | ) | | 275,701 |
|
Cash flow dependent: | | | | | | | | | | | | | | |
Sponsor led buyout | | 42,939 |
| | 3,151 |
| | (2,624 | ) | | 2,845 |
| | (4,088 | ) | | (132 | ) | | 42,091 |
|
Other | | 25,159 |
| | (3,056 | ) | | — |
| | — |
| | 17,438 |
| | (125 | ) | | 39,416 |
|
Total cash flow dependent | | 68,098 |
| | 95 |
| | (2,624 | ) | | 2,845 |
| | 13,350 |
| | (257 | ) | | 81,507 |
|
Private bank | | 21,551 |
| | 12,615 |
| | (581 | ) | | — |
| | 54,490 |
| | (280 | ) | | 87,795 |
|
Balance sheet dependent | | 12,722 |
| | (1,364 | ) | | — |
| | — |
| | 11,951 |
| | (74 | ) | | 23,235 |
|
Premium wine | | 5,296 |
| | 3,650 |
| | (192 | ) | | — |
| | 3,663 |
| | (40 | ) | | 12,377 |
|
Other | | 7,602 |
| | 8,732 |
| | — |
| | — |
| | (5,507 | ) | | 747 |
| | 11,574 |
|
Total allowance for credit losses | | $ | 304,924 |
| | $ | 25,464 |
| | $ | (36,896 | ) | | $ | 7,755 |
| | $ | 248,901 |
| | $ | (1,185 | ) | | $ | 548,963 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 | | Beginning Balance December 31, 2018 | | Charge-offs | | Recoveries | | Provision for (Reduction of) Credit Losses | | Foreign Currency Translation Adjustments | | Ending Balance March 31, 2019 |
(Dollars in thousands) | | | | | | |
Private equity/venture capital | | $ | 93,781 |
| | $ | — |
| | $ | — |
| | $ | 1,483 |
| | $ | 47 |
| | $ | 95,311 |
|
Investor dependent: | | | | | | | | | | | | |
Early stage | | 25,885 |
| | (1,668 | ) | | 568 |
| | 1,886 |
| | 59 |
| | 26,730 |
|
Mid stage | | 20,999 |
| | (6,516 | ) | | 3 |
| | 22,957 |
| | 720 |
| | 38,163 |
|
Later stage | | 25,217 |
| | — |
| | 644 |
| | 4,171 |
| | 131 |
| | 30,163 |
|
Total investor dependent | | 72,101 |
| | (8,184 | ) | | 1,215 |
| | 29,014 |
| | 910 |
| | 95,056 |
|
Cash flow dependent: | | | | | | | | | | | | |
Sponsor led buyout | | 44,274 |
| | — |
| | — |
| | (3,239 | ) | | (102 | ) | | 40,933 |
|
Other | | 21,754 |
| | (716 | ) | | — |
| | (508 | ) | | (16 | ) | | 20,514 |
|
Total cash flow dependent | | 66,028 |
| | (716 | ) | | — |
| | (3,747 | ) | | (118 | ) | | 61,447 |
|
Private Bank | | 20,583 |
| | (59 | ) | | 210 |
| | (746 | ) | | (24 | ) | | 19,964 |
|
Balance sheet dependent | | 21,707 |
| | — |
| | — |
| | (73 | ) | | (2 | ) | | 21,632 |
|
Premium wine | | 3,646 |
| | — |
| | — |
| | 294 |
| | 9 |
| | 3,949 |
|
Other | | 3,057 |
| | (41 | ) | | — |
| | (404 | ) | | 180 |
| | 2,792 |
|
Total allowance for credit losses | | $ | 280,903 |
| | $ | (9,000 | ) | | $ | 1,425 |
| | $ | 25,821 |
| | $ | 1,002 |
| | $ | 300,151 |
|
The following table summarizes the aging of our loans broken out by risk-based segments as of March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | Equal to or Greater Than 90 Days Past Due | | Total Past Due | | Current | | Total | | Loans Past Due 90 Days or More Still Accruing Interest |
March 31, 2020: | | | | | | | | | | | | | | |
Private equity/venture capital | | $ | 165,904 |
| | $ | 23 |
| | $ | — |
| | $ | 165,927 |
| | $ | 18,702,948 |
| | $ | 18,868,875 |
| | $ | — |
|
Investor dependent: | | | | | | | | | | | | | | |
Early stage | | 8,750 |
| | 1,231 |
| | 3,487 |
| | 13,468 |
| | 1,792,543 |
| | 1,806,011 |
| | 1,499 |
|
Mid stage | | 5,556 |
| | 192 |
| | 1,667 |
| | 7,415 |
| | 1,391,794 |
| | 1,399,209 |
| | 1,667 |
|
Later stage | | 9,910 |
| | 5,500 |
| | — |
| | 15,410 |
| | 2,016,080 |
| | 2,031,490 |
| | — |
|
Total investor dependent | | 24,216 |
| | 6,923 |
| | 5,154 |
| | 36,293 |
| | 5,200,417 |
| | 5,236,710 |
| | 3,166 |
|
Cash flow dependent: | | | | | | | | | | | | | | |
Sponsor led buyout | | 165 |
| | — |
| | — |
| | 165 |
| | 2,120,842 |
| | 2,121,007 |
| | — |
|
Other | | 1,186 |
| | 722 |
| | — |
| | 1,908 |
| | 2,754,387 |
| | 2,756,295 |
| | — |
|
Total cash flow dependent | | 1,351 |
| | 722 |
| | — |
| | 2,073 |
| | 4,875,229 |
| | 4,877,302 |
| | — |
|
Private bank | | 6,730 |
| | — |
| | 4,522 |
| | 11,252 |
| | 3,658,043 |
| | 3,669,295 |
| | 1,752 |
|
Balance sheet dependent | | 3,261 |
| | 3,087 |
| | — |
| | 6,348 |
| | 1,844,593 |
| | 1,850,941 |
| | — |
|
Premium wine | | 10,438 |
| | 21,001 |
| | — |
| | 31,439 |
| | 1,025,488 |
| | 1,056,927 |
| | — |
|
Other | | 677 |
| | — |
| | — |
| | 677 |
| | 407,358 |
| | 408,035 |
| | — |
|
Total loans (1) | | $ | 212,577 |
| | $ | 31,756 |
| | $ | 9,676 |
| | $ | 254,009 |
| | $ | 35,714,076 |
| | $ | 35,968,085 |
| | $ | 4,918 |
|
December 31, 2019: | | | | | | | | | | | | | | |
Private equity/venture capital | | $ | 97,739 |
| | $ | 383 |
| | $ | 3,150 |
| | $ | 101,272 |
| | $ | 17,611,525 |
| | 17,712,797 |
| | $ | 3,150 |
|
Investor dependent: | | | | | | | | | | | | | | |
Early stage | | 1,307 |
| | 22,062 |
| | 723 |
| | 24,092 |
| | 1,629,333 |
| | 1,653,425 |
| | — |
|
Mid stage | | 10,025 |
| | 6,999 |
| | — |
| | 17,024 |
| | 1,049,759 |
| | 1,066,783 |
| | — |
|
Later stage | | 8,113 |
| | 500 |
| | 10,569 |
| | 19,182 |
| | 1,679,494 |
| | 1,698,676 |
| | — |
|
Total investor dependent | | 19,445 |
| | 29,561 |
| | 11,292 |
| | 60,298 |
| | 4,358,586 |
| | 4,418,884 |
| | — |
|
Cash flow dependent | | | | | | | | | | | | | | |
Sponsor led buyout | | — |
| | — |
| | — |
| | — |
| | 2,203,020 |
| | 2,203,020 |
| | — |
|
Other | | 2,426 |
| | 3,061 |
| | 2 |
| | 5,489 |
| | 2,247,358 |
| | 2,252,847 |
| | — |
|
Total cash flow dependent | | 2,426 |
| | 3,061 |
| | 2 |
| | 5,489 |
| | 4,450,378 |
| | 4,455,867 |
| | — |
|
Private bank | | 6,582 |
| | 2,049 |
| | 1,544 |
| | 10,175 |
| | 3,479,044 |
| | 3,489,219 |
| | 365 |
|
Balance sheet dependent | | 2,731 |
| | — |
| | — |
| | 2,731 |
| | 1,294,573 |
| | 1,297,304 |
| | — |
|
Premium wine | | 8,435 |
| | 3,170 |
| | — |
| | 11,605 |
| | 1,051,907 |
| | 1,063,512 |
| | — |
|
Other | | 17 |
| | — |
| | — |
| | 17 |
| | 890,104 |
| | 890,121 |
| | — |
|
Total loans (1) | | $ | 137,375 |
| | $ | 38,224 |
| | $ | 15,988 |
| | $ | 191,587 |
| | $ | 33,136,117 |
| | $ | 33,327,704 |
| | $ | 3,515 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
Nonaccrual Loans
The following tables summarize our nonaccrual loan activity by risk-based segment for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 | | Beginning Balance December 31, 2019 | | Additions | | Paydowns and Other Reductions | | Charge-offs | | Ending Balance March 31, 2020 |
(Dollars in thousands) | | | | | |
Private equity/venture capital | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Investor dependent: | | | | | | | | | | |
Early stage | | 11,093 |
| | 12,343 |
| | (2,764 | ) | | (2,258 | ) | | 18,414 |
|
Mid stage | | 17,330 |
| | 12,091 |
| | (388 | ) | | (16,853 | ) | | 12,180 |
|
Later stage | | 6,296 |
| | 11,224 |
| | 128 |
| | (3,205 | ) | | 14,443 |
|
Total investor dependent | | 34,719 |
| | 35,658 |
| | (3,024 | ) | | (22,316 | ) | | 45,037 |
|
Cash flow dependent: | | | | | | | | | | |
Sponsor led buyout | | 44,585 |
| | — |
| | (41,961 | ) | | (2,624 | ) | | — |
|
Other | | 17,681 |
| | — |
| | (17,650 | ) | | (18 | ) | | 13 |
|
Total cash flow dependent | | 62,266 |
| | — |
| | (59,611 | ) | | (2,642 | ) | | 13 |
|
Private bank | | 5,480 |
| | — |
| | (42 | ) | | (581 | ) | | 4,857 |
|
Balance sheet dependent | | — |
| | — |
| | — |
| | — |
| | — |
|
Premium wine | | 204 |
| | 688 |
| | — |
| | (192 | ) | | 700 |
|
Other | | — |
| | — |
| | — |
| | — |
| | — |
|
Total nonaccrual loans (1) | | $ | 102,669 |
| | $ | 36,346 |
| | $ | (62,677 | ) | | $ | (25,731 | ) | | $ | 50,607 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
|
| | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 | | Beginning Balance December 31, 2018 | | Additions | | Paydowns and Other Reductions | | Charge-offs | | Ending Balance March 31, 2019 |
(Dollars in thousands) | | | | | |
Private equity/venture capital | | $ | 3,700 |
| | $ | 2,247 |
| | $ | — |
| | $ | — |
| | $ | 5,947 |
|
Investor dependent: | | | | | | | | | | |
Early stage | | 7,616 |
| | 4,433 |
| | (3,212 | ) | | (140 | ) | | 8,697 |
|
Mid stage | | 4,751 |
| | 32,099 |
| | (521 | ) | | (4,230 | ) | | 32,099 |
|
Later stage | | 11,385 |
| | 12,063 |
| | (308 | ) | | — |
| | 23,140 |
|
Total investor dependent | | 23,752 |
| | 48,595 |
| | (4,041 | ) | | (4,370 | ) | | 63,936 |
|
Cash flow dependent: | | | | | | | | | | |
Sponsor led buyout | | 39,534 |
| | — |
| | (1,297 | ) | | — |
| | 38,237 |
|
Other | | 17,156 |
| | — |
| | — |
| | (466 | ) | | 16,690 |
|
Total cash flow dependent | | 56,690 |
| | — |
| | (1,297 | ) | | (466 | ) | | 54,927 |
|
Private bank | | 3,919 |
| | 15 |
| | (66 | ) | | (59 | ) | | 3,809 |
|
Balance sheet dependent | | 5,004 |
| | — |
| | (268 | ) | | — |
| | 4,736 |
|
Premium wine | | 285 |
| | — |
| | (17 | ) | | — |
| | 268 |
|
Other | | 792 |
| | — |
| | (792 | ) | | — |
| | — |
|
Total nonaccrual loans (1) | | $ | 94,142 |
| | $ | 50,857 |
| | $ | (6,481 | ) | | $ | (4,895 | ) | | $ | 133,623 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
The following table summarizes our nonaccrual loans with no allowance for credit loss at March 31, 2020 and December 31, 2019:
|
| | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Nonaccrual Loans | | Nonaccrual Loans with no Allowance for Credit Loss | | Nonaccrual Loans | | Nonaccrual Loans with no Allowance for Credit Loss |
Private equity/venture capital | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Investor dependent: | | | | | | | | |
Early stage | | 18,414 |
| | 1,562 |
| | 11,093 |
| | 460 |
|
Mid stage | | 12,180 |
| | 261 |
| | 17,330 |
| | 274 |
|
Later stage | | 14,443 |
| | 1,807 |
| | 6,296 |
| | — |
|
Total investor dependent | | 45,037 |
| | 3,630 |
| | 34,719 |
| | 734 |
|
Cash flow dependent: | | | | | | | | |
Sponsor led buyout | | — |
| | — |
| | 44,585 |
| | — |
|
Other | | 13 |
| | — |
| | 17,681 |
| | 2,782 |
|
Total cash flow dependent | | 13 |
| | — |
| | 62,266 |
| | 2,782 |
|
Private bank | | 4,857 |
| | 3,269 |
| | 5,480 |
| | 3,714 |
|
Balance sheet dependent | | — |
| | — |
| | — |
| | — |
|
Premium wine | | 700 |
| | — |
| | 204 |
| | — |
|
Other | | — |
| | — |
| | — |
| | — |
|
Total nonaccrual loans (1) | | $ | 50,607 |
| | $ | 6,899 |
| | $ | 102,669 |
| | $ | 7,230 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
Troubled Debt Restructurings
As of September 30, 2017March 31, 2020, we had 1815 TDRs with a total carrying value of $87.4$42.2 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were $1.2$0.6 million of unfunded commitments available for funding to the clients associated with these TDRs as of September 30, 2017.March 31, 2020.
The following table summarizes our loans modified in TDRs, broken out by portfoliorisk-based segment, and class of financing receivables at September 30, 2017March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Loans modified in TDRs: | | | | |
Private equity/venture capital | | $ | — |
| | $ | — |
|
Investor dependent | | | | |
Early stage | | 7,350 |
| | 9,471 |
|
Mid stage | | 5,955 |
| | 5,189 |
|
Later stage | | 8,272 |
| | 23,318 |
|
Total investor dependent | | 21,577 |
| | 37,978 |
|
Cash flow dependent | | | | |
Sponsor led buyout | | 10,350 |
| | 55,443 |
|
Other | | — |
| | — |
|
Total cash flow dependent | | 10,350 |
| | 55,443 |
|
Private bank | | 1,351 |
| | 2,104 |
|
Balance sheet dependent | | — |
| | — |
|
Premium wine | | 8,934 |
| | 13,457 |
|
Other | | — |
| | — |
|
Total loans modified in TDRs (1) | | $ | 42,212 |
| | $ | 108,982 |
|
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Loans modified in TDRs: | | | | |
Commercial loans: | | | | |
Software/internet | | $ | 63,326 |
| | $ | 52,646 |
|
Hardware | | 395 |
| | 14,870 |
|
Life science/healthcare | | 20,015 |
| | 24,176 |
|
Premium wine | | 3,265 |
| | 3,194 |
|
Other | | — |
| | 387 |
|
Total commercial loans | | 87,001 |
| | 95,273 |
|
Consumer loans: | | | | |
Other consumer loans | | 437 |
| | 786 |
|
Total | | $ | 87,438 |
| | $ | 96,059 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
The following table summarizes the recorded investment in loans modified in TDRs, broken out by portfoliorisk-based segment, and class of financing receivable, for modifications made during the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 |
| 2016 | | 2017 | | 2016 |
Loans modified in TDRs during the period: | | | | | | | | |
Commercial loans: | | | | | | | | |
Software/internet | | $ | 10,876 |
| | $ | 78 |
| | $ | 26,034 |
| | $ | 4,569 |
|
Hardware | | 396 |
| | 10,329 |
| | 396 |
| | 10,329 |
|
Life science/healthcare | | — |
| | 1,714 |
| | — |
| | 1,714 |
|
Premium wine | | — |
| | — |
| | 185 |
| | 495 |
|
Total commercial loans | | 11,272 |
| | 12,121 |
| | 26,615 |
| | 17,107 |
|
Consumer loans: | | | | | | | | |
Other consumer loans | | — |
| | — |
| | — |
| | 786 |
|
Total loans modified in TDRs during the period (1) | | $ | 11,272 |
| | $ | 12,121 |
| | $ | 26,615 |
| | $ | 17,893 |
|
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
Loans modified in TDRs during the period: | | | | |
Private equity/venture capital | | $ | — |
| | $ | — |
|
Investor dependent | | | | |
Early stage | | — |
| | 677 |
|
Mid stage | | 5,955 |
| | — |
|
Later stage | | 2,769 |
| | — |
|
Total investor dependent | | 8,724 |
| | 677 |
|
Cash flow dependent | | | | |
Sponsor led buyout | | — |
| | — |
|
Other | | — |
| | 5,000 |
|
Total cash flow dependent | | — |
| | 5,000 |
|
Private bank | | — |
| | — |
|
Balance sheet dependent | | — |
| | — |
|
Premium wine | | — |
| | — |
|
Other | | — |
| | — |
|
Total loans modified in TDRs during the period (1) (2) | | $ | 8,724 |
| | $ | 5,677 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
| |
(2) | There were zero$12.5 million and $2.62.2 million of partial charge-offs duringfor the three and nine months endedSeptember 30, 2017, respectively,March 31, 2020 and $0.7 million and $3.5 million of partial charge-offs during the three and nine months endedSeptember 30, 2016March 31, 2019, respectively. |
During the three and nine months ended September 30, 2017 allMarch 31, 2020 and 2019, new TDRs of $11.3$8.3 million and $26.6$5.7 million, respectively, were modified through payment deferrals granted to our clients.
During the three months ended September 30, 2016, $12.0 million ofMarch 31, 2020, new TDRs were modified through payment deferrals granted to our clients and $0.1of $0.4 million were modified through partial forgiveness of principal. During the nine months ended September 30, 2016, $17.6 million of new TDRs were modified through payment deferrals granted to our clients and $0.3 million were modified through partial forgiveness of principal.
The related allowance for loan losses for the majority of our TDRs is determined on an individual basis by comparing the carrying value of the loan to the present value of the estimated future cash flows, discounted at the pre-modification contractual interest rate. For certain TDRs, the related allowance for loan losses is determined based on the fair value of the collateral if the loan is collateral dependent.
principle.
The following table summarizes the recorded investment in loans modified in TDRs within the previous 12 months that subsequently defaulted during the three and nine months ended September 30, 2017March 31, 2020 and September 30, 2016.2019:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
TDRs modified within the previous 12 months that defaulted during the period: | | | | |
Private equity/venture capital | | $ | — |
| | $ | — |
|
Investor dependent | | | | |
Early stage | | — |
| | — |
|
Mid stage | | — |
| | — |
|
Later stage | | — |
| | — |
|
Total investor dependent | | — |
| | — |
|
Cash flow dependent | | | | |
Sponsor led buyout | | — |
| | — |
|
Other | | — |
| | 5,000 |
|
Total cash flow dependent | | — |
| | 5,000 |
|
Private bank | | — |
| | — |
|
Balance sheet dependent | | — |
| | — |
|
Premium wine | | 8,247 |
| | — |
|
Other | | — |
| | — |
|
Total TDRs modified within the previous 12 months that defaulted in the period (1) | | $ | 8,247 |
| | $ | 5,000 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
TDRs modified within the previous 12 months that defaulted during the period: | | | | | | | | |
Commercial loans: | | | | | | | | |
Software/internet | | $ | 1,234 |
| | $ | — |
| | $ | 1,234 |
| | $ | 584 |
|
Premium wine | | 186 |
| | 790 |
| | 186 |
| | 790 |
|
Total TDRs modified within the previous 12 months that defaulted in the period | | $ | 1,420 |
| | $ | 790 |
| | $ | 1,420 |
| | $ | 1,374 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
Charge-offs and defaults on previously restructured loans are evaluated to determine the impact to the allowance for loancredit losses for loans, if any. The evaluation of these defaults may impact the assumptions used in calculating the reserve on other TDRs and impairednonaccrual loans as well as management’s overall outlook of macroeconomic factors that affect the reserve on the loan portfolio as a whole. After evaluating the charge-offs and defaults experienced on our TDRs we determined that no change to our reserving methodology for TDRs was necessary to determine the allowance for loancredit losses for loans as of September 30, 2017.March 31, 2020.
Allowance for Credit Losses: Unfunded Credit Commitments
We maintain a separate allowance for credit losses for unfunded credit commitments that is determined using a methodology that is inherently similar to the methodology used for calculating the allowance for credit losses for loans. At March 31, 2020, the reduction of our allowance for credit losses for unfunded credit commitments was primarily attributable to a decrease in the expected future commitments for milestone tranches, which are tied to company performance or additional funding rounds, based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic mentioned above.
The following table summarizes the activity relating to our allowance for credit losses for unfunded credit commitments for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Allowance for credit losses: unfunded credit commitments, beginning balance | | $ | 67,656 |
| | $ | 55,183 |
|
Impact of adopting ASC 326 | | 22,826 |
| | — |
|
(Reduction of) provision for credit losses | | (5,477 | ) | | 2,730 |
|
Foreign currency translation adjustments | | (315 | ) | | 57 |
|
Allowance for credit losses: unfunded credit commitments, ending balance (1) | | $ | 84,690 |
| | $ | 57,970 |
|
| |
(1) | The “allowance for credit losses: unfunded credit commitments” is included as a component of “other liabilities” on our unaudited interim consolidated balance sheets. See Note 15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional disclosures related to our commitments to extend credit. |
We have operating leases for our corporate offices, data centers and certain equipment utilized at those properties. We are obligated under a number of noncancelable operating leases for premises and equipment that expire at various dates, through 2030, and in most instances, include options to renew or extend at market rates and terms. Such leases may provide for periodic adjustments of rent during the term of the lease based on changes in various economic indicators.
At the inception of the lease, the lease is evaluated to determine whether the lease will be accounted for as an operating or a finance lease. There were no significant assumptions or judgments required upon applying the new lease standard. Operating lease right-of-use assets and operating lease liabilities are included in our consolidated balance sheets. We have no leases that meet the definition of a finance lease under ASC 842 and our lessor accounting treatment for subleases is not material.
Total recorded balances for the lease assets and liabilities are as follows:
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 |
| December 31, 2019 |
Assets: | | | | |
Right-of-use assets - operating leases | | $ | 206,392 |
| | $ | 197,365 |
|
Liabilities: | | | | |
Lease liabilities - operating leases | | 227,271 |
| | 218,847 |
|
The components of our lease cost and supplemental cash flow information related to leases for the three months ended March 31, 2020 and 2019 were as follows:
|
| | | | | | | | |
(Dollars in thousands) | | Three months ended March 31, 2020 | | Three months ended March 31, 2019 |
Operating lease cost | | $ | 11,364 |
| | $ | 9,518 |
|
Short-term lease cost | | 339 |
| | 263 |
|
Variable lease cost | | 595 |
| | 846 |
|
Less: sublease income | | (1,132 | ) | | (1,108 | ) |
Total lease cost, net | | $ | 11,166 |
| | $ | 9,519 |
|
Supplemental cash flows information: | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Cash paid for operating leases | | $ | 12,221 |
| | 10,354 |
|
Noncash items during the period: | | | | |
Lease obligations in exchange for obtaining Right-of-use assets | | | | |
Operating leases | | $ | 21,613 |
| | — |
|
The table below presents additional information related to the Company's leases as of March 31, 2020 and December 31, 2019:
|
| | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Weighted-average remaining term (in years) - operating leases | | 6.27 |
| | 6.29 |
|
Weighted-average discount rate - operating leases (1) | | 2.83 | % | | 2.92 | % |
| |
(1) | The incremental borrowing rate used to calculate the lease liability was determined based on the facts and circumstances of the economic environment and the Company’s credit standing as of the effective date of ASC 842. Additionally, the total lease term and total lease payments were also considered in determining the rate. Based on these considerations the Company identified credit terms available under its existing credit lines which represent a collateralized borrowing rate that has varying credit terms that could be matched to total lease terms and total lease payments in ultimately determining the implied borrowing rate in each lease contract. |
The following table presents our undiscounted future cash payments for our operating lease liabilities as of March 31, 2020:
|
| | | | |
Years ended December 31, (Dollars in thousands) | | Operating Leases |
2020 (excluding the three months ended March 31, 2020) | | $ | 34,310 |
|
2021 | | 44,228 |
|
2022 | | 39,196 |
|
2023 | | 38,429 |
|
2024 | | 32,712 |
|
2025 and thereafter | | 60,124 |
|
Total future lease payments (1) | | $ | 248,999 |
|
Less: imputed interest | | (21,728 | ) |
Total lease liabilities | | $ | 227,271 |
|
| |
(1) | As of March 31, 2020, we have additional leases that have not yet commenced. We estimate that we will record additional lease liabilities of $18.8 million upon commencement. These leases will commence in 2020 with lease terms of five years. |
| |
9. | Goodwill and Other Intangible Assets |
Goodwill
Goodwill at both March 31, 2020 and December 31, 2019 was $137.8 million, which was a result of revenue generating synergies expected from our acquisition of SVB Leerink in 2019. Due to the economic uncertainty caused by COVID-19, we conducted an evaluation and determined that it was more likely than not that the fair value of SVB Leerink was not less than its carrying amount; therefore, no impairment was recognized on goodwill as of March 31, 2020. All reported goodwill amounts have been allocated to the SVB Leerink reporting segment and are expected to be deductible for tax purposes. Refer to Note 14 — “Segment Reporting” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information.
Other Intangible Assets
The components of net other intangible assets related to the acquisition of SVB Leerink were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Amount | | Accumulated Amortization | | Net Carrying Amount |
Other intangible assets: | | | | | | | | | | | | |
Customer relationships | | $ | 42,000 |
| | $ | 4,773 |
| | $ | 37,227 |
| | $ | 42,000 |
| | $ | 3,818 |
| | $ | 38,182 |
|
Other | | 18,900 |
| | 8,055 |
| | 10,845 |
| | 18,900 |
| | 7,665 |
| | 11,235 |
|
Total other intangible assets | | $ | 60,900 |
| | $ | 12,828 |
| | $ | 48,072 |
| | $ | 60,900 |
| | $ | 11,483 |
| | $ | 49,417 |
|
For the three months ended March 31, 2020, we recorded amortization expense of $1.3 million. Assuming no future impairments of other intangible assets or additional acquisitions or dispositions, the following table presents the Company's future expected amortization expense for other intangible assets that will continue to be amortized as of March 31, 2020:
|
| | | | |
Years ended December 31, (Dollars in thousands) | | Other Intangible Assets |
2020 (excluding the three months ended March 31, 2020) | | $ | 4,037 |
|
2021 | | 4,732 |
|
2022 | | 4,732 |
|
2023 | | 4,732 |
|
2024 | | 4,732 |
|
2025 and thereafter | | 25,107 |
|
Total future amortization expense | | $ | 48,072 |
|
| |
8.10. | Short-Term Borrowings and Long-Term Debt |
The following table represents outstanding short-term borrowings and long-term debt at September 30, 2017March 31, 2020 and December 31, 20162019:
| | | | | | | | Carrying Value | | | | | | Carrying Value |
(Dollars in thousands) | | Maturity | | Principal value at September 30, 2017 | | September 30, 2017 | | December 31, 2016 | | Maturity | | Principal value at March 31, 2020 | | March 31, 2020 | | December 31, 2019 |
Short-term borrowings: | | | | | | | | | | | | |
Short-term FHLB advances | |
| | $ | — |
| | $ | — |
| | $ | 500,000 |
| | (1) | | $ | 2,700,000 |
| | $ | 2,700,000 |
| | $ | — |
|
Federal funds purchased | | | April 1, 2020 | | 375,000 |
| | 375,000 |
| | — |
|
Other short-term borrowings | | (1) | | 4,840 |
| | 4,840 |
| | 12,668 |
| | (2) | | 63,162 |
| | 63,162 |
| | 17,430 |
|
Total short-term borrowings | | | | $ | 4,840 |
| | $ | 512,668 |
| | | | $ | 3,138,162 |
| | $ | 17,430 |
|
Long-term debt: | | | | | | | | | | | | |
3.50% Senior Notes | | January 29, 2025 | | $ | 350,000 |
| | $ | 347,221 |
| | $ | 346,979 |
| | January 29, 2025 | | $ | 350,000 |
| | $ | 348,076 |
| | $ | 347,987 |
|
5.375% Senior Notes | | September 15, 2020 | | 350,000 |
| | 348,035 |
| | 347,586 |
| |
6.05% Subordinated Notes (2) | | June 1, 2017 | | — |
| | — |
| | 46,646 |
| |
7.0% Junior Subordinated Debentures | | October 15, 2033 | | 50,000 |
| | 54,362 |
| | 54,493 |
| |
Total long-term debt | | | | $ | 749,618 |
| | $ | 795,704 |
| | | | $ | 348,076 |
| | $ | 347,987 |
|
| |
(1) | Represents advances from the FHLB at March 31, 2020 with maturity dates through May 7, 2020. |
| |
(2) | Represents cash collateral received from certain counterparties in relation to market value exposures of derivative contracts in our favor. |
| |
(2) | Our 6.05% Subordinated Notes were repaid on June 1, 2017 and therefore, the interest rate swap agreement related to this issuance was terminated upon repayment of the 6.05% Subordinated Notes. At December 31, 2016, included in the carrying value of our 6.05% Subordinated Notes were $0.8 million related to hedge accounting associated with the notes.
|
Interest expense related to short-term borrowings and long-term debt was $9.0 million and $27.2$5.9 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $9.7 million and $28.2$10.2 million for the three and nine months ended September 30, 2016, respectively. Interest expense is net of the hedge accounting impact from our interest rate swap agreement related to our 6.05% Subordinated Notes through June 1, 2017.March 31, 2019. The weighted average interest rate associated with our short-term borrowings was 1.060.36 percent as of September 30, 2017March 31, 2020 and 0.591.55 percent as of as of December 31, 2016.2019.
Short-term Borrowings
Available Lines of Credit
We have certain facilities in place to enable us to access short-term borrowings on a secured (using high-quality fixed income securities as collateral) and an unsecured basis. TheseOur secured facilities include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of September 30, 2017, we did not have any borrowings outstanding against our uncommitted federal funds lines. We also pledge securitiescollateral pledged to the FHLB of San Francisco and the discount window at the Federal Reserve Bank. The fair valueFRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of March 31, 2020, collateral pledged to the FHLB of San Francisco (comprisedwas comprised primarily of U.S. Treasury securities)fixed income investment securities and loans and had a carrying value of $4.8 billion, of which $1.4 billion was available to support additional borrowings. As of March 31, 2020, collateral pledged to the discount window at September 30, 2017 totaled $1.9the FRB was comprised of fixed income investment securities and had a carrying value of $1.0 billion,, all of which was unused and available to support additional borrowings. The fair value of collateral pledged at the discount window of the Federal Reserve Bank at September 30, 2017 totaled $0.7 billion, all of which wasOur total unused and available to support additional borrowings.borrowing capacity for our uncommitted federal funds lines totaled $1.6 billion at March 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $3.3 billion at March 31, 2020.
| |
9.11. | Derivative Financial Instruments |
We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk and to assist customers with their risk management objectives.objectives, which may include currency exchange rate risks and interest rate risks. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.
Interest Rate Risk
Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk foron our 6.05% Subordinated Notes,variable-interest rate loan portfolio, we enteredenter into a fixed-for-floating interest rate swap agreement atcontracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the time of debt issuance based upon LIBOR with matched-terms. The net cash benefit associated with ourmarket interest rates. We designate these interest rate swap is recordedcontracts as a reduction in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swaps is calculated using a discounted cash flow methodhedges that qualify for hedge accounting under ASC 815, Derivatives and adjusted for credit valuation associated with counterparty risk. ChangesHedging ("ASC 815"), and record them in other assets and other liabilities. For qualifying cash flow hedges, changes in the fair value of the interest rate swapsderivative are reflectedrecorded in eitheraccumulated other assets (for swapscomprehensive income and recognized in an asset position) or other liabilities (for swaps in a liability position). On June 1, 2017, our interest rate swap was terminated upon repaymentearnings as the hedged item affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the 6.05% Subordinated Notes.hedged item in the line item "Loans" as part of interest income, a component of consolidated net income.
We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in accumulated other comprehensive income are reclassified into earnings in the line item "Loans" as part of interest income, a component of consolidated net income. As of March 31, 2020, all derivatives previously classified as hedges with notional balances totaling $5.0 billion and a net asset fair value of $227.5 million were terminated. As of March 31, 2020, the total unrealized gains on terminated cash flow hedges remaining in AOCI is $226.9 million, $163.9 million net of tax. The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gains will be reclassified into earnings is approximately five years. The transactions were initiated on March 26, 2020 and were mostly settled as of March 31, 2020, as such, we recorded cash flows received from the settled transactions of $180.5 million and a related receivable of $47.0 million for the remaining unsettled transactions.
Currency Exchange Risk
We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are recorded in the line item “Other”“other” as part of noninterest income, a component of consolidated net income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded in the line item “Other”“other” as part of noninterest income, a component of consolidated net income.
Other Derivative Instruments
Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2-“Summary2 — “Summary of Significant Accounting Policies" under Part II, Item 8 of our 20162019 Form 10-K.
Counterparty Credit Risk
We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.
The total notional or contractual amounts and fair value collateral and net exposure of our derivative financial instruments at September 30, 2017March 31, 2020 and December 31, 20162019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | March 31, 2020 | | December 31, 2019 |
| | | | September 30, 2017 | | December 31, 2016 | | Notional or Contractual Amount | | Fair Value | | Notional or Contractual Amount | | Fair Value |
(Dollars in thousands) | | Balance Sheet Location | | Notional or Contractual Amount | | Fair Value | | Collateral (1) | | Net Exposure (2) | | Notional or Contractual Amount | | Fair Value | | Collateral (1) | | Net Exposure (2) | |
| Derivative Assets (1) |
| Derivative Liabilities (1) | | Derivative Assets (1) |
| Derivative Liabilities (1) |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate risks: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | Other assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 45,964 |
| | $ | 810 |
| | $ | 89 |
| | $ | 721 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,915,000 |
| | $ | 22,676 |
| | $ | — |
|
Interest rate swaps | | | — |
| | — |
| | — |
| | 3,085,000 |
| | — |
| | 25,623 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | |
|
|
|
|
| |
| | |
|
|
Currency exchange risks: | | | | | | | | | | | | | | | | | |
|
|
|
|
| |
| | |
|
|
Foreign exchange forwards | | Other assets | | 286,378 |
| | 3,166 |
| | — |
| | 3,166 |
| | 219,950 |
| | 3,057 |
| | — |
| | 3,057 |
| | 330,045 |
|
| 5,928 |
|
| — |
| | — |
| | — |
|
| — |
|
Foreign exchange forwards | | Other liabilities | | 84,618 |
| | (1,244 | ) | | — |
| | (1,244 | ) | | 54,338 |
| | (968 | ) | | — |
| | (968 | ) | | 158,592 |
|
| — |
|
| 2,751 |
| | 300,250 |
| | — |
|
| 2,154 |
|
Net exposure | | | | 1,922 |
| | — |
| | 1,922 |
| | | | 2,089 |
| | — |
| | 2,089 |
| |
Other derivative instruments: | | | | | | | | | | | | | | | | | |
|
| |
| | |
| | |
| |
Equity warrant assets | | Other assets | | 211,018 |
| | 141,785 |
| | — |
| | 141,785 |
| | 211,434 |
| | 131,123 |
| | — |
| | 131,123 |
| | 235,074 |
|
| 152,710 |
|
| — |
| | 225,893 |
| | 165,473 |
|
| — |
|
Other derivatives: | | | | | | | | | | | | | | | | | |
Client foreign exchange forwards | | Other assets | | 1,925,726 |
| | 90,691 |
| | 4,840 |
| | 85,851 |
| | 1,251,308 |
| | 54,587 |
| | 12,579 |
| | 42,008 |
| | 6,914,487 |
|
| 226,621 |
|
| — |
| | 4,661,517 |
| | 114,546 |
|
| — |
|
Client foreign exchange forwards | | Other liabilities | | 1,838,439 |
| | (86,627 | ) | | — |
| | (86,627 | ) | | 1,068,991 |
| | (43,317 | ) | | — |
| | (43,317 | ) | | 5,720,213 |
|
| — |
|
| 186,417 |
| | 4,326,059 |
| | — |
|
| 94,745 |
|
Client foreign currency options | | Other assets | | 101,544 |
| | 1,090 |
| | — |
| | 1,090 |
| | 775,000 |
| | 10,383 |
| | — |
| | 10,383 |
| | 237,349 |
|
| 6,723 |
|
| — |
| | 154,985 |
| | 1,308 |
|
| — |
|
Client foreign currency options | | Other liabilities | | 101,544 |
| | (1,090 | ) | | — |
| | (1,090 | ) | | 775,000 |
| | (10,383 | ) | | — |
| | (10,383 | ) | | 237,349 |
|
| — |
|
| 6,723 |
| | 154,985 |
| | — |
|
| 1,308 |
|
Client interest rate derivatives | | Other assets | | 676,148 |
| | 11,824 |
| | — |
| | 11,824 |
| | 583,511 |
| | 10,110 |
| | — |
| | 10,110 |
| | 747,228 |
|
| 80,543 |
|
| — |
| | 1,275,190 |
| | 28,811 |
|
| — |
|
Client interest rate derivatives(2) | | Other liabilities | | 711,969 |
| | (11,955 | ) | | — |
| | (11,955 | ) | | 627,639 |
| | (9,770 | ) | | — |
| | (9,770 | ) | | 829,528 |
|
| — |
|
| 31,533 |
| | 1,372,914 |
| | — |
|
| 14,154 |
|
Net exposure | | | | 3,933 |
| | 4,840 |
| | (907 | ) | | | | 11,610 |
| | 12,579 |
| | (969 | ) | |
Net | | | | $ | 147,640 |
| | $ | 4,840 |
| | $ | 142,800 |
| | | | $ | 145,632 |
| | $ | 12,668 |
| | $ | 132,964 |
| |
Total derivatives not designated as hedging instruments | | | | | 472,525 |
|
| 227,424 |
| | | | 310,138 |
|
| 112,361 |
|
Total derivatives | | | | | $ | 472,525 |
| | $ | 227,424 |
| | | | $ | 332,814 |
| | $ | 137,984 |
|
| |
(1) | Cash collateral received from our counterpartiesDerivative assets and liabilities are included in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings”"accrued interest receivable and other assets" and "other liabilities", respectively, on our consolidated balance sheets. |
| |
(2) | Net exposureThe amount reported reflects reductions of approximately $55.7 million and $17.4 million of derivative liabilities at March 31, 2020 and December 31, 2019, respectively, reflecting variation margin treated as settlement of the related derivative fair values for contracts in a gain position reflects the replacement cost in the event of nonperformancelegal and accounting purposes as required by all such counterparties. The credit ratings of our institutional counterparties as of September 30, 2017 remain at investment grade or higher and there were no material changes in their credit ratings during the three and nine months ended September 30, 2017.central clearing houses. |
A summary of our derivative activity and the related impact on our consolidated statements of income for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
|
| | | | | | | | | | |
| | | | Three months ended March 31, |
(Dollars in thousands) | | Statement of income location | | 2020 | | 2019 |
Derivatives designated as hedging instruments: | | | | | | |
Interest rate risks: | | | | | | |
Amounts reclassified from accumulated other comprehensive income into income | | Interest income—loans | | $ | 2,089 |
| | $ | (3 | ) |
Derivatives not designated as hedging instruments: | | | | | | |
Currency exchange risks: | | | | | | |
(Losses) gains on revaluations of internal foreign currency instruments, net | | Other noninterest income | | $ | (8,375 | ) | | $ | 1,050 |
|
Gains (losses) on internal foreign exchange forward contracts, net | | Other noninterest income | | 8,668 |
| | (469 | ) |
Net gains associated with internal currency risk | | | | $ | 293 |
| | $ | 581 |
|
Other derivative instruments: | | | | | | |
Losses on revaluations of client foreign currency instruments, net | | Other noninterest income | | $ | (8,284 | ) | | $ | (13,571 | ) |
Gains on client foreign exchange forward contracts, net | | Other noninterest income | | 7,747 |
| | 12,654 |
|
Net losses associated with client currency risk | | | | $ | (537 | ) | | $ | (917 | ) |
Net gains on equity warrant assets | | Gains on equity warrant assets, net | | $ | 13,395 |
| | $ | 21,305 |
|
Net losses on other derivatives | | Other noninterest income | | $ | (4,345 | ) | | $ | (365 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | | | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | Statement of income location | | 2017 | | 2016 | | 2017 | | 2016 |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Interest rate risks: | | | | | | | | | | |
Net cash benefit associated with interest rate swaps | | Interest expense—borrowings | | $ | 62 |
| | $ | 580 |
| | $ | 997 |
| | $ | 1,778 |
|
Changes in fair value of interest rate swaps | | Other noninterest income | | — |
| | (3 | ) | | (7 | ) | | (33 | ) |
Net gains associated with interest rate risk derivatives | | | | $ | 62 |
| | $ | 577 |
| | $ | 990 |
| | $ | 1,745 |
|
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Currency exchange risks: | | | | | | | | | | |
Gains (losses) on revaluations of internal foreign currency instruments, net | | Other noninterest income | | $ | 10,561 |
| | $ | (1,406 | ) | | $ | 29,265 |
| | $ | (4,222 | ) |
(Losses) gains on internal foreign exchange forward contracts, net | | Other noninterest income | | (10,550 | ) | | 1,352 |
| | (28,349 | ) | | 3,067 |
|
Net gains (losses) associated with internal currency risk | | | | $ | 11 |
| | $ | (54 | ) | | $ | 916 |
| | $ | (1,155 | ) |
Other derivative instruments: | | | | | | | | | | |
Gains on revaluations of client foreign currency instruments, net | | Other noninterest income | | $ | 3,760 |
| | $ | 3,488 |
| | $ | 8,889 |
| | $ | 7,009 |
|
Losses on client foreign exchange forward contracts, net | | Other noninterest income | | (3,871 | ) | | (3,194 | ) | | (8,350 | ) | | (8,780 | ) |
Net (losses) gains associated with client currency risk | | | | $ | (111 | ) | | $ | 294 |
| | $ | 539 |
| | $ | (1,771 | ) |
Net gains on equity warrant assets | | Gains on equity warrant assets, net | | $ | 24,922 |
| | $ | 21,558 |
| | $ | 42,432 |
| | $ | 33,252 |
|
Net (losses) gains on other derivatives | | Other noninterest income | | $ | (38 | ) | | $ | 31 |
| | $ | (524 | ) | | $ | (659 | ) |
Balance Sheet Offsetting
Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract.
The following table summarizes our assets subject to enforceable master netting arrangements as of September 30, 2017March 31, 2020 and December 31, 20162019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Assets | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements | | Net Amount |
(Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Received (1) | |
March 31, 2020 | | | | | | | | | | | | |
Derivative assets: | | | | | | | | | | | | |
Interest rate swaps | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Foreign exchange forwards | | 232,549 |
| | — |
| | 232,549 |
| | (76,009 | ) | | (59,693 | ) | | 96,847 |
|
Foreign currency options | | 6,723 |
| | — |
| | 6,723 |
| | (2,016 | ) | | (3,469 | ) | | 1,238 |
|
Client interest rate derivatives | | 80,543 |
| | — |
| | 80,543 |
| | (80,543 | ) | | — |
| | — |
|
Total derivative assets | | 319,815 |
| | — |
| | 319,815 |
| | (158,568 | ) | | (63,162 | ) | | 98,085 |
|
Reverse repurchase, securities borrowing, and similar arrangements | | 401,758 |
| | — |
| | 401,758 |
| | (401,758 | ) | | — |
| | — |
|
Total | | $ | 721,573 |
| | $ | — |
| | $ | 721,573 |
| | $ | (560,326 | ) | | $ | (63,162 | ) | | $ | 98,085 |
|
December 31, 2019 | | | | | | | | | | | | |
Derivative assets: | | | | | | | | | | | | |
Interest rate swaps | | $ | 22,676 |
| | $ | — |
| | $ | 22,676 |
| | $ | (22,598 | ) | | $ | — |
| | $ | 78 |
|
Foreign exchange forwards | | $ | 114,546 |
| | $ | — |
| | $ | 114,546 |
| | $ | (36,855 | ) | | $ | (17,095 | ) | | $ | 60,596 |
|
Foreign currency options | | 1,308 |
| | — |
| | 1,308 |
| | (848 | ) | | (335 | ) | | 125 |
|
Client interest rate derivatives | | 28,811 |
| | — |
| | 28,811 |
| | (28,811 | ) | | — |
| | — |
|
Total derivative assets | | 167,341 |
| | — |
| | 167,341 |
| | (89,112 | ) | | (17,430 | ) | | 60,799 |
|
Reverse repurchase, securities borrowing, and similar arrangements | | 289,340 |
| | — |
| | 289,340 |
| | (289,340 | ) | | — |
| | — |
|
Total | | $ | 456,681 |
| | $ | — |
| | $ | 456,681 |
| | $ | (378,452 | ) | | $ | (17,430 | ) | | $ | 60,799 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Assets | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements | | Net Amount |
(Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Received | |
September 30, 2017 | | | | | | | | | | | | |
Derivative Assets: | | | | | | | | | | | | |
Interest rate swaps | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Foreign exchange forwards | | 93,857 |
| | — |
| | 93,857 |
| | (21,154 | ) | | (4,840 | ) | | 67,863 |
|
Foreign currency options | | 1,090 |
| | — |
| | 1,090 |
| | (331 | ) | | — |
| | 759 |
|
Client interest rate derivatives | | 11,824 |
| | — |
| | 11,824 |
| | (11,808 | ) | | — |
| | 16 |
|
Total derivative assets | | 106,771 |
| | — |
| | 106,771 |
| | (33,293 | ) | | (4,840 | ) | | 68,638 |
|
Reverse repurchase, securities borrowing, and similar arrangements | | 62,664 |
| | — |
| | 62,664 |
| | (62,664 | ) | | — |
| | — |
|
Total | | $ | 169,435 |
| | $ | — |
| | $ | 169,435 |
| | $ | (95,957 | ) | | $ | (4,840 | ) | | $ | 68,638 |
|
December 31, 2016 | | | | | | | | | | | | |
Derivative Assets: | | | | | | | | | | | | |
Interest rate swaps | | $ | 810 |
| | $ | — |
| | $ | 810 |
| | $ | (721 | ) | | $ | (89 | ) | | $ | — |
|
Foreign exchange forwards | | 57,644 |
| | — |
| | 57,644 |
| | (22,738 | ) | | (12,579 | ) | | 22,327 |
|
Foreign currency options | | 10,383 |
| | — |
| | 10,383 |
| | (8,806 | ) | | — |
| | 1,577 |
|
Client interest rate derivatives | | 10,110 |
| | — |
| | 10,110 |
| | (10,091 | ) | | — |
| | 19 |
|
Total derivative assets | | 78,947 |
| | — |
| | 78,947 |
| | (42,356 | ) | | (12,668 | ) | | 23,923 |
|
Reverse repurchase, securities borrowing, and similar arrangements | | 64,028 |
| | — |
| | 64,028 |
| | (64,028 | ) | | — |
| | — |
|
Total | | $ | 142,975 |
| | $ | — |
| | $ | 142,975 |
| | $ | (106,384 | ) | | $ | (12,668 | ) | | $ | 23,923 |
|
| |
(1) | Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets. |
The following table summarizes our liabilities subject to enforceable master netting arrangements as of September 30, 2017March 31, 2020 and December 31, 20162019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements | | Net Amount |
(Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Pledged (1) | |
March 31, 2020 | | | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate swaps | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Foreign exchange forwards | | 189,168 |
| | — |
| | 189,168 |
| | (68,027 | ) | | (7,442 | ) | | 113,699 |
|
Foreign currency options | | 6,723 |
| | — |
| | 6,723 |
| | (2,009 | ) | | — |
| | 4,714 |
|
Client interest rate derivatives | | 31,533 |
| | — |
| | 31,533 |
| | — |
| | (31,085 | ) | | 448 |
|
Total derivative liabilities | | 227,424 |
| | — |
| | 227,424 |
| | (70,036 | ) | | (38,527 | ) | | 118,861 |
|
Repurchase, securities lending, and similar arrangements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 227,424 |
| | $ | — |
| | $ | 227,424 |
| | $ | (70,036 | ) | | $ | (38,527 | ) | | $ | 118,861 |
|
December 31, 2019 | | | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate swaps | | 25,623 |
| | — |
| | 25,623 |
| | (22,676 | ) | | (2,947 | ) | | — |
|
Foreign exchange forwards | | 96,899 |
| | — |
| | 96,899 |
| | (33,314 | ) | | (22,030 | ) | | 41,555 |
|
Foreign currency options | | 1,308 |
| | — |
| | 1,308 |
| | (531 | ) | | — |
| | 777 |
|
Client interest rate derivatives | | 14,154 |
| | — |
| | 14,154 |
| | — |
| | (13,936 | ) | | 218 |
|
Total derivative liabilities | | 137,984 |
| | — |
| | 137,984 |
| | (56,521 | ) | | (38,913 | ) | | 42,550 |
|
Repurchase, securities lending, and similar arrangements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 137,984 |
| | $ | — |
| | $ | 137,984 |
| | $ | (56,521 | ) | | $ | (38,913 | ) | | $ | 42,550 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts offset in the Statement of Financial Position | | Net Amounts of Liabilities Presented in the Statement of Financial Position | | Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements | | Net Amount |
(Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Pledged | |
September 30, 2017 | | | | | | | | | | | | |
Derivative Liabilities: | | | | | | | | | | | | |
Foreign exchange forwards | | $ | 87,871 |
| | $ | — |
| | $ | 87,871 |
| | $ | (68,852 | ) | | $ | — |
| | $ | 19,019 |
|
Foreign currency options | | 1,090 |
| | — |
| | 1,090 |
| | (759 | ) | | — |
| | 331 |
|
Client interest rate derivatives | | 11,955 |
| | — |
| | 11,955 |
| | (11,936 | ) | | — |
| | 19 |
|
Total derivative liabilities | | 100,916 |
| | — |
| | 100,916 |
| | (81,547 | ) | | — |
| | 19,369 |
|
Repurchase, securities lending, and similar arrangements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 100,916 |
| | $ | — |
| | $ | 100,916 |
| | $ | (81,547 | ) | | $ | — |
| | $ | 19,369 |
|
December 31, 2016 | | | | | | | | | | | | |
Derivative Liabilities: | | | | | | | | | | | | |
Foreign exchange forwards | | $ | 44,285 |
| | $ | — |
| | $ | 44,285 |
| | $ | (17,964 | ) | | $ | — |
| | $ | 26,321 |
|
Foreign currency options | | 10,383 |
| | — |
| | 10,383 |
| | (1,585 | ) | | — |
| | 8,798 |
|
Client interest rate derivatives | | 9,770 |
| | — |
| | 9,770 |
| | (9,770 | ) | | — |
| | — |
|
Total derivative liabilities | | 64,438 |
| | — |
| | 64,438 |
| | (29,319 | ) | | — |
| | 35,119 |
|
Repurchase, securities lending, and similar arrangements | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | | $ | 64,438 |
| | $ | — |
| | $ | 64,438 |
| | $ | (29,319 | ) | | $ | — |
| | $ | 35,119 |
|
| |
10. | Other Noninterest Income and Other Noninterest Expense |
A summary of other noninterest income for the three and nine months ended September 30, 2017 and 2016 is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| Nine months ended September 30, |
(Dollars in thousands) | | 2017 |
| 2016 |
| 2017 |
| 2016 |
Fund management fees | | $ | 5,198 |
| | $ | 5,231 |
| | $ | 15,903 |
| | $ | 14,149 |
|
Service-based fee income | | 469 |
| | 2,029 |
| | 3,860 |
| | 6,270 |
|
Gains on revaluation of client foreign currency instruments, net (1) | | 3,760 |
| | 3,488 |
| | 8,889 |
| | 7,009 |
|
Losses on client foreign exchange forward contracts, net (1) | | (3,871 | ) | | (3,194 | ) | | (8,350 | ) | | (8,780 | ) |
Gains (losses) on revaluation of internal foreign currency instruments, net (2) | | 10,561 |
| | (1,406 | ) | | 29,265 |
| | (4,222 | ) |
(Losses) gains on internal foreign exchange forward contracts, net (2) | | (10,550 | ) | | 1,352 |
| | (28,349 | ) | | 3,067 |
|
Other (3) | | 10,329 |
| | 11,378 |
| | 19,910 |
| | 19,018 |
|
Total other noninterest income | | $ | 15,896 |
| | $ | 18,878 |
| | $ | 41,128 |
| | $ | 36,511 |
|
| |
(1) | Cash collateral pledged to our counterparties in relation to market value exposures of derivative contracts in a liability position and repurchase agreements are recorded as a component of “cash and cash equivalents" on our consolidated balance sheets. |
All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. Included below is a summary of noninterest income for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Noninterest income: | | | | |
Gains on investment securities, net | | $ | 46,055 |
| | $ | 29,028 |
|
Gains on equity warrant assets, net | | 13,395 |
| | 21,305 |
|
Client investment fees | | 43,393 |
| | 44,482 |
|
Foreign exchange fees | | 47,505 |
| | 38,048 |
|
Credit card fees | | 28,304 |
| | 27,483 |
|
Deposit service charges | | 24,589 |
| | 20,939 |
|
Lending related fees | | 13,125 |
| | 13,937 |
|
Letters of credit and standby letters of credit fees | | 11,542 |
| | 9,354 |
|
Investment banking revenue | | 46,867 |
| | 49,795 |
|
Commissions | | 16,022 |
| | 14,108 |
|
Other | | 11,137 |
| | 11,897 |
|
Total noninterest income | | $ | 301,934 |
| | $ | 280,376 |
|
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, gains and losses from sales of our AFS debt securities portfolio, when applicable, and carried interest.
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, our China Joint Venture, debt funds, private and public portfolio companies, which include public equity securities held as a result of exercised equity warrant assets and qualified affordable housing projects. We experience variability in the performance of our non-marketable and other equity securities from period to period, which results in net gains or losses on investment securities (both realized and unrealized). This variability is due to a number of factors, including unrealized changes in the values of our investments, changes in the amount of realized gains from distributions, changes in liquidity events and general economic and market conditions. Unrealized gains from non-marketable and other equity securities for any single period are typically driven by valuation changes.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of certain sales restrictions to which these equity securities may be subject to (i.e., 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.
Carried interest is comprised of preferential allocations of profits recognizable when the return on assets of our individual managed fund of funds and direct venture funds exceeds certain performance targets and is payable to us, as the general partners of the managed funds. The carried interest we earn is often shared with employees, who are also members of the general partner entities. We record carried interest on a quarterly basis by measuring fund performance to date versus the performance target. For our unconsolidated managed funds, carried interest is recorded as gains on investment securities, net. For our consolidated managed funds, it is recorded as a component of net income attributable to noncontrolling interests. Carried interest allocated to others is recorded as a component of net income attributable to noncontrolling interests. Any carried interest paid to us (or our employees) may be subject to reversal to the extent fund performance declines to a level where inception to date carried interest is lower than actual payments made by the funds. The limited partnership agreements for our funds provide that carried interest is generally not paid to the general partners until the funds have provided a full return of contributed capital to the limited partners. Accrued, but unpaid carried interest may be subject to reversal to the extent that the fund performance declines to a level where inception-to-date carried interest is less than prior amounts recognized. Carried interest income is accounted for under an ownership model based on ASC 323 — Equity Method of Accounting and ASC 810 — Consolidation.
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed with the objective of earning an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. Though infrequent, sales of debt securities in our AFS securities portfolio may result in net gains or losses and are conducted pursuant to the guidelines of our investment policy related to the management of our liquidity position and interest rate risk.
Gains on investment securities are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our investment-related activities. A summary of gains and losses on investment securities for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
(Losses) gains on non-marketable and other equity securities, net | | $ | (15,110 | ) | | $ | 32,658 |
|
Gains (losses) on sales of available-for-sale securities, net | | 61,165 |
| | (3,630 | ) |
Total gains on investment securities, net | | $ | 46,055 |
| | $ | 29,028 |
|
Gains on equity warrant assets, net
In connection with negotiating credit facilities and certain other services, we often obtain rights to acquire stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science/healthcare industries. Any changes in fair value from the grant date fair value of equity warrant assets will be recognized as increases or decreases to other assets on our balance sheet and as net gains or losses on equity warrant assets, in noninterest income, a component of consolidated net income. Gains on equity warrant assets are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities. A summary of net gains on equity warrant assets for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
Equity warrant assets: | | | | |
Gains on exercises, net | | $ | 19,193 |
| | $ | 5,482 |
|
Terminations | | (326 | ) | | (415 | ) |
Changes in fair value, net | | (5,472 | ) | | 16,238 |
|
Total net gains on equity warrant assets | | $ | 13,395 |
| | $ | 21,305 |
|
Client investment fees
Client investment fees include fees earned from discretionary investment management services for substantially all clients, managing clients’ portfolios based on their investment policies, strategies and objectives and investment advisory fees. Revenue is recognized on a monthly basis upon completion of our performance obligation and consideration is typically received in the subsequent month. Included in our sweep money market fees are Rule 12(b)-1 fees, revenue sharing and customer transactional-based fees. Rule 12(b)-1 fees and revenue sharing are recognized as earned based on client funds that are invested in the period, typically monthly. Transactional based fees are earned and recognized on fixed income securities when the transaction is executed on the clients' behalf. Amounts paid to third-party service providers are predominantly expensed, such that client investment fees are recorded gross of payments made to third parties. A summary of client investment fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Client investment fees by type: | | | | |
Sweep money market fees | | $ | 23,049 |
| | $ | 26,544 |
|
Asset management fees (1) | | 9,137 |
| | 6,671 |
|
Repurchase agreement fees | | 11,207 |
| | 11,267 |
|
Total client investment fees (2) | | $ | 43,393 |
| | $ | 44,482 |
|
| |
(1) | Represents fees earned from investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management. |
| |
(2) | Represents fees earned on client investment funds which are maintained at third-party financial institutions and are not recorded on our balance sheet. |
Foreign exchange fees
Foreign exchange fees represent the income differential between purchases and sales of foreign currency on behalf of our clients, primarily from spot contracts. Foreign exchange spot contract fees are recognized upon the completion of the single performance obligation, the execution of a spot trade in exchange for a fee. In line with customary business practice, the legal right transfers to the client upon execution of a foreign exchange contract on the trade date, and as such, we currently recognize our fees based on the trade date and the transactions are typically settled within two business days.
Forward contract and option premium fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities. A summary of foreign exchange fee income by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
Foreign exchange fees by instrument type: | | | | |
Spot contract commissions | | $ | 40,934 |
| | $ | 35,029 |
|
Forward contract commissions | | 6,339 |
| | 2,995 |
|
Option premium fees | | 232 |
| | 24 |
|
Total foreign exchange fees | | $ | 47,505 |
| | $ | 38,048 |
|
Credit card fees
Credit card fees include interchange income from credit and debit cards and fees earned from processing transactions for merchants. Interchange income is earned after satisfying our performance obligation of providing nightly settlement services to a payment network. Costs related to rewards programs are recorded when the rewards are earned by the customer and presented as a reduction to interchange fee income. Rewards programs continue to be accounted for under ASC 310 - Receivables. Our performance obligations for merchant service fees are to transmit data and funds between the merchant and the payment network. Credit card interchange and merchant service fees are earned daily upon completion of transaction settlement services.
Annual card service fees are recognized on a straight-line basis over a 12-month period and continue to be accounted for under ASC 310 - Receivables.
A summary of credit card fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
Credit card fees by instrument type: | | | | |
Card interchange fees, net | | $ | 21,775 |
| | $ | 21,393 |
|
Merchant service fees | | 5,027 |
| | 4,534 |
|
Card service fees | | 1,502 |
| | 1,556 |
|
Total credit card fees | | $ | 28,304 |
| | $ | 27,483 |
|
Deposit service charges
Deposit service charges include fees earned from performing cash management activities and other deposit account services. Deposit services include, but are not limited to, the following: receivables services, which include merchant services, remote capture, lockbox, electronic deposit capture, and fraud control services. Payment and cash management products and services include wire transfer and automated clearing house payment services to enable clients to transfer funds more quickly, as well as business bill pay, business credit and debit cards, account analysis, and disbursement services. Deposit service charges are recognized over the period in which the related performance obligation is provided, generally on a monthly basis, and are presented in the "Disaggregation of revenue from contracts with customers"table below.
Lending related fees
Unused commitment fees, minimum finance fees and unused line fees are recognized as earned on a monthly basis. Fees that qualify for syndication treatment are recognized at the completion of the syndicated loan deal for which the fees were received. Lending related fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our lending-related activities. A summary of lending related fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
Lending related fees by instrument type: | | | | |
Unused commitment fees | | $ | 8,406 |
| | $ | 9,670 |
|
Other | | 4,719 |
| | 4,267 |
|
Total lending related fees | | $ | 13,125 |
| | $ | 13,937 |
|
Letters of credit and standby letters of credit fees
Commercial and standby letters of credit represent conditional commitments issued by us on behalf of a client to guarantee the performance of the client to a third party when certain specified future events have occurred. Fees generated from letters of credit and standby letters of credit are deferred as a component of other liabilities and recognized in noninterest income over the commitment period using the straight-line method, based on the likelihood that the commitment being drawn down will be remote. Letters of credit and standby letters of credit fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our lending related activities.
Investment banking revenue
The Company earns investment banking revenue from clients for providing services related to securities underwriting, private placements and advisory services on strategic matters such as mergers and acquisitions. Underwriting fees are attributable to public and private offerings of equity and debt securities and are recognized at the point in time when the offering has been deemed to be completed by the lead manager of the underwriting group. Once the offering is completed, the performance obligation has been satisfied and the Company recognizes the applicable management fee as well the underwriting fee, net of consideration payable to customers. The Company recognizes private placement fees at the point in time when the private placement is completed, which is generally when the client accepts capital from the fund raise. Advisory fees from mergers and acquisitions engagements are generally recognized at the point in time when the related transaction is completed. Expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other deal-related expenses are expensed as incurred. The Company has determined that it acts as principal in the majority of these transactions and therefore presents expenses gross within other operating expenses.
A summary of investment banking revenue by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Investment banking revenue: | | | | |
Underwriting fees | | $ | 31,290 |
| | $ | 35,772 |
|
Advisory fees | | 15,487 |
| | 12,273 |
|
Private placements and other | | 90 |
| | 1,750 |
|
Total investment banking revenue | | $ | 46,867 |
| | $ | 49,795 |
|
Commissions
Commissions include commissions received from customers for the execution of agency-based brokerage transactions in listed and over-the-counter equities. The execution of each trade order represents a distinct performance obligation and the transaction price is fixed at the point in time or trade order execution. Trade execution is satisfied at the point in time that the customer has control of the asset and as such, fees are recorded on a trade date basis. Commissions are presented in the "Disaggregation of revenue from contracts with customers"table below.
Other
Other noninterest income primarily includes income from fund management fees and service revenue. Fund management fees are comprised of fees charged directly to our managed funds of funds and direct venture funds. Fund management fees are based upon the contractual terms of the limited partnership agreements and are generally recognized as earned over the specified contract period, which is generally equal to the life of the individual fund. Fund management fees are calculated as a percentage of committed capital and collected in advance and are received quarterly. Fund management fees for certain of our limited partnership agreements are calculated as a percentage of distributions made by the funds and revenue is recorded only at the time of a distribution event. As distribution events are not predetermined for these certain funds, management fees are considered variable and constrained under ASC 606.
Other service revenue primarily consists of dividend income on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest and other fee income. We recognize revenue when our performance obligations are met and record revenues on a daily/monthly, quarterly, semi-annual or annual basis. For event driven revenue sources, we recognize revenue when: (i) persuasive evidence of an arrangement exists, (ii) we have performed the service, provided we have no other remaining obligations to the customer, (iii) the fee is fixed or determinable and (iv) collectability is probable.
A summary of other noninterest income by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Other noninterest income by instrument type: | | | | |
Fund management fees | | $ | 7,908 |
| | $ | 8,041 |
|
Net losses on revaluation of foreign currency instruments, net of foreign exchange forward contracts (1) | | (244 | ) | | (336 | ) |
Other service revenue | | 3,473 |
| | 4,192 |
|
Total other noninterest income | | $ | 11,137 |
| | $ | 11,897 |
|
| |
(1) | Represents the net revaluation of client and internal foreign currency denominated financial instruments. We enter into client foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client and internal foreign currency denominated financial instruments. |
Disaggregation of revenue from contracts with customers
The following tables present our revenues from contracts with customers disaggregated by revenue source and segment for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 (Dollars in thousands) | | Global Commercial Bank (2) | | SVB Private Bank | | SVB Capital (2) | | SVB Leerink (2) | | Other Items | | Total |
Revenue from contracts with customers: | | | | | | | | | | | | |
Client investment fees | | $ | 42,736 |
| | $ | 657 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 43,393 |
|
Spot contract commissions | | 40,675 |
| | 161 |
| | — |
| | — |
| | 98 |
| | 40,934 |
|
Card interchange fees, gross | | 35,724 |
| | 7 |
| | — |
| | — |
| | 566 |
| | 36,297 |
|
Merchant service fees | | 5,027 |
| | — |
| | — |
| | — |
| | — |
| | 5,027 |
|
Deposit service charges | | 24,238 |
| | 27 |
| | — |
| | — |
| | 324 |
| | 24,589 |
|
Investment banking revenue | | — |
| | — |
| | — |
| | 46,867 |
| | — |
| | 46,867 |
|
Commissions | | — |
| | ��� |
| | — |
| | 16,022 |
| | — |
| | 16,022 |
|
Fund management fees | | — |
| | — |
| | 6,478 |
| | 1,430 |
| | — |
| | 7,908 |
|
Correspondent bank rebates | | 1,403 |
| | — |
| | — |
| | — |
| | — |
| | 1,403 |
|
Total revenue from contracts with customers | | $ | 149,803 |
| | $ | 852 |
| | $ | 6,478 |
| | $ | 64,319 |
| | $ | 988 |
| | $ | 222,440 |
|
Revenues outside the scope of ASC 606 (1) | | 17,031 |
| | 48 |
| | (1,560 | ) | | (1,642 | ) | | 65,617 |
| | 79,494 |
|
Total noninterest income | | $ | 166,834 |
| | $ | 900 |
| | $ | 4,918 |
| | $ | 62,677 |
| | $ | 66,605 |
| | $ | 301,934 |
|
| |
(1) | Amounts are accounted for under separate guidance than ASC 606. |
| |
(2) | Global Commercial Bank’s, SVB Capital’s and SVB Leerink's components of noninterest income are shown net of noncontrolling interests. Noncontrolling interest is included within “Other Items." |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 (Dollars in thousands) | | Global Commercial Bank (2) | | SVB Private Bank | | SVB Capital (2) | | SVB Leerink (2) | | Other Items | | Total |
Revenue from contracts with customers: | | | | | | | | | | | | |
Client investment fees (3) | | $ | 44,102 |
| | $ | 380 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 44,482 |
|
Spot contract commissions | | 34,806 |
| | 122 |
| | — |
| | — |
| | 101 |
| | 35,029 |
|
Card interchange fees, gross | | 38,715 |
| | — |
| | — |
| | — |
| | 147 |
| | 38,862 |
|
Merchant service fees | | 4,534 |
| | — |
| | — |
| | — |
| | — |
| | 4,534 |
|
Deposit service charges | | 20,793 |
| | 35 |
| | — |
| | — |
| | 111 |
| | 20,939 |
|
Investment banking revenue | | — |
| | — |
| | — |
| | 49,795 |
| | — |
| | 49,795 |
|
Commissions | | — |
| | — |
| | — |
| | 14,108 |
| | — |
| | 14,108 |
|
Fund management fees | | — |
| | — |
| | 6,659 |
| | 1,382 |
| | — |
| | 8,041 |
|
Correspondent bank rebates | | 1,467 |
| | — |
| | — |
| | — |
| | — |
| | 1,467 |
|
Total revenue from contracts with customers | | $ | 144,417 |
| | $ | 537 |
| | $ | 6,659 |
| | $ | 65,285 |
| | $ | 359 |
| | $ | 217,257 |
|
Revenues outside the scope of ASC 606 (1) | | 8,444 |
| | (27 | ) | | 18,186 |
| | 2,832 |
| | 33,684 |
| | 63,119 |
|
Total noninterest income | | $ | 152,861 |
| | $ | 510 |
| | $ | 24,845 |
| | $ | 68,117 |
| | $ | 34,043 |
| | $ | 280,376 |
|
| |
(1) | Amounts are accounted for under separate guidance than ASC 606. |
| |
(2) | Represents theGlobal Commercial Bank’s and SVB Capital’s components of noninterest income are shown net revaluation of foreign currency denominated financial instruments issued and held by us, primarily loans, deposits and cash. We enter into internal foreign exchange forward contracts to economically reduce our foreign exchange exposure related to these foreign currency denominated financial instruments issued and held by us.noncontrolling interests. Noncontrolling interest is included within “Other Items." |
| |
(3) | Includes dividendsFor the three months ended March 31, 2019, the amount of client investment fees previously reported as "Other Items" has been correctly allocated to the reportable segment "Global Commercial Bank" to properly reflect the source of such revenue. The correction of this immaterial error had no impact on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest and other fee income.the "Total" amount of client investment fees. |
The timing of revenue recognition may differ from the timing of cash settlements or invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, and unearned revenue when revenue is recognized subsequent to receipt of consideration. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. During the three months ended March 31, 2020 and 2019, changes in our contract assets, contract liabilities and receivables were not material. Additionally, revenues recognized during the three months ended March 31, 2020 and 2019 that were included in the corresponding contract liability balance at the beginning of the periods were not material.
| |
13. | Other Noninterest Expense |
A summary of other noninterest expense for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Lending and other client related processing costs | | $ | 9,158 |
| | $ | 5,177 |
|
Correspondent bank fees | | 3,986 |
| | 3,744 |
|
Investment banking activities | | 3,030 |
| | 4,185 |
|
Trade order execution costs | | 2,745 |
| | 2,516 |
|
Data processing services | | 3,454 |
| | 2,899 |
|
Telephone | | 2,227 |
| | 2,741 |
|
Dues and publications | | 1,130 |
| | 1,524 |
|
Postage and supplies | | 856 |
| | 770 |
|
Other | | 14,117 |
| | 9,980 |
|
Total other noninterest expense | | $ | 40,703 |
| | $ | 33,536 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Lending and other client related processing costs | | $ | 6,935 |
| | $ | 5,885 |
| | $ | 18,806 |
| | $ | 13,721 |
|
Telephone | | 2,518 |
| | 2,460 |
| | 7,892 |
| | 7,109 |
|
Data processing services | | 2,244 |
| | 2,137 |
| | 7,254 |
| | 6,353 |
|
Dues and publications | | 883 |
| | 809 |
| | 2,355 |
| | 2,258 |
|
Postage and supplies | | 612 |
| | 598 |
| | 2,013 |
| | 2,172 |
|
Other | | 4,872 |
| | 3,644 |
| | 16,350 |
| | 12,679 |
|
Total other noninterest expense | | $ | 18,064 |
| | $ | 15,533 |
| | $ | 54,670 |
| | $ | 44,292 |
|
We have three4 reportable segments for management reporting purposes: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Capital.Leerink. The results of our operating segments are based on our internal management reporting process.
Our Global Commercial Bank and SVB Private Bank segments' primary source of revenue is from net interest income, which is primarily the difference between interest earned on loans, net of funds transfer pricing (“FTP”), and interest paid on deposits, net of FTP. Accordingly, these segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which a funding credit is given for deposits raised, and a funding charge is made for loans funded.funded loans. FTP is calculated at an instrument level based on account characteristics.
We also evaluate performance based on provision for credit losses, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. In calculating each operating segment’s noninterest expense, we consider the direct costs incurred by the operating segment as well as certain allocated direct costs. As part of this review, we allocate certain corporate overhead costs to a corporate account. We do not allocate income taxestax expense or the provision for
unfunded credit commitments (included in provision for credit losses) to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore, period-end asset balances are not presented for segment reporting purposes. Changes in an individual client’s primary relationship designation have resulted, and in the future may result, in the inclusion of certain clients in different segments in different periods.
Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, our internal management reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. Our management reporting process measures the performance of our operating segments based on our internal operating structure, which is subject to change from time to time, and is not necessarily comparable with similar information for other financial services companies.
For reporting purposes, SVB Financial Group has three4 operating segments for which we report our financial information:
Global Commercial Bank is comprised of results from the following:
| |
• | Global Commercial Bank is comprised of results from the following: |
| |
◦ | Our Commercial Bank products and services are provided by the Bank and its subsidiaries to commercial clients in the technology, life science/healthcare and private equity/venture capital industries. The Bank provides solutions to the financial needs of commercial clients through credit, global treasury management, foreign exchange, global trade finance, and other services. It servesWe broadly serve clients within the United States,U.S., as well as non-U.S. clients in key international innovation markets. In addition, the Bank and its subsidiaries offer a variety of investment services and solutions to its clients that enable them to effectively manage their assets. |
| |
◦ | Our Global Funds Banking (formerly Private EquityEquity) Division provides banking products and services primarily to our private equity and venture capital clients. |
| |
◦ | Our SVBWine practice provides banking products and services to our premium wine industry clients, including vineyard development loans.
|
| |
◦ | SVB Analytics previously provided equity valuation services and currently provides research for investors and companies in the global innovation economy. In September 2017, SVB Analytics sold its equity valuation services business.
|
| |
◦ | Debt Fund Investments is comprised of our investments in certain debt funds in which we are a strategic investor. |
| |
• | SVB Private Bank is the private banking division of the Bank, which provides a range of personal financial solutions for consumers. Our clients are primarily private equity/venture capital professionals and executive leaders of the innovation companies they support. We offer a customized suite of 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, as well as cash and wealth management services. In addition, we provide real estate secured loans to eligible employees through our Employee Home Ownership Program. |
| |
• | SVB Capital is the funds management business of SVB Financial Group, which focuses primarily on venture capital investments. SVB Capital manages funds (primarily venture capital funds) on behalf of third-party limited partners and, on a more limited basis, SVB Financial Group. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. SVB Capital generates income for the Company primarily from investment returns (including carried interest allocations) and management fees. |
| |
• | SVB Leerink is an investment bank specializing in the equity and convertible capital markets, mergers and acquisitions, equity research and sales and trading for growth and innovation-minded healthcare and life science companies and operates as a wholly-owned subsidiary of SVB Financial. SVB Leerink provides investment banking services across all subsectors of healthcare including: biotechnology, pharmaceuticals, medical devices, diagnostic and life science tools, healthcare services and digital health. SVB Leerink focuses on two primary lines of business: |
SVB Private Bank is the private(i) investment banking division of the Bank, which provides a range of personalfocused on providing companies with capital-raising services, financial solutions for consumers. Our clients are primarily private equity/venture capital professionalsadvice on mergers and executive leaders of the innovation companies they support. We offer a customized suiteacquisitions, sales and trading services and equity research, and (ii) sponsorship of 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, as well as cash and wealth management services.
SVB Capital is the funds management business of SVBFG, which focuses primarily on venture capital investments. SVB Capital manages funds (primarily venture capital funds) on behalf of third party limited partners and, on a more limited basis, SVB Financial Group. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capitalinvestment funds. SVB Capital generates income for the Company primarily from investment returns (including carried interest allocations) and management fees.
The summary financial results of our operating segments are presented along with a reconciliation to our consolidated interim results.
Our segment information for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
| | (Dollars in thousands) | | Global Commercial Bank (1) | | SVB Private Bank | | SVB Capital (1) | | Other Items (2) | | Total | | Global Commercial Bank (1) | | SVB Private Bank | | SVB Capital (1) | | SVB Leerink (1) | | Other Items (2) | | Total |
Three months ended September 30, 2017 | | | | | | | | | | | |
Three months ended March 31, 2020 | | | | | | | | | | | | | |
Net interest income | | $ | 337,860 |
| | $ | 14,600 |
| | $ | 15 |
| | $ | 21,499 |
| | $ | 373,974 |
| | $ | 463,835 |
| | $ | 15,164 |
| | $ | 21 |
| | $ | 201 |
| | $ | 44,916 |
| | $ | 524,137 |
|
Provision for credit losses | | (20,874 | ) | | (1,535 | ) | | — |
| | (1,113 | ) | | (23,522 | ) | |
(Provision for) reduction of credit losses | | | (194,411 | ) | | (54,490 | ) | | — |
| | — |
| | 5,421 |
| | (243,480 | ) |
Noninterest income | | 97,227 |
| | 460 |
| | 13,913 |
| | 47,178 |
| | 158,778 |
| | 166,834 |
| | 900 |
| | 4,918 |
| | 62,677 |
| | 66,605 |
| | 301,934 |
|
Noninterest expense (3) | | (176,964 | ) | | (4,706 | ) | | (4,873 | ) | | (71,218 | ) | | (257,761 | ) | | (224,855 | ) | | (10,090 | ) | | (8,585 | ) | | (62,037 | ) | | (94,018 | ) | | (399,585 | ) |
Income (loss) before income tax expense (4) | | $ | 237,249 |
| | $ | 8,819 |
| | $ | 9,055 |
| | $ | (3,654 | ) | | $ | 251,469 |
| | $ | 211,403 |
| | $ | (48,516 | ) | | $ | (3,646 | ) | | $ | 841 |
| | $ | 22,924 |
| | $ | 183,006 |
|
Total average loans, net of unearned income | | $ | 18,807,616 |
| | $ | 2,499,507 |
| | $ | — |
| | $ | 277,769 |
| | $ | 21,584,892 |
| |
Total average assets (5) | | 47,817,114 |
| | 2,538,400 |
| | 323,417 |
| | (883,565 | ) | | 49,795,366 |
| |
Total average loans, amortized cost | | | $ | 29,137,484 |
| | $ | 3,857,478 |
| | $ | — |
| | $ | — |
| | $ | 665,766 |
| | $ | 33,660,728 |
|
Total average assets (5) (6) | | | 61,813,129 |
| | 3,892,400 |
| | 447,201 |
| | 483,648 |
| | 5,770,790 |
| | 72,407,168 |
|
Total average deposits | | 42,376,024 |
| | 1,231,390 |
| | — |
| | 435,428 |
| | 44,042,842 |
| | 59,217,433 |
| | 1,922,663 |
| | — |
| | — |
| | 668,135 |
| | 61,808,231 |
|
Three months ended September 30, 2016 | | | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | | | | | |
Net interest income | | $ | 262,484 |
| | $ | 13,298 |
| | $ | 1 |
| | $ | 13,378 |
| | $ | 289,161 |
| | $ | 445,876 |
| | $ | 11,981 |
| | $ | 6 |
| | $ | 442 |
| | $ | 54,581 |
| | $ | 512,886 |
|
Provision for credit losses | | (16,974 | ) | | (1,976 | ) | | — |
| | (1,054 | ) | | (20,004 | ) | |
Noninterest income | | 79,226 |
| | 664 |
| | 30,619 |
| | 33,631 |
| | 144,140 |
| |
(Provision for) reduction of credit losses | | | (26,805 | ) | | 984 |
| | — |
| | — |
| | (2,730 | ) | | (28,551 | ) |
Noninterest income (7) | | | 152,861 |
| | 510 |
| | 24,845 |
| | 68,117 |
| | 34,043 |
| | 280,376 |
|
Noninterest expense (3) | | (159,479 | ) | | (3,122 | ) | | (3,924 | ) | | (54,248 | ) | | (220,773 | ) | | (198,683 | ) | | (7,414 | ) | | (5,782 | ) | | (60,540 | ) | | (93,245 | ) | | (365,664 | ) |
Income (loss) before income tax expense (4) | | $ | 165,257 |
| | $ | 8,864 |
| | $ | 26,696 |
| | $ | (8,293 | ) | | $ | 192,524 |
| | $ | 373,249 |
| | $ | 6,061 |
| | $ | 19,069 |
| | $ | 8,019 |
| | $ | (7,351 | ) | | $ | 399,047 |
|
Total average loans, net of unearned income | | $ | 16,357,099 |
| | $ | 2,074,982 |
| | $ | — |
| | $ | 215,113 |
| | $ | 18,647,194 |
| |
Total average assets (5) | | 40,828,549 |
| | 2,096,237 |
| | 325,321 |
| | 201,222 |
| | 43,451,329 |
| |
Total average loans, amortized cost | | | $ | 24,798,197 |
| | $ | 3,085,883 |
| | $ | — |
| | $ | — |
| | $ | 503,992 |
| | $ | 28,388,072 |
|
Total average assets (5) (6) (8) | | | 50,132,098 |
| | 3,109,275 |
| | 378,732 |
| | 300,332 |
| | 3,608,000 |
| | 57,528,437 |
|
Total average deposits | | 36,484,125 |
| | 1,115,446 |
| | — |
| | 310,183 |
| | 37,909,754 |
| | 47,596,868 |
| | 1,491,234 |
| | — |
| | — |
| | 626,107 |
| | 49,714,209 |
|
Nine months ended September 30, 2017 | | | | | | | | | | | |
Net interest income | | $ | 924,789 |
| | $ | 42,952 |
| | $ | 41 |
| | $ | 58,881 |
| | $ | 1,026,663 |
| |
Provision for credit losses | | (65,007 | ) | | (2,266 | ) | | — |
| | (2,789 | ) | | (70,062 | ) | |
Noninterest income | | 260,650 |
| | 1,715 |
| | 45,707 |
| | 96,893 |
| | 404,965 |
| |
Noninterest expense (3) | | (525,043 | ) | | (12,675 | ) | | (14,537 | ) | | (194,385 | ) | | (746,640 | ) | |
Income (loss) before income tax expense (4) | | $ | 595,389 |
| | $ | 29,726 |
| | $ | 31,211 |
| | $ | (41,400 | ) | | $ | 614,926 |
| |
Total average loans, net of unearned income | | $ | 18,125,020 |
| | $ | 2,371,027 |
| | $ | — |
| | $ | 230,420 |
| | $ | 20,726,467 |
| |
Total average assets (5) | | 45,414,432 |
| | 2,403,777 |
| | 333,439 |
| | (586,597 | ) | | 47,565,051 |
| |
Total average deposits | | 40,398,413 |
| | 1,289,990 |
| | — |
| | 373,232 |
| | 42,061,635 |
| |
Nine months ended September 30, 2016 | | | | | | | | | | | |
Net interest income (expense) | | $ | 773,342 |
| | $ | 40,508 |
| | $ | (51 | ) | | $ | 40,119 |
| | $ | 853,918 |
| |
Provision for credit losses | | (86,143 | ) | | (2,481 | ) | | — |
| | (1,601 | ) | | (90,225 | ) | |
Noninterest income | | 231,295 |
| | 2,052 |
| | 44,492 |
| | 65,211 |
| | 343,050 |
| |
Noninterest expense (3) | | (462,234 | ) | | (9,481 | ) | | (11,521 | ) | | (141,375 | ) | | (624,611 | ) | |
Income (loss) before income tax expense (4) | | $ | 456,260 |
| | $ | 30,598 |
| | $ | 32,920 |
| | $ | (37,646 | ) | | $ | 482,132 |
| |
Total average loans, net of unearned income | | $ | 15,769,964 |
| | $ | 1,978,175 |
| | $ | — |
| | $ | 207,358 |
| | $ | 17,955,497 |
| |
Total average assets (5) | | 41,020,808 |
| | 1,999,455 |
| | 334,328 |
| | 315,125 |
| | 43,669,716 |
| |
Total average deposits | | 37,002,027 |
| | 1,120,575 |
| | — |
| | 321,388 |
| | 38,443,990 |
| |
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(1) | Global Commercial Bank’s, SVB Capital’s and SVB Capital’sLeerink's components of net interest income, noninterest income, noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented. Noncontrolling interest is included within “Other Items”.Items." |
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(2) | The “Other Items” column reflects the adjustments necessary to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP. Net interest income consists primarily of interest earned from our fixed income investment portfolio, net of FTP. Noninterest income consists primarily of gains or losses on equity warrant assets, and gains or losses on the sale of fixed income securities.AFS securities and gains or losses on equity securities from exercised warrant assets. Noninterest expense consists primarily of expenses associated with corporate support functions such as finance, human resources, marketing, legal and other expenses. |
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(3) | The Global Commercial Bank segment includes direct depreciation and amortization of $5.95.5 million and $6.44.9 million for the three months endedSeptember 30, 2017March 31, 2020 and 2016, respectively, and $19.1 million and $18.3 million for the nine months endedSeptember 30, 2017 and 20162019, respectively. |
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(4) | The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates. |
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(5) | Total average assets equal the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for each segment to reconcile the results to the consolidated financial statements prepared in conformity with GAAP. |
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(6) | Included in the total average assets for SVB Leerink is goodwill of $137.8 million for both the three months ended March 31, 2020 and 2019. |
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(7) | For the three months ended March 31, 2019, amounts of client investment fees included in the line item "Noninterest Income" previously reported as "Other Items" have been correctly allocated to our reportable segment "Global Commercial Bank" to properly reflect the source of such revenue. The correction of this immaterial error had no impact on the "Total" amount of noninterest income. |
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(8) | For the three months ended March 31, 2019, amounts for average assets previously reported as "Other Items" have been correctly allocated to the reportable segments "Global Commercial Bank" and “Private Bank” to properly reflect the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for “Global Commercial Bank” and “Private Bank.” The correction of this immaterial error had no impact on the "Total" amount of average assets. |
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12.15. | Off-Balance Sheet Arrangements, Guarantees and Other Commitments |
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract.
Commitments to Extend Credit
The following table summarizes information related to our commitments to extend credit at September 30, 2017March 31, 2020 and December 31, 20162019:
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
Loan commitments available for funding: (1) | | | | | | | | |
Fixed interest rate commitments | | $ | 1,462,728 |
| | $ | 1,475,179 |
| | $ | 433,254 |
| | $ | 2,434,042 |
|
Variable interest rate commitments | | 13,037,817 |
| | 13,572,161 |
| | 21,325,138 |
| | 19,309,317 |
|
Total loan commitments available for funding | | 14,500,545 |
| | 15,047,340 |
| | 21,758,392 |
| | 21,743,359 |
|
Commercial and standby letters of credit (2) | | 1,841,385 |
| | 1,695,856 |
| | 2,909,918 |
| | 2,778,561 |
|
Total unfunded credit commitments | | $ | 16,341,930 |
| | $ | 16,743,196 |
| | $ | 24,668,310 |
| | $ | 24,521,920 |
|
Commitments unavailable for funding (3) | | $ | 2,209,680 |
| | $ | 1,719,524 |
| | $ | 2,312,967 |
| | $ | 3,051,075 |
|
Allowance for unfunded credit commitments (4) | | 48,172 |
| | 45,265 |
| | 84,690 |
| | 67,656 |
|
| |
(1) | Represents commitments which are available for funding, due to clients meeting all collateral, compliance and financial covenants required under loan commitment agreements. |
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(2) | See below for additional information on our commercial and standby letters of credit. |
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(3) | Represents commitments which are currently unavailable for funding due to clients failing to meet all collateral, compliance and financial covenants under loan commitment agreements. |
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(4) | Our allowance for credit losses for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit. |
Commercial and Standby Letters of Credit
The table below summarizes our commercial and standby letters of credit at September 30, 2017March 31, 2020. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Expires In One Year or Less | | Expires After One Year | | Total Amount Outstanding | | Maximum Amount of Future Payments |
Financial standby letters of credit | | $ | 2,701,150 |
| | $ | 76,538 |
| | $ | 2,777,688 |
| | $ | 2,777,688 |
|
Performance standby letters of credit | | 105,359 |
| | 17,406 |
| | 122,765 |
| | 122,765 |
|
Commercial letters of credit | | 9,369 |
| | 96 |
| | 9,465 |
| | 9,465 |
|
Total | | $ | 2,815,878 |
| | $ | 94,040 |
| | $ | 2,909,918 |
| | $ | 2,909,918 |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Expires In One Year or Less | | Expires After One Year | | Total Amount Outstanding | | Maximum Amount of Future Payments |
Financial standby letters of credit | | $ | 1,666,751 |
| | $ | 54,244 |
| | $ | 1,720,995 |
| | $ | 1,720,995 |
|
Performance standby letters of credit | | 85,220 |
| | 7,042 |
| | 92,262 |
| | 92,262 |
|
Commercial letters of credit | | 28,128 |
| | — |
| | 28,128 |
| | 28,128 |
|
Total | | $ | 1,780,099 |
| | $ | 61,286 |
| | $ | 1,841,385 |
| | $ | 1,841,385 |
|
Deferred fees related to financial and performance standby letters of credit were $10$16.0 million at both September 30, 2017March 31, 2020 and $17.2 million at December 31, 2016.2019. At September 30, 2017,March 31, 2020, collateral in the form of cash of $926 million$1.7 billion was available to us to reimburse losses, if any, under financial and performance standby letters of credit.
Commitments to Invest in Venture Capital and Private Equity Funds
Subject to applicable regulatory requirements, including the Volcker Rule, weWe make commitments to invest in venture capital and private equity funds, which generally makesmake investments in 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 call most of the capital commitments over 5 to 7 years, and in certain cases, the funds may not call 100% of committed capital. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total capital commitments, unfunded capital commitments, and our ownership percentage in each fund at September 30, 2017March 31, 2020:
| | (Dollars in thousands) | | SVBFG Capital Commitments | | SVBFG Unfunded Commitments | | SVBFG Ownership of each Fund (3) | | SVBFG Capital Commitments | | SVBFG Unfunded Commitments | | SVBFG Ownership of each Fund (3) |
CP I, LP | | $ | 6,000 |
| | $ | 270 |
| | 10.7 | % | | $ | 6,000 |
| | $ | 270 |
| | 10.7 | % |
CP II, LP (1) | | 1,200 |
| | 162 |
| | 5.1 |
| | 1,200 |
| | 162 |
| | 5.1 |
|
Shanghai Yangpu Venture Capital Fund (LP) | | 872 |
| | — |
| | 6.8 |
| |
Capital Preferred Return Fund, LP | | | 12,688 |
| | — |
| | 20.0 |
|
Growth Partners, LP | | | 24,670 |
| | 1,340 |
| | 33.0 |
|
Strategic Investors Fund, LP | | 15,300 |
| | 688 |
| | 12.6 |
| | 15,300 |
| | 688 |
| | 12.6 |
|
Strategic Investors Fund II, LP | | 15,000 |
| | 1,050 |
| | 8.6 |
| | 15,000 |
| | 1,050 |
| | 8.6 |
|
Strategic Investors Fund III, LP | | 15,000 |
| | 1,275 |
| | 5.9 |
| | 15,000 |
| | 1,275 |
| | 5.9 |
|
Strategic Investors Fund IV, LP | | 12,239 |
| | 2,325 |
| | 5.0 |
| | 12,239 |
| | 2,325 |
| | 5.0 |
|
Strategic Investors Fund V funds | | 515 |
| | 131 |
| | Various |
| | 515 |
| | 131 |
| | Various |
|
Capital Preferred Return Fund, LP | | 12,688 |
| | — |
| | 20.0 |
| |
Growth Partners, LP | | 24,670 |
| | 1,340 |
| | 33.0 |
| |
Other venture capital and private equity fund investments (equity method accounting) | | | 21,787 |
| | 5,732 |
| | Various |
|
Debt funds (equity method accounting) | | 58,493 |
| | — |
| | Various |
| | 58,493 |
| | — |
| | Various |
|
Other fund investments (2) | | 302,867 |
| | 11,360 |
| | Various |
| | 282,508 |
| | 6,049 |
| | Various |
|
Total | | $ | 464,844 |
| | $ | 18,601 |
| | | | $ | 465,400 |
| | $ | 19,022 |
| | |
| |
(1) | Our ownership includes direct ownership of 1.3 percent and indirect ownership interest of 3.8 percent through our investment in Strategic Investors Fund II, LP. |
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(2) | Represents commitments to 243202 funds (primarily venture capital funds) where our ownership interest is generally less than five5 percent of the voting interests of each such fund. |
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(3) | We are subject to the Volcker Rule, which restricts or limits us from sponsoring or having ownership interests in “covered” funds including venture capital and private equity funds. See “Business - Supervision and Regulation” under Part 1, Item 1 of Part I of our 20162019 Form 10-K. |
The following table details the amounts of remaining unfunded commitments to venture capital and private equity funds by our consolidated managed funds of funds (including our interest and the noncontrolling interests) at September 30, 2017March 31, 2020:
|
| | | | |
(Dollars in thousands) | | Unfunded Commitments |
Strategic Investors Fund, LP | | $ | 376 |
|
Capital Preferred Return Fund, LP | | 1,532 |
|
Growth Partners, LP | | 2,447 |
|
Total | | $ | 4,355 |
|
|
| | | | |
(Dollars in thousands) | | Unfunded Commitments |
Strategic Investors Fund, LP | | $ | 1,338 |
|
Capital Preferred Return Fund, LP | | 2,197 |
|
Growth Partners, LP | | 2,936 |
|
Total | | $ | 6,471 |
|
We are subject to income tax in the U.S. federal jurisdiction and various state and foreign jurisdictions and have identified our federal tax return and California tax returns as major tax filings. Our U.S. federal tax returns for 20142016 and subsequent tax years remain open to full examination. Our California tax returns for 20132016 and subsequent tax years remain open to full examination.
At September 30, 2017,March 31, 2020, our unrecognized tax benefit was $6.3$14.3 million, the recognition of which would reduce our income tax expense by $3.8$11.1 million. We do not expect that our unrecognized tax benefit will materially change in the next 12 months.
We recognize interest and penalties related to income tax matters as part of income before income taxes. Interest and penalties were not material for the three and nine months ended September 30, 2017.March 31, 2020.
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14.17. | Fair Value of Financial Instruments |
Fair Value Measurements
Our available-for-sale securities, derivative instruments and certain non-marketable and other equity securities are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our interim consolidated financial statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable and on the significance of those inputs in the fair value measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data and views of market participants. The three levels for measuring fair value are based on the reliability of inputs and are as follows:
Level 1
Fair value measurements based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. Assets utilizing Level 1 inputs include U.S. Treasury securities, foreign government debt securities, exchange-traded equity securities and certain marketable securities accounted for under fair value accounting.
Level 2
Fair value measurements based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Valuations for the available-for-sale securities are provided by independent pricing service providers who have experience in valuing these securities and by comparison to and/or average of quoted market prices obtained from independent brokers. We perform a monthly analysis on the values received from third parties to ensure 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 prices received from independent brokers represent a reasonable estimate of the fair value 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 determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. Below is a summary of the significant inputs used for each class of Level 2 assets and liabilities:
U.S. agency debentures: Fair value measurements of U.S. agency debentures are based on the characteristics specific to bonds held, such as issuer name, issuance date, coupon rate, maturity date and any applicable issuer call option features. Valuations are based on market spreads relative to similar term benchmark market interest rates, generally U.S. Treasury securities.
Agency-issued mortgage-backed securities: Agency-issued mortgage-backed securities are pools of individual conventional mortgage loans underwritten to U.S. agency standards with similar coupon rates, tenor, and other attributes such as geographic location, loan size and origination vintage. Fair value measurements of these securities are based on observable price adjustments relative to benchmark market interest rates taking into consideration estimated loan prepayment speeds.
Agency-issued collateralized mortgage obligations: Agency-issued collateralized mortgage obligations are structured into classes or tranches with defined cash flow characteristics and are collateralized by U.S. agency-issued mortgage pass-through securities. Fair value measurements of these securities incorporate similar characteristics of mortgage pass-through securities such as coupon rate, tenor, geographic location, loan size and origination vintage, in addition to incorporating the effect of estimated prepayment speeds on the cash flow structure of the class or tranche. These measurements incorporate observable market spreads over an estimated average life after considering the inputs listed above.
Agency-issued commercial mortgage-backed securities: Fair value measurements of these securities are based on spreads to benchmark market interest rates (usually U.S. Treasury rates or rates observable in the swaps market), prepayment speeds, loan default rate assumptions and loan loss severity assumptions on underlying loans.
Municipal bonds
Foreign exchange forward and notes: Bonds issued by municipal governments generally have stated coupon rates, final maturity datesoption contract assets and are subject to being called ahead of the final maturity date at the option of the issuer.liabilities: Fair value measurements
of these securitiesassets and liabilities are priced based on spreads to other municipal benchmark bonds with similar characteristics; or, relative to marketspot and forward foreign currency rates on U.S. Treasury bonds of similar maturity.and option volatility assumptions.
Interest rate derivative and interest rate swap assets and liabilities: Fair value measurements of interest rate derivatives and interest rate swaps are priced considering the coupon rate of the fixed leg of the contract and the variable coupon rate on the floating leg of the contract. Valuation is based on both spot and forward rates on the swap yield curve and the credit worthiness of the contract counterparty.
Foreign exchange forward and option contract assets and liabilities:Other equity securities: Fair value measurements of these assets and liabilitiesequity securities of public companies are priced based on spot and forward foreign currency rates and option volatility assumptions.quoted market prices less a discount if the securities are subject to certain sales restrictions. Certain sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sale restrictions which typically range from three to six months.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions.
Level 3
The fair value measurement is derived from valuation techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions we believe market participants would use in pricing the asset. The valuation techniques are consistent with the market approach, income approach and/or the cost approach used to measure fair value. Below is a summary of the valuation techniques used for each class of Level 3 assets:
Other ventureVenture capital investments:and private equity fund investments not measured at net asset value: Fair value measurements are based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. The significant unobservable inputs used in the fair value measurement include the information about each portfolio company, including actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Significant changes to any one of these inputs in isolation could result in a significant change in the fair value measurement,measurement; however, we generally consider all factors available through ongoing communication with the portfolio companies and venture capital fund managers to determine whether there are changes to the portfolio company or the environment that indicate a change in the fair value measurement.
Other securities: Fair value measurements of equity securities of public companies are priced based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Marketability discounts generally range from 10 percent to 20 percent depending on the duration of the sale restrictions which typically range from three to six months.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions. Modeled asset values are further adjusted by applying a discount of up to 20 percent for certain warrants that have lock-upcertain sales restrictions or other features that indicate a discount to fair value is warranted. As a lock-up term nears, and other sale restrictions are lifted, discounts are adjusted downward to zero percent 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.
It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon valuation techniques that use primarily market-based or independently-sourced market parameters, including interest rate yield curves, prepayment speeds, option volatilities and currency rates. Substantially all of our financial instruments use the foregoing methodologies, and are categorized as a Level 1 or Level 2 measurement in the fair value hierarchy. However, in certain cases, when market observable inputs for our valuation techniques may not be readily available, we are required to make judgments about assumptions we believe market participants would use in estimating the fair value of the financial instrument, and based on the significance of those judgments, the measurement may be determined to be a Level 3 fair value measurement.
The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. For inactive markets, there is little information, if any, to evaluate if individual transactions are orderly. Accordingly, we are required to estimate, based upon all available facts and circumstances, the degree to which orderly transactions are occurring and provide more weighting to price quotes that are based upon orderly transactions. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Accordingly, the degree of judgment exercised by management in determining fair value is greater for financial assets and liabilities categorized as Level 3.
The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017:March 31, 2020:
| | (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at September 30, 2017 | | Level 1 | | Level 2 | | Level 3 | | Balance at March 31, 2020 |
Assets: | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 7,498,340 |
| | $ | — |
| | $ | — |
| | $ | 7,498,340 |
| | $ | 4,043,840 |
| | $ | — |
| | $ | — |
| | $ | 4,043,840 |
|
U.S. agency debentures | | — |
| | 1,676,169 |
| | — |
| | 1,676,169 |
| | — |
| | 101,687 |
| | — |
| | 101,687 |
|
Foreign government debt securities | | | 22,152 |
| | — |
| | — |
| | 22,152 |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | | — |
| | 4,943,512 |
| | — |
| | 4,943,512 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | — |
| | 3,012,695 |
| | — |
| | 3,012,695 |
| | — |
| | 1,465,675 |
| | — |
| | 1,465,675 |
|
Agency-issued collateralized mortgage obligations—variable rate | | — |
| | 395,880 |
| | — |
| | 395,880 |
| |
Equity securities | | 802 |
| | 19,451 |
| | — |
| | 20,253 |
| |
Agency-issued commercial mortgage-backed securities | | | — |
| | 2,071,198 |
| | — |
| | 2,071,198 |
|
Total available-for-sale securities | | 7,499,142 |
| | 5,104,195 |
| | — |
| | 12,603,337 |
| | 4,065,992 |
| | 8,582,072 |
| | — |
| | 12,648,064 |
|
Non-marketable and other securities (fair value accounting): | | | | | | | | | |
Non-marketable and other equity securities (fair value accounting): | | | | | | | | | |
Non-marketable securities: | | | | | | | | | | | | | | | | |
Venture capital and private equity fund investments measured at net asset value | | — |
| | — |
| | — |
| | 128,768 |
| | — |
| | — |
| | — |
| | 257,132 |
|
Other venture capital investments (1) | | — |
| | — |
| | 1,897 |
| | 1,897 |
| |
Other securities (1) | | 392 |
| | — |
| | — |
| | 392 |
| |
Total non-marketable and other securities (fair value accounting) | | 392 |
| | — |
| | 1,897 |
| | 131,057 |
| |
Venture capital and private equity fund investments not measured at net asset value (1) | | | — |
| | — |
| | 134 |
| | 134 |
|
Other equity securities in public companies | | | 14,886 |
| | 12,013 |
| | — |
| | 26,899 |
|
Total non-marketable and other equity securities (fair value accounting) | | | 14,886 |
| | 12,013 |
| | 134 |
| | 284,165 |
|
Other assets: | | | | | | | | | | | | | | | | |
Foreign exchange forward and option contracts | | — |
| | 94,947 |
| | — |
| | 94,947 |
| | — |
| | 239,272 |
| | — |
| | 239,272 |
|
Equity warrant assets | | — |
| | 2,710 |
| | 139,075 |
| | 141,785 |
| | — |
| | 2,852 |
| | 149,858 |
| | 152,710 |
|
Client interest rate derivatives | | — |
| | 11,824 |
| | — |
| | 11,824 |
| | — |
| | 80,543 |
| | — |
| | 80,543 |
|
Total assets | | $ | 7,499,534 |
| | $ | 5,213,676 |
| | $ | 140,972 |
| | $ | 12,982,950 |
| | $ | 4,080,878 |
| | $ | 8,916,752 |
| | $ | 149,992 |
| | $ | 13,404,754 |
|
Liabilities: | | | | | | | | | | | | | | | | |
Foreign exchange forward and option contracts | | $ | — |
| | $ | 88,961 |
| | $ | — |
| | $ | 88,961 |
| | $ | — |
| | $ | 195,891 |
| | $ | — |
| | $ | 195,891 |
|
Client interest rate derivatives | | — |
| | 11,955 |
| | — |
| | 11,955 |
| | — |
| | 31,533 |
| | — |
| | 31,533 |
|
Total liabilities | | $ | — |
| | $ | 100,916 |
| | $ | — |
| | $ | 100,916 |
| | $ | — |
| | $ | 227,424 |
| | $ | — |
| | $ | 227,424 |
|
| |
(1) | Included in Level 1 and Level 3 assets are is $0.3 million and $1.7 million, respectively,120 thousand attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests. |
The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2016:2019:
| | (Dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2016 | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2019 |
Assets: | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 8,909,491 |
| | $ | — |
| | $ | — |
| | $ | 8,909,491 |
| | $ | 6,894,010 |
| | $ | — |
| | $ | — |
| | $ | 6,894,010 |
|
U.S. agency debentures | | — |
| | 2,078,375 |
| | — |
| | 2,078,375 |
| | — |
| | 99,547 |
| | — |
| | 99,547 |
|
Foreign government debt securities | | | 9,038 |
| | — |
| | — |
| | 9,038 |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | | — |
| | 4,148,791 |
| | — |
| | 4,148,791 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | — |
| | 1,152,665 |
| | — |
| | 1,152,665 |
| | — |
| | 1,538,343 |
| | — |
| | 1,538,343 |
|
Agency-issued collateralized mortgage obligations—variable rate | | — |
| | 474,283 |
| | — |
| | 474,283 |
| |
Equity securities | | 175 |
| | 5,422 |
| | — |
| | 5,597 |
| |
Agency-issued commercial mortgage-backed securities | | | — |
| | 1,325,190 |
| | — |
| | 1,325,190 |
|
Total available-for-sale securities | | 8,909,666 |
| | 3,710,745 |
| | — |
| | 12,620,411 |
| | 6,903,048 |
| | 7,111,871 |
| | — |
| | 14,014,919 |
|
Non-marketable and other securities (fair value accounting): | | | | | | | | | |
Non-marketable and other equity securities (fair value accounting): | | | | | | | | | |
Non-marketable securities: | | | | | | | | | | | | | | | | |
Venture capital and private equity fund investments measured at net asset value | | — |
| | — |
| | — |
| | 141,649 |
| | — |
| | — |
| | — |
| | 265,263 |
|
Other venture capital investments (1) | | — |
| | — |
| | 2,040 |
| | 2,040 |
| |
Other securities (1) | | 753 |
| | — |
| | — |
| | 753 |
| |
Total non-marketable and other securities (fair value accounting) | | 753 |
| | — |
| | 2,040 |
| | 144,442 |
| |
Venture capital and private equity fund investments not measured at net asset value (1) | | | — |
| | — |
| | 134 |
| | 134 |
|
Other equity securities in public companies | | | 17,290 |
| | 41,910 |
| | — |
| | 59,200 |
|
Total non-marketable and other equity securities (fair value accounting) | | | 17,290 |
| | 41,910 |
| | 134 |
| | 324,597 |
|
Other assets: | | | | | | | | | | | | | | | | |
Interest rate swaps | | — |
| | 810 |
| | — |
| | 810 |
| |
Foreign exchange forward and option contracts | | — |
| | 68,027 |
| | — |
| | 68,027 |
| | — |
| | 115,854 |
| | — |
| | 115,854 |
|
Equity warrant assets | | — |
| | 2,310 |
| | 128,813 |
| | 131,123 |
| | — |
| | 4,435 |
| | 161,038 |
| | 165,473 |
|
Interest rate swaps | | | — |
| | 22,676 |
| | — |
| | 22,676 |
|
Client interest rate derivatives | | — |
| | 10,110 |
| | — |
| | 10,110 |
| | — |
| | 28,811 |
| | — |
| | 28,811 |
|
Total assets | | $ | 8,910,419 |
| | $ | 3,792,002 |
| | $ | 130,853 |
| | $ | 12,974,923 |
| | $ | 6,920,338 |
| | $ | 7,325,557 |
| | $ | 161,172 |
| | $ | 14,672,330 |
|
Liabilities: | | | | | | | | | | | | | | | | |
Foreign exchange forward and option contracts | | $ | — |
| | $ | 54,668 |
| | $ | — |
| | $ | 54,668 |
| | $ | — |
| | $ | 98,207 |
| | $ | — |
| | $ | 98,207 |
|
Interest rate swaps | | | — |
| | 25,623 |
| | — |
| | 25,623 |
|
Client interest rate derivatives | | — |
| | 9,770 |
| | — |
| | 9,770 |
| | — |
| | 14,154 |
| | — |
| | 14,154 |
|
Total liabilities | | $ | — |
| | $ | 64,438 |
| | $ | — |
| | $ | 64,438 |
| | $ | — |
| | $ | 137,984 |
| | $ | — |
| | $ | 137,984 |
|
| |
(1) | Included in Level 1 and Level 3 assets are is $0.6 million and $1.8 million, respectively,120 thousand attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests. |
The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2017March 31, 2020 and 20162019:
| | (Dollars in thousands) | | Beginning Balance | | Total Realized and Unrealized Gains (Losses) Included in Income | | Sales | | Issuances | | Distributions and Other Settlements | | Transfers Out of Level 3 | | Ending Balance | | Beginning Balance | | Total Net Gains (Losses) Included in Net Income | | Purchases | | Sales/Exits | | Issuances | | Distributions and Other Settlements | | Transfers Out of Level 3 | | Ending Balance |
Three months ended September 30, 2017 | | | | | | | | | | | | | | | |
Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | | |
Other venture capital investments (1) | | $ | 1,897 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,897 |
| |
Three months ended March 31, 2020 | | | | | | | | | | | | | | | | | |
Non-marketable and other equity securities (fair value accounting): | | | | | | | | | | | | | | | | | |
Venture capital and private equity fund investments not measured at net asset value (1) | | | $ | 134 |
| | $ | 5 |
| | $ | — |
| | $ | (5 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 134 |
|
Other assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity warrant assets (2) | | 128,952 |
| | 24,354 |
| | (17,412 | ) | | 3,622 |
| | — |
| | (441 | ) | | 139,075 |
| | 161,038 |
| | 14,601 |
| | — |
| | (30,034 | ) | | 4,519 |
| | — |
| | (266 | ) | | 149,858 |
|
Total assets | | $ | 130,849 |
| | $ | 24,354 |
| | $ | (17,412 | ) | | $ | 3,622 |
| | $ | — |
| | $ | (441 | ) | | $ | 140,972 |
| | $ | 161,172 |
| | $ | 14,606 |
| | $ | — |
| | $ | (30,039 | ) | | $ | 4,519 |
| | $ | — |
| | $ | (266 | ) | | $ | 149,992 |
|
Three months ended September 30, 2016 | | | | | | | | | | | | | | | |
Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | | |
Other venture capital investments (1) | | $ | 2,040 |
| | $ | 4 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,040 |
| |
Three months ended March 31, 2019 | | | | | | | | | | | | | | | | | |
Non-marketable and other equity securities (fair value accounting): | | | | | | | | | | | | | | | | | |
Venture capital and private equity fund investments not measured at net asset value (1) | | | $ | 1,079 |
| | $ | (47 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 1,035 |
|
Other assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity warrant assets (2) | | 127,811 |
| | 21,092 |
| | (10,682 | ) | | 5,251 |
| | — |
| | (252 | ) | | 143,220 |
| | 145,199 |
| | 19,165 |
| | 575 |
| | (12,304 | ) | | 4,543 |
| | — |
| | (429 | ) | | 156,749 |
|
Total assets | | $ | 129,851 |
| | $ | 21,096 |
| | $ | (10,686 | ) | | $ | 5,251 |
| | $ | — |
| | $ | (252 | ) | | $ | 145,260 |
| | $ | 146,278 |
| | $ | 19,118 |
| | $ | 575 |
| | $ | (12,304 | ) | | $ | 4,543 |
| | $ | 3 |
| | $ | (429 | ) | | $ | 157,784 |
|
Nine months ended September 30, 2017 | | | | | | | | | | | | | | | |
Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | | |
Other venture capital investments (1) | | $ | 2,040 |
| | $ | (143 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,897 |
| |
Other assets: | | | | | | | | | | | | | | | |
Equity warrant assets (2) | | 128,813 |
| | 41,549 |
| | (40,998 | ) | | 11,071 |
| | — |
| | (1,360 | ) | | 139,075 |
| |
Total assets | | $ | 130,853 |
| | $ | 41,406 |
| | $ | (40,998 | ) | | $ | 11,071 |
| | $ | — |
| | $ | (1,360 | ) | | $ | 140,972 |
| |
Nine months ended September 30, 2016 | | | | | | | | | | | | | | | |
Non-marketable and other securities (fair value accounting): | | | | | | | | | | | | | | | |
Other venture capital investments (1) | | $ | 2,040 |
| | $ | (21 | ) | | $ | (4 | ) | | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 2,040 |
| |
Other assets: | | | | | | | | | | | | | | | |
Equity warrant assets (2) | | 135,168 |
| | 33,115 |
| | (34,276 | ) | | 9,842 |
| | — |
| | (629 | ) | | 143,220 |
| |
Total assets | | $ | 137,208 |
| | $ | 33,094 |
| | $ | (34,280 | ) | | $ | 9,842 |
| | $ | 25 |
| | $ | (629 | ) | | $ | 145,260 |
| |
| |
(1) | Realized and unrealized gains (losses) are recorded in the line item “Gains on investment securities, net”,net," a component of noninterest income. |
| |
(2) | Realized and unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net”,net," a component of noninterest income. |
The following table presents the amount of net unrealized gains and losses included in earnings (which is inclusive of noncontrolling interest) attributable to Level 3 assets still held at September 30, 2017March 31, 2020 and 20162019:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Non-marketable and other equity securities (fair value accounting): | | | | |
Venture capital and private equity fund investments not measured at net asset value (1) | | $ | — |
| | $ | (47 | ) |
Other assets: | | | | |
Equity warrant assets (2) | | (4,145 | ) | | 14,772 |
|
Total unrealized (losses) gains, net | | $ | (4,145 | ) | | $ | 14,725 |
|
Unrealized losses attributable to noncontrolling interests (1) | | $ | — |
| | $ | (39 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Non-marketable and other securities (fair value accounting): | | | | | | | | |
Other venture capital investments (1) | | $ | — |
| | $ | — |
| | $ | (143 | ) | | $ | — |
|
Other assets: | | | | | | | | |
Equity warrant assets (2) | | 17,827 |
| | 15,785 |
| | 23,734 |
| | 23,144 |
|
Total unrealized gains, net | | $ | 17,827 |
| | $ | 15,785 |
| | $ | 23,591 |
| | $ | 23,144 |
|
Unrealized losses attributable to noncontrolling interests | | $ | — |
| | $ | — |
| | $ | (127 | ) | | $ | — |
|
| |
(1) | Unrealized gains (losses) are recorded in the line item “Gains on investment securities, net”," a component of noninterest income. |
| |
(2) | Unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net”," a component of noninterest income. |
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of current sales restrictions to which these securities are subject, the actual sales of securities and the timing of such actual sales.
The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at September 30, 2017March 31, 2020 and December 31, 2016.2019. We have not included in this table our venture capital and private equity fund investments (fair value accounting) as we use net asset value per share (as obtained from the general partners of the investments) as a practical expedient to determine fair value.
| | (Dollars in thousands) | | Fair value | | Valuation Technique | | Significant Unobservable Inputs | | Weighted Average | | Fair value | | Valuation Technique | | Significant Unobservable Inputs | | Input Range | | Weighted Average |
September 30, 2017: | | | | | |
Other venture capital investments (fair value accounting) | | $ | 1,897 |
| | Private company equity pricing | | (1) | | (1 | ) | |
March 31, 2020: | | | | | |
Venture capital and private equity fund investments (fair value accounting) | | | $ | 134 |
| | Private company equity pricing | | (1) | | (1) | | (1 | ) |
Equity warrant assets (public portfolio) | | 21,660 |
| | Black-Scholes option pricing model | | Volatility | | 37.5 | % | | 318 |
| | Black-Scholes option pricing model | | Volatility | | 55.9% | | 55.9 | % |
| | | Risk-Free interest rate | | 1.8 |
| | | | Risk-Free interest rate | | 0.7 | | 0.7 |
|
| | | Sales restrictions discount (2) | | 19.9 |
| | | | Sales restrictions discount (2) | | 10.0 - 20.0 | | 14.6 |
|
Equity warrant assets (private portfolio) | | 117,415 |
| | Black-Scholes option pricing model | | Volatility | | 36.7 |
| | 149,540 |
| | Black-Scholes option pricing model | | Volatility | | 25.6% - 55.9% | | 41.1 |
|
| | | Risk-Free interest rate | | 1.5 |
| | | | Risk-Free interest rate | | 0.1 - 0.7 | | 0.3 |
|
| | | Marketability discount (3) | | 16.6 |
| | | | Marketability discount (3) | | 25.0 | | 25.0 |
|
| | | Remaining life assumption (4) | | 45.0 |
| | | | Remaining life assumption (4) | | 45.0 | | 45.0 |
|
December 31, 2016: | | | | | |
Other venture capital investments (fair value accounting) | | $ | 2,040 |
| | Private company equity pricing | | (1) | | (1 | ) | |
December 31, 2019: | | | | | |
Venture capital and private equity fund investments (fair value accounting) | | | $ | 134 |
| | Private company equity pricing | | (1) | | (1) | | (1 | ) |
Equity warrant assets (public portfolio) | | 764 |
| | Black-Scholes option pricing model | | Volatility | | 46.6 | % | | 346 |
| | Black-Scholes option pricing model | | Volatility | | 39.2% - 54.8% | | 50.7 | % |
| | | Risk-Free interest rate | | 2.1 |
| | | | Risk-Free interest rate | | 1.9 | | 1.9 |
|
| | | Sales restrictions discount (2) | | 17.7 |
| | | | Sales restrictions discount (2) | | 10.0 - 20.0 | | 13.6 |
|
Equity warrant assets (private portfolio) | | 128,049 |
| | Black-Scholes option pricing model | | Volatility | | 36.9 |
| | 160,692 |
| | Black-Scholes option pricing model | | Volatility | | 23.6% - 54.8% | | 38.2 |
|
| | | Risk-Free interest rate | | 1.3 |
| | | | Risk-Free interest rate | | 0.5 - 1.9 | | 1.6 |
|
| | | Marketability discount (3) | | 17.1 |
| | | | Marketability discount (3) | | 17.5 | | 17.5 |
|
| | | Remaining life assumption (4) | | 45.0 |
| | | | Remaining life assumption (4) | | 45.0 | | 45.0 |
|
| |
(1) | In determining the fair value of our other venture capital and private equity fund investment portfolio (not measured at net asset value), we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Additionally, we have ongoing communication with the portfolio companies and venture capital fund managers, to determine whether there is a material change in fair value. We use company provided valuation reports, if available, to support our valuation assumptions. These factors are specific to each portfolio company and a weighted average or range of values of the unobservable inputs is not meaningful. |
assumptions. These factors are specific to each portfolio company and a weighted average or range of values of the unobservable inputs is not meaningful.
| |
(2) | We adjust quoted market prices of public companies, which are subject to certain sales restrictions. Sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sales restrictions, which typically range from three to six months. months. |
| |
(3) | Our marketability discount is applied to all private company warrants to account for a general lack of liquidity due to the private nature of the associated underlying company. The quantitative measure used is based upon various option-pricing models. On a quarterly basis, a sensitivity analysis is performed on our marketability discount. |
| |
(4) | We adjust the contractual remaining term of private company warrants based on our estimate of the actual remaining life, which we determine by utilizing historical data on cancellationsterminations and exercises. At September 30, 2017March 31, 2020, the weighted average contractual remaining term was 5.96.2 years, compared to our estimated remaining life of 2.72.8 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption. |
For the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, we did not have any transfers between Level 2 and Level 1 or transfers between Level 3 and Level 1. All transfers from Level 3 to Level 2 for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 were due to the transfer of equity warrant assets from our private portfolio to our public portfolio (see our Level 3 reconciliation above). All amounts reported as transfers represent the fair value as of the date of the change in circumstances that caused the transfer.
Financial Instruments not Carried at Fair Value
FASB guidance over financial instruments requires that we disclose estimated fair values for our financial instruments not carried at fair value. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with these requirements.
Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. As broadly traded markets do not exist for many of our financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. The aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.
The following describes the methods and assumptions used in estimating the fair values of financial instruments for which carrying value approximates fair value and estimated fair values of financial instruments not recorded at fair value on a recurring basis and excludes financial instruments and assets and liabilities already recorded at fair value as described above.
Financial Instruments for which Carrying Value Approximates Fair Value
Certain financial instruments that are not carried at fair value on the Consolidated Balance Sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and cash equivalents; FHLB and FRB stock; accrued interest receivable; short-term borrowings; short-term time deposits; and accrued interest payable. In addition, U.S. GAAP requires that the fair value of deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not permitted.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value on a Recurring Basis
Held-to-Maturity Securities
Held-to-maturity securities include similar investments held in our available-for-sale securities portfolio and are valued using the same methodologies. All securities included in our held-to-maturity securities portfolio are valued using Level 2 inputs. Refer to Level 2 fair value measurements above for significant inputs used in the valuation of our held-to-maturity investment securities.
Non-Marketable Securities (Cost and Equity Method Accounting)
Non-marketable securities includes other investments (equity method accounting), venture capital and private equity fund investments (cost method accounting), and other venture capital investments (cost method accounting). Other investments (equity method accounting) includes our investment in SPD-SVB, our joint venture bank in China. At this time, the carrying value of our investment in SPD-SVB is a reasonable estimate of fair value. The fair value of the remaining other investments (equity method accounting) and the fair value of venture capital and private equity fund investments (cost method accounting) and other venture capital investments (cost method accounting) is based on financial information obtained from the fund investments' or debt fund investments' respective general partners. For private company investments, estimated fair value is based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, and financing transactions subsequent to the acquisition of the investment. For our fund investments, we utilize the net asset value per share as obtained from the general partners of the investments. We adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example June 30th, for our September 30th consolidated
financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
Loans
The fair value of fixed and variable rate loans is estimated by discounting contractual cash flows using rates that reflect current pricing for similar loans and the projected forward yield curve. This method is not based on the exit price concept of fair value required under ASC 820, Fair Value Measurements and Disclosures.
Long-Term Deposits
The fair value of long-term time deposits is estimated by discounting the cash flows using our cost of borrowings and the projected forward yield curve over their remaining contractual term.
Long-Term Debt
The fair value of long-term debt is generally based on quoted market prices, when available, or is estimated based on calculations utilizing third-party pricing services and current market spread, price indications from reputable dealers or observable market prices of the underlying instrument(s), whichever is deemed more reliable. Also included in the estimated fair value of our 6.05% Subordinated Notes are amounts related to hedge accounting associated with the notes.
Off-Balance Sheet Financial Instruments
The fair value of net available commitments to extend credit is estimated based on the average amount we would receive or pay to execute a new agreement with identical terms and pricing, while taking into account the counterparties’ credit standing.
Letters of credit are carried at their fair value, which was equivalent to the residual premium or fee at September 30, 2017 and December 31, 2016. Commitments to extend credit and letters of credit typically result in loans with a market interest rate if funded.
The following fair value hierarchy table presents the estimated fair values of our financial instruments that are not carried at fair value at September 30, 2017March 31, 2020 and December 31, 20162019:
| | | | | | Estimated Fair Value | | | | Estimated Fair Value |
(Dollars in thousands) | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 | | Carrying Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2017: | | | | | | | | | | | |
March 31, 2020: | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,555,571 |
| | $ | 3,555,571 |
| | $ | 3,555,571 |
| | $ | — |
| | $ | — |
| | $ | 9,561,448 |
| | $ | 9,561,448 |
| | $ | 9,561,448 |
| | $ | — |
| | $ | — |
|
Held-to-maturity securities | | 11,055,006 |
| | 11,023,415 |
| | — |
| | 11,023,415 |
| | — |
| | 13,574,289 |
| | 14,131,154 |
| | — |
| | 14,131,154 |
| | — |
|
Non-marketable securities (cost and equity method accounting) not measured at net asset value | | 122,493 |
| | 127,338 |
| | — |
| | — |
| | 127,338 |
| |
Non-marketable securities (cost and equity method accounting) measured at net asset value | | 225,883 |
| | 329,468 |
| | — |
| | — |
| | — |
| |
Non-marketable securities not measured at net asset value | | | 190,959 |
| | 190,959 |
| | — |
| | — |
| | 190,959 |
|
Non-marketable securities measured at net asset value | | | 224,669 |
| | 224,669 |
| | — |
| | — |
| | — |
|
Net commercial loans | | 19,449,408 |
| | 19,878,367 |
| | — |
| | — |
| | 19,878,367 |
| | 31,837,622 |
| | 32,128,958 |
| | — |
| | — |
| | 32,128,958 |
|
Net consumer loans | | 2,490,909 |
| | 2,457,138 |
| | — |
| | — |
| | 2,457,138 |
| | 3,581,500 |
| | 3,614,597 |
| | — |
| | — |
| | 3,614,597 |
|
FHLB and Federal Reserve Bank stock | | 58,012 |
| | 58,012 |
| | — |
| | — |
| | 58,012 |
| | 116,323 |
| | 116,323 |
| | — |
| | — |
| | 116,323 |
|
Accrued interest receivable | | 129,451 |
| | 129,451 |
| | — |
| | 129,451 |
| | — |
| |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Other short-term borrowings | | 4,840 |
| | 4,840 |
| | 4,840 |
| | — |
| | — |
| |
Short-term borrowings | | | 3,138,162 |
| | 3,138,162 |
| | — |
| | 3,138,162 |
| | — |
|
Non-maturity deposits (1) | | 44,766,988 |
| | 44,766,988 |
| | 44,766,988 |
| | — |
| | — |
| | 61,738,032 |
| | 61,738,032 |
| | 61,738,032 |
| | — |
| | — |
|
Time deposits | | 45,045 |
| | 44,895 |
| | — |
| | 44,895 |
| | — |
| | 173,925 |
| | 173,855 |
| | — |
| | 173,855 |
| | — |
|
3.50% Senior Notes | | 347,221 |
| | 350,864 |
| | — |
| | 350,864 |
| | — |
| | 348,076 |
| | 363,878 |
| | — |
| | 363,878 |
| | — |
|
5.375% Senior Notes | | 348,035 |
| | 383,439 |
| | — |
| | 383,439 |
| | — |
| |
7.0% Junior Subordinated Debentures | | 54,362 |
| | 54,977 |
| | — |
| | 54,977 |
| | — |
| |
Accrued interest payable | | 4,150 |
| | 4,150 |
| | — |
| | 4,150 |
| | — |
| |
Off-balance sheet financial assets: | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | — |
| | 20,751 |
| | — |
| | — |
| | 20,751 |
| | — |
| | 27,162 |
| | — |
| | — |
| | 27,162 |
|
December 31, 2016: | | | | | | | | | | | |
December 31, 2019: | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 2,545,750 |
| | $ | 2,545,750 |
| | $ | 2,545,750 |
| | $ | — |
| | $ | — |
| | $ | 6,781,783 |
| | $ | 6,781,783 |
| | $ | 6,781,783 |
| | $ | — |
| | $ | — |
|
Held-to-maturity securities | | 8,426,998 |
| | 8,376,138 |
| | — |
| | 8,376,138 |
| | — |
| | 13,842,946 |
| | 14,115,272 |
| | — |
| | 14,115,272 |
| | — |
|
Non-marketable securities (cost and equity method accounting) not measured at net asset value | | 120,037 |
| | 127,343 |
| | — |
| | — |
| | 127,343 |
| |
Non-marketable securities (cost and equity method accounting) measured at net asset value | | 245,626 |
| | 353,870 |
| | — |
| | — |
| | — |
| |
Non-marketable securities not measured at net asset value | | | 195,405 |
| | 195,405 |
| | — |
| | — |
| | 195,405 |
|
Non-marketable securities measured at net asset value | | | 235,351 |
| | 235,351 |
| | — |
| | — |
| | — |
|
Net commercial loans | | 17,518,430 |
| | 17,811,356 |
| | — |
| | — |
| | 17,811,356 |
| | 29,104,532 |
| | 29,615,176 |
| | — |
| | — |
| | 29,615,176 |
|
Net consumer loans | | 2,156,148 |
| | 2,199,501 |
| | — |
| | — |
| | 2,199,501 |
| | 3,755,180 |
| | 3,820,804 |
| | — |
| | — |
| | 3,820,804 |
|
FHLB and Federal Reserve Bank stock | | 57,592 |
| | 57,592 |
| | — |
| | — |
| | 57,592 |
| | 60,258 |
| | 60,258 |
| | — |
| | — |
| | 60,258 |
|
Accrued interest receivable | | 111,222 |
| | 111,222 |
| | — |
| | 111,222 |
| | — |
| |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | |
Short-term FHLB advances | | 500,000 |
| | 500,000 |
| | 500,000 |
| | — |
| | — |
| |
Other short-term borrowings | | 12,668 |
| | 12,668 |
| | 12,668 |
| | — |
| | — |
| |
Short-term borrowings | | | 17,430 |
| | 17,430 |
| | — |
| | 17,430 |
| | — |
|
Non-maturity deposits (1) | | 38,923,750 |
| | 38,923,750 |
| | 38,923,750 |
| | — |
| | — |
| | 61,569,714 |
| | 61,569,714 |
| | 61,569,714 |
| | — |
| | — |
|
Time deposits | | 56,118 |
| | 55,949 |
| | — |
| | 55,949 |
| | — |
| | 188,093 |
| | 187,980 |
| | — |
| | 187,980 |
| | — |
|
3.50% Senior Notes | | 346,979 |
| | 337,600 |
| | — |
| | 337,600 |
| | — |
| | 347,987 |
| | 366,856 |
| | — |
| | 366,856 |
| | — |
|
5.375% Senior Notes | | 347,586 |
| | 378,777 |
| | — |
| | 378,777 |
| | — |
| |
6.05% Subordinated Notes (2) | | 46,646 |
| | 47,489 |
| | — |
| | 47,489 |
| | — |
| |
7.0% Junior Subordinated Debentures | | 54,493 |
| | 53,140 |
| | — |
| | 53,140 |
| | — |
| |
Accrued interest payable | | 12,013 |
| | 12,013 |
| | — |
| | 12,013 |
| | — |
| |
Off-balance sheet financial assets: | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | — |
| | 22,074 |
| | — |
| | — |
| | 22,074 |
| | — |
| | 27,197 |
| | — |
| | — |
| | 27,197 |
|
| |
(1) | Includes noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits. |
| |
(2) | At December 31, 2016, included in the carrying value and estimated fair value of our 6.05% Subordinated Notes was an interest rate swap valued at $0.8 million related to hedge accounting associated with the notes.
|
Investments in Entities that Calculate Net Asset Value Per Share
FASB guidance over certain fund investments requires that we disclose the fair value of funds, significant investment strategies of the investees, redemption features of the investees, restrictions on the ability to sell investments, estimate of the period of time over which the underlying assets are expected to be liquidated by the investee, and unfunded commitments related to the investments.
Our investments in debt funds and venture capital and private equity fund investments generally cannot be redeemed. Alternatively, we expect distributions, if any, to be received primarily through IPO and M&A activity of the underlying assets of the fund. Subject to applicable requirements under the Volcker Rule, we do not have any plans to sell any of these fund
investments. If we decide to sell these investments in the future, the investee fund’s management must approve of the buyer before the sale of the investments can be completed. The fair values of the fund investments have been estimated using the net asset value per share of the investments, adjusted for any differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example June 30December 31thst, for our September 30March 31thst consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
The following table is a summary of the estimated fair values of these investments and remaining unfunded commitments for each major category of these investments as of September 30, 2017March 31, 2020:
| | (Dollars in thousands) | | Carrying Amount | | Fair Value | | Unfunded Commitments | | Carrying Amount | | Fair Value | | Unfunded Commitments |
Non-marketable securities (fair value accounting): | | | | | | | | | | | | |
Venture capital and private equity fund investments (1) | | $ | 128,768 |
| | $ | 128,768 |
| | $ | 6,471 |
| | $ | 257,132 |
| | $ | 257,132 |
| | $ | 9,518 |
|
Non-marketable securities (equity method accounting): | | | | | | | | | | | | |
Venture capital and private equity fund investments (2) | | 87,218 |
| | 87,218 |
| | 4,943 |
| | 206,495 |
| | 206,495 |
| | 10,675 |
|
Debt funds (2) | | 17,889 |
| | 17,889 |
| | — |
| | 6,910 |
| | 6,910 |
| | — |
|
Other investments (2) | | 17,820 |
| | 17,820 |
| | 886 |
| | 11,265 |
| | 11,265 |
| | 886 |
|
Non-marketable securities (cost method accounting): | | | | | | | |
Venture capital and private equity fund investments (2) | | 102,956 |
| | 206,541 |
| | 10,474 |
| |
Total | | $ | 354,651 |
| | $ | 458,236 |
| | $ | 22,774 |
| | $ | 481,802 |
| | $ | 481,802 |
| | $ | 21,079 |
|
| |
(1) | Venture capital and private equity fund investments within non-marketable securities (fair value accounting) include investments made by our managed funds of funds and one of our direct venture funds. Thesefunds (consolidated VIEs) and investments representin venture capital and private equity fund investments (unconsolidated VIEs). Collectively, these investments in venture capital and private equity funds that investare primarily in U.S. and global technology and life science/healthcare companies. Included in the fair value and unfunded commitments of fund investments under fair value accounting are $95.763.2 million and $4.93.2 million, respectively, attributable to noncontrolling interests. It is estimated that we will receive distributions from the fund investments over the next 10 to 13 years, depending on the age of the funds and any potential extensions of terms of the funds. |
| |
(2) | Venture capital and private equity fund investments, debt funds, and other fund investments within non-marketable securities (equity and cost method accounting) include funds that invest in or lend money to primarily U.S. and global technology and life science/healthcare companies. It is estimated that we will receive distributions from the funds over the next 5 to 8 years, depending on the age of the funds and any potential extensions of the terms of the funds. |
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us and/or our affiliates, and we may from time to time be involved in other legal or regulatory proceedings. In accordance with applicable accounting guidance, we establish accruals for all such matters, including expected settlements, when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.
To the extent we believe any potential loss relating to such matters may have a material impact on our liquidity, consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we aim to disclose information relating to such potential loss. We also aim to disclose information relating to any material potential loss that is probable but not reasonably estimable. In such cases, where reasonably practicable, we aim to provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.
Based upon information available to us, our review of lawsuits and claims filed or pending against us to date and consultation with our outside legal counsel, we have not recognized a material accrual liability for any such matters, nor do we currently expect that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as a whole, in the future.
We have no material related party transactions requiring disclosure. In the ordinary course of business, the Bank may extend credit to related parties, including executive officers, directors, principal shareholders and their related interests. Additionally, we provide real estate secured loans to eligible employees through our EHOP. For additional details, see Note 16—“Employee17 — “Employee Compensation and Benefit Plans" under Part II, Item 8 of our 20162019 Form 10-K.
Paycheck Protection Program
In April 2020, we started accepting applications under the Paycheck Protection Program ("PPP") administered by the Small Business Association (“SBA”) under the CARES Act and began to originate loans to qualified small businesses. Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage, rent, and utility payments. To the extent not forgiven, loans are subject to certain terms including, among others, the following: maximum two-year term; interest rate of 1.0%; six-month deferral of loan payments; 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 prepaid by the borrower at any time.
As of May 5, 2020, we have over 4,400 outstanding loans recorded in the amount of approximately $2.0 billion of PPP loans as approved by the SBA and expect to continue funding additional loans as they become approved under the program. This funded amount reflects repayments received as of such date. We expect additional repayments from PPP borrowers, particularly on or prior to May 14, 2020 (subject to any extension permitted by the SBA), in connection with their reliance on certain regulatory “safe harbors” relating to their necessity certification pursuant to SBA guidance.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including in particular “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part I, Item 2 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 might in the future make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include, but are not limited to, the following:
Financial projections, including with respect to our net interest income, noninterest income, earnings per share, noninterest expenses (including professional services, compliance, compensation and other costs), cash flows, balance sheet positions, capital expenditures, 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/venture capital funding and investment levels;
Forecasts of future interest rates, economic performance, and income from investments;
Forecasts of expected levels of provisions for loancredit losses, nonperforming loans, loan growth and client funds;
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,""would," “predict,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “assume,” “seek,” “expect,” “plan,” “intend,” 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 these forward-looking statements are reasonable, we have based these expectations on our current beliefs as well as our assumptions, and such expectations may prove to be incorrect. 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 interest rate environment, and the associated impact on us;
The credit profile and credit quality of our loan portfolio and volatility of our levels of nonperforming assets and charge-offs;
The COVID-19 pandemic and its effects on the economic and business environments in which we operate;
The adequacy of our allowance for loancredit losses and the need to make provisions for loancredit losses for any period;
The borrowing needs of our clients;
The sufficiency of our capital and liquidity positions;
The levels of loans, deposits and client investment fund balances;
The performance of our portfolio investments; the general condition of the public and private equity and mergers and acquisitions markets and their impact on our investments, including equity warrant assets, venture capital and private equity funds and direct equity investments;
Our overall investment plans and strategies; the realization, timing, valuation and performance of our equity or other investments;
The levels of public offerings, mergers and acquisitions and venture capital investment activity of our clients that may impact the borrowing needs of our clients;
The occurrence of fraudulent activity, including breaches of our information security or cyber security-related incidents;
Business disruptions and interruptions due to natural disasters and other external events;
The impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
Expansion of our business internationally, and the impact of international market and economic events on us;
The impact of governmental policy, legal requirements and regulations, including the Economic Growth, Regulatory Relief and Consumer Protection Act and the Dodd-Frank Act, promulgated by the Federal Reserve and other regulatory requirements;
The impact of lawsuits and claims, as well as legal or regulatory proceedings;
The impact of changes in accounting standards and tax laws (including any tax reform, such as the proposed Tax Cuts and Jobs Act);laws;
The levels of equity capital available to our client or portfolio companies;
The effectiveness of our risk management framework and quantitative models;
The sale of impaired assets;
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 SVB Leerink; and
| |
• | Other factors as discussed in “Risk Factors” under Part I, Item 1A in our 2019 Form 10-K and under Part II, Item 1A of this report. |
Other factors as discussed in “Risk Factors” under Part I, Item 1A in our 2016 Form 10-K.
We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q, except as required by law.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and accompanying notes as presented in Part I, Item 1 of this report and in conjunction with our 20162019 Form 10-K.
Reclassifications
Certain prior period amounts primarily related to the changes to our income statement presentationadoption of gains on derivative instruments, net and provision for unfunded credit commitmentsASU 2016-13, CECL, have been reclassified to conform to current period presentations.
Management’s Overview of ThirdFirst Quarter 20172020 Performance
Overall, we had an outstanding thirdOur first quarter performance reflected strong balance sheet growth and business momentum particularly during the first two months of the quarter. This momentum, however, was offset by rapid economic deterioration in 2017, which was marked by higher net interestMarch 2020 due to the effects of the COVID-19 pandemic. Despite the impact of COVID-19, including a meaningful increase in our provision for credit losses and core fee income, increaseda decrease in our market-driven revenues (including gains from equity warrant gains,assets and non-marketable securities, and investment banking revenues), the first quarter resulted in strong growth in loans and total client funds, growth, healthy loan growthstable net interest income and stable credit quality. Additionally,solid core fee income. As discussed further below, we saw higher noninterest expense,are focused on supporting our employees, clients and communities during this crisis. As the broader economic picture remains uncertain, we believe our solid financial foundation of strong capital, ample liquidity and a high-quality balance sheet makes us well-positioned to continue to support and lend to our clients and manage the impact of a weaker economy while investing in our long-term growth.
Recent Developments - COVID-19
The current global health crisis created by the COVID-19 pandemic has resulted in unprecedented challenges and volatility in economic, market and business conditions. It has caused significant economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. We cannot predict at this time the scope and duration of the pandemic, as COVID-19 has not yet been contained, including in the United States and other international locations in which we operate. Moreover, the impact of COVID-19 on economic, market and
business conditions is likely to be exacerbated if uncontained for a prolonged period of time, and even if it is contained, there may be a seasonal or other resurgence of the epidemic. While there have been various governmental and other responses to control the spread of COVID-19 and to mitigate the adverse impact of COVID-19, such as stay at home orders, economic relief for individuals and businesses, and monetary policy measures, it remains uncertain whether these actions will be successful.
The global spread of COVID-19 accelerated in March 2020 at which time it was declared a pandemic by the World Health Organization. Since then, we have been focused on our business and human response to the crisis --- managing and operating our business as seamlessly as possible, and supporting our clients, employees and communities as we weather through the crisis together.
During this volatile time, we remain focused on our capital and liquidity. We are “well-capitalized,” remaining above all applicable regulatory capital requirements. We have a liquid and high-quality balance sheet, with approximately half of our assets as of March 31, 2020 held in cash and marketable securities, primarily from increased compensationagency-backed mortgage securities and benefits expensesU.S. Treasuries. We also have access to funding sources, as necessary. Moreover, we have temporarily suspended our stock repurchase program and will reassess this decision once the economic environment is more stable. In addition, we have also elected to use a regulatory capital relief option related to the impact of COVID-19 on our CECL adoption.
Prior to the effective adoption date of CECL, federal banking regulatory agencies had provided relief for the initial capital decrease at adoption by allowing the impact to be phased-in over three years on a straight-line basis. Subsequent to the adoption of CECL, federal banking regulatory agencies provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by COVID-19 as well as professional services expenses reflectivethe significant resources required to implement CECL. At the time of increased expensesthe adoption of CECL, we were not expecting to utilize the initial relief provided by the federal banking regulatory agencies as the initial capital decrease at adoption did not have a material impact to our capital ratios; however, the impact to our capital from subsequent increases in our allowance for credit losses related to COVID-19 economic factors is expected to increase. As a result, we have elected to use the regulatory capital phase-in under the 2020 CECL Interim Final Rule ("IFR") allowing for deferral of the full effect of the impact from the adoption of CECL on our capital levels over two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total).
The uncertainties of the duration and severity of the effect of COVID-19 on economic, market and business conditions has made it more difficult to forecast our operating results and the macroeconomic conditions to which our business is subject. Some notable negative effects emerged late in the first quarter, as discussed in this Management Discussion and Analysis section, but any longer-term effects or trends remain subject to significant uncertainty. Moreover, we are subject to heightened business, operational (including fraud), market, credit and other risks related to the COVID-19 pandemic, which may have an adverse effect on our business, financial condition and results of operations. (See “Risk Factors” under Part II, Item 1A of this report)
We continue to serve our clients during this difficult time, while managing our credit risk. We have offered special debt relief assistance to support certain clients who are experiencing financial hardships related to the COVID-19 pandemic, including offering certain venture-backed companies, Private Bank, Wine and other clients the opportunity to temporarily defer their scheduled loan principal payments. We continue to engage with our increasing regulatory, riskclients to understand client needs, and compliance initiativeswe may implement additional assistance or other relief to support clients across various sectors and life stages. Additionally, we are participating as a lender under the Paycheck Protection Program (“PPP”) under the CARES Act and may participate in other government relief programs in the U.S. or internationally. These government programs are complex and our domesticparticipation in any of these programs may lead to governmental, regulatory and other scrutiny, litigation, negative publicity and reputation damage for us and our customers who participate. Overall, these relief measures, whether our own programs or our participation in government programs, are new programs for us and we may not be successful in implementing or administering the programs as intended. Further, the extent to which these programs are successful in assisting our clients is uncertain. If these relief measures are not effective, there may be an adverse effect on our revenue and results of operations, including increased provisions in our allowance for credit losses, higher rates of default and increased credit losses in future periods.
We are also prioritizing the safety and well-being of our employees. In March 2020, we activated our business continuity and pandemic plans globally, moving to a work-from-home plan, prohibiting all business travel and postponing or moving online all SVB-hosted events, and enabling remote access to our systems. We have implemented various programs to provide work, life and health-related support for our employees, ranging from expanded time-off, counseling and medical benefits for employees directly impacted by COVID-19, to providing reimbursements and practical support for working from home. In addition, we are also developing a plan for employees to eventually return to work in our offices, which will be subject to a variety of complex considerations.
Moreover, consistent with our tradition of supporting and giving back to our communities, we have also committed $5.5 million to local, regional and global expansion as well as investments madeCOVID-19 relief activities in projects, systemsvarious U.S. and technologyinternational locations where we have offices. This includes corporate contributions to supportglobal, national and regional charities, direct community-based giving, and a 3:1 match
for employees’ donations to relevant causes. In April 2020, we also announced our revenue growthintention to donate net PPP loan origination fees received from the Small Business Administration to COVID-19 relief efforts.
Until the pandemic subsides, we expect continued draws on lines of credit; reduced revenues from our businesses; increased credit losses in our lending portfolios, in particular early-stage companies and related initiativespremium wineries; and reduced activity in our noninterest income-producing lines of business. Additionally, we expect the global slowdown in IPO and M&A activity to result in decreased investment banking revenues and decreased utilization of capital call lines of credit. Even after the pandemic subsides, it is possible that the U.S. and other operating costs. Our coremajor economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, continued to perform well as a resultfinancial condition, liquidity, capital and results of our ongoing focus on innovation companies and their investors and continued efforts to secure client relationships. We saw continued success in working with private equity/venture capital firms and technology clients as well as clients in our private banking division.operations.
A summary of our performance for the three months ended September 30, 2017March 31, 2020 (compared to the three months ended September 30, 2016,March 31, 2019, where applicable) is as follows:
|
| | |
BALANCE SHEET | | EARNINGS |
Assets.$49.8 $72.4 billion in average total assets (up 14.6%25.9%). $50.8$75.0 billion in period-end total assets (up 17.3%24.7%). Loans.$21.633.7 billion in average total loan balances net of unearned income (up 15.8%18.6%). $22.2$36.0 billion in period-end total loan balances net of unearned income (up 16.1%24.7%). Total Client Funds (on-balanceFunds. (on-balance sheet deposits and off-balance sheet client investment funds).$97.3 $165.4 billion in average total client fund balances (up 20.1%20.6%). $99.0$168.9 billion in period-end total client fund balances (up 21.5%20.2%). AFS/HTM Fixed Income Investments.$23.127.1 billion in average fixed income investment securities (up 11.5%22.8%). $23.7$26.2 billion in period-end fixed income investment securities (up 15.6%20.2%).
| | EPS.EPS.Earnings per diluted share of $2.79 (up 31.6%$2.55 (down 53.1%).
Net Income.Income.Consolidated net income available to common stockholders of $148.6$132.3 million (up 33.8%(down 54.2%). - Net interest income of $374.0$524.1 million (up 29.3%2.2%). - Net interest margin of 3.10% (up 353.12% (down 69 bps). - Noninterest income of $158.8$301.9 million (up 10.2%7.7%), with non-GAAP core fee income+ of $102.7$168.5 million (up 27.6%9.2%) and non-GAAP core fee income plus investment banking revenue and commissions++ of $231.3 million (up 6.1%). - Noninterest expense of $257.8$399.6 million (up 16.8%9.3%).
ROE.ROE.Return on average equity (annualized) (“ROE”ROE”) performance of 14.59%8.17%.
Operating Efficiency Ratio.Ratio. Operating efficiency ratio of 48.38%48.37% with a non-GAAP core operating efficiency ratio of 47.71%+++.
|
| | |
CAPITAL | | CREDIT QUALITY |
Capital++++. Continued strong capital, levels, with all capital ratios considered “well-capitalized” under banking regulations. SVBFGSVB Financial and SVBBank capital ratios, respectively, were: - CET 1 risk-based capital ratio of 12.96%12.35% and 12.41%10.90%. - Tier 1 risk-based capital ratio of 13.32%13.35% and 12.41%10.90%. - Total risk-based capital ratio of 14.29%14.45% and 13.40%12.04%. - Tier 1 leverage ratio of 8.34%9.00% and 7.59%7.21%.
| | Credit Quality. Continued disciplined underwriting.Quality. Stable credit in an evolving credit environment. - Allowance for loancredit losses for loans of 1.12%1.53% as a percentage of period-end total gross loans. - Provision for loan lossesloans of 0.40%2.78% as a percentage of period-end total gross loans (annualized). - Net loan charge-offs of 0.19%0.35% as a percentage of average total gross loans (annualized).
|
+ Consists of fee income for deposit services, letters of credit and standby letters of credit, credit cards, client investments, foreign exchange and lending-related activities. This is a non-GAAP financial metric.measure. (See the non-GAAP reconciliation under “Results of Operations—Noninterest Income”)
++ Consists of non-GAAP core fee income plus investment banking revenue and commissions. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under “Results of Operations—Noninterest Income”).
+++ This ratio excludes certain financial line items where performance is typically subject to market or other conditions beyond our control and excludes SVB Leerink revenue and expenses. It is calculated by dividing noninterest expense after adjusting for noninterest expense attributable to SVB Leerink by total revenue after adjusting for noninterest income attributable to SVB Leerink, net gains or losses on investment securities and equity warrant assets, investment banking revenue and commissions. Additionally, noninterest expense and total revenue are adjusted for income or losses and expenses attributable to noncontrolling interests and adjustments to net interest income for a taxable equivalent basis. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under "Results of Operations-Noninterest Expense").
++++ Federal banking regulatory agencies have provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by COVID-19 as well as the significant resources required to implement current expected credit loss("CECL"). The interim final rule provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the estimated amount of the capital impact for two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total). For additional details, see "Capital Resources" within "Consolidated Financial Condition" under Part 1, Item 2 of this report.
A summary of our performance for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands, except per share data, employees and ratios) | | 2017 |
| 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 |
| 2019 | | % Change |
| | | | | | | | | | | | | | |
Diluted earnings per common share | | $ | 2.79 |
| | $ | 2.12 |
| | 31.6 |
| % | | $ | 7.01 |
| | $ | 5.42 |
| | 29.3 |
| % | |
Income Statement: | | | | | | | | |
Diluted earnings per share | | | $ | 2.55 |
| | $ | 5.44 |
| | (53.1 | ) | % |
Net income available to common stockholders | | 148,620 |
| | 111,081 |
| | 33.8 |
| | | 373,296 |
| | 283,219 |
| | 31.8 |
| | | 132,253 |
| | 288,732 |
| | (54.2 | ) | |
Net interest income | | 373,974 |
| | 289,161 |
| | 29.3 |
| | | 1,026,663 |
| | 853,918 |
| | 20.2 |
| | | 524,137 |
| | 512,886 |
| | 2.2 |
| |
Net interest margin | | 3.10 | % | | 2.75 | % | | 35 |
| bps | | 2.99 | % | | 2.72 | % | | 27 |
| bps | | 3.12 | % | | 3.81 | % | | (69 | ) | bps |
Provision for credit losses | | $ | 23,522 |
| | $ | 20,004 |
| | 17.6 |
| % | | $ | 70,062 |
| | $ | 90,225 |
| | (22.3 | ) | % | | $ | 243,480 |
| | $ | 28,551 |
| | NM |
| % |
Noninterest income | | 158,778 |
| | 144,140 |
| | 10.2 |
| | 404,965 |
| | 343,050 |
| | 18.0 |
| | | 301,934 |
| | 280,376 |
| | 7.7 |
| |
Noninterest expense | | 257,761 |
| | 220,773 |
| | 16.8 |
| | 746,640 |
| | 624,611 |
| | 19.5 |
| | | 399,585 |
| | 365,664 |
| | 9.3 |
| |
Non-GAAP core fee income (1) | | 102,722 |
| | 80,526 |
| | 27.6 |
| | 272,567 |
| | 231,522 |
| | 17.7 |
| | | 168,458 |
| | 154,243 |
| | 9.2 |
| |
Non-GAAP core fee income, plus investment banking revenue and commissions (1) | | | 231,347 |
| | 218,146 |
| | 6.1 |
| |
Non-GAAP noninterest income, net of noncontrolling interests (1) | | 153,164 |
| | 139,461 |
| | 9.8 |
| | | 383,256 |
| | 339,423 |
| | 12.9 |
| | | 303,788 |
| | 277,128 |
| | 9.6 |
| |
Non-GAAP noninterest expense, net of noncontrolling interests(2) | | 257,636 |
| | 220,656 |
| | 16.8 |
| | | 746,123 |
| | 624,327 |
| | 19.5 |
| | |
Non-GAAP noninterest expense, net of noncontrolling interests (2) | | | 399,445 |
| | 365,285 |
| | 9.4 |
| |
Balance Sheet: | |
| | | | | |
| | | | | | |
| | | | | |
Average available-for-sale securities | | $ | 12,674,610 |
| | $ | 12,743,715 |
| | (0.5 | ) | % | | $ | 12,539,773 |
| | $ | 13,608,722 |
| | (7.9 | ) | % | | $ | 13,565,908 |
| | $ | 6,870,168 |
| | 97.5 |
| % |
Average held-to-maturity securities | | 10,467,470 |
| | 8,003,825 |
| | 30.8 |
| | 9,405,525 |
| | 8,347,190 |
| | 12.7 |
| | | 13,576,061 |
| | 15,223,958 |
| | (10.8 | ) | |
Average loans, net of unearned income | | 21,584,892 |
| | 18,647,194 |
| | 15.8 |
|
| | 20,726,467 |
| | 17,955,497 |
| | 15.4 |
| | |
Average loans, amortized cost | | | 33,660,728 |
| | 28,388,072 |
| | 18.6 |
|
|
Average noninterest-bearing demand deposits | | 36,578,779 |
| | 30,522,314 |
| | 19.8 |
| | | 34,653,264 |
| | 30,694,119 |
| | 12.9 |
| | | 41,335,984 |
| | 38,222,687 |
| | 8.1 |
| |
Average interest-bearing deposits | | 7,464,063 |
| | 7,387,440 |
| | 1.0 |
| | | 7,408,371 |
| | 7,749,871 |
| | (4.4 | ) | | | 20,472,247 |
| | 11,491,522 |
| | 78.2 |
| |
Average total deposits | | 44,042,842 |
| | 37,909,754 |
| | 16.2 |
| | | 42,061,635 |
| | 38,443,990 |
| | 9.4 |
| | | 61,808,231 |
| | 49,714,209 |
| | 24.3 |
| |
Earnings Ratios: | |
| | | | | |
| | | | | | |
| | | | | |
Return on average assets (annualized) (3) | | 1.18 | % | | 1.02 | % | | 15.7 |
| % | | 1.05 | % | | 0.87 | % | | 20.7 |
| % | | 0.73 | % | | 2.04 | % | | (64.2 | ) | % |
Return on average SVBFG stockholders’ equity (annualized) (4) | | 14.59 |
| | 12.32 |
| | 18.4 |
| | | 12.85 |
| | 10.95 |
| | 17.4 |
| | | 8.17 |
| | 22.16 |
| | (63.1 | ) | |
Asset Quality Ratios: | |
| | | | | |
| | | | | | |
| | | | | |
Allowance for loan losses as a % of total period-end gross loans | | 1.12 | % | | 1.25 | % | | (13 | ) | bps | | 1.12 | % | | 1.25 | % | | (13 | ) | bps | |
Allowance for loan losses for performing loans as a % of total gross performing loans | | 0.92 |
| | 1.03 |
| | (11 | ) | | | 0.92 |
| | 1.03 |
| | (11 | ) | | |
Gross loan charge-offs as a % of average total gross loans (annualized) | | 0.23 |
| | 0.52 |
| | (29 | ) | | | 0.33 |
| | 0.53 |
| | (20 | ) | | |
Net loan charge-offs as a % of average total gross loans (annualized) | | 0.19 |
| | 0.48 |
| | (29 | ) | | | 0.29 |
| | 0.47 |
| | (18 | ) | | |
Allowance for credit losses for loans as a % of total period-end loans (5) | | | 1.53 | % | | 1.03 | % | | 50 |
| bps |
Allowance for credit losses for performing loans as a % of total performing loans (5) | | | 1.43 |
| | 0.83 |
| | 60 |
| |
Gross loan charge-offs as a % of average total loans (annualized) (5) | | | 0.44 |
| | 0.13 |
| | 31 |
| |
Net loan charge-offs as a % of average total loans (annualized) (5) | | | 0.35 |
| | 0.11 |
| | 24 |
| |
Capital Ratios: | |
| | | | | |
| | | | | | |
| | | | | |
CET 1 risk-based capital ratio | | 12.96 | % | | 12.75 | % | | 21 |
| bps | | 12.96 | % | | 12.75 | % | | 21 |
| bps | |
Tier 1 risk-based capital ratio | | 13.32 |
| | 13.21 |
| | 11 |
| | 13.32 |
| | 13.21 |
| | 11 |
| | |
Total risk-based capital ratio | | 14.29 |
| | 14.22 |
| | 7 |
| | 14.29 |
| | 14.22 |
| | 7 |
| | |
Tier 1 leverage ratio | | 8.34 |
| | 8.35 |
| | (1 | ) | | | 8.34 |
| | 8.35 |
| | (1 | ) | | |
Tangible common equity to tangible assets (5) | | 8.00 |
| | 8.30 |
| | (30 | ) | | | 8.00 |
| | 8.30 |
| | (30 | ) | | |
Tangible common equity to risk-weighted assets (5) | | 13.01 |
| | 13.11 |
| | (10 | ) | | | 13.01 |
| | 13.11 |
| | (10 | ) | | |
SVBFG CET 1 risk-based capital ratio | | | 12.35 | % | | 12.89 | % | | (54 | ) | bps |
SVBFG tier 1 risk-based capital ratio | | | 13.35 |
| | 13.04 |
| | 31 |
| |
SVBFG total risk-based capital ratio | | | 14.45 |
| | 13.94 |
| | 51 |
| |
SVBFG tier 1 leverage ratio | | | 9.00 |
| | 9.10 |
| | (10 | ) | |
SVBFG tangible common equity to tangible assets (6) | | | 8.70 |
| | 8.59 |
| | 11 |
| |
SVBFG tangible common equity to risk-weighted assets (6) | | | 13.40 |
| | 12.86 |
| | 54 |
| |
Bank CET 1 risk-based capital ratio | | 12.41 |
| | 12.77 |
| | (36 | ) | | 12.41 |
| | 12.77 |
| | (36 | ) | | | 10.90 |
| | 12.35 |
| | (145 | ) | |
Bank tier 1 risk-based capital ratio | | 12.41 |
| | 12.77 |
| | (36 | ) | | | 12.41 |
| | 12.77 |
| | (36 | ) | | | 10.90 |
| | 12.35 |
| | (145 | ) | |
Bank total risk-based capital ratio | | 13.40 |
| | 13.83 |
| | (43 | ) | | | 13.40 |
| | 13.83 |
| | (43 | ) | | | 12.04 |
| | 13.29 |
| | (125 | ) | |
Bank tier 1 leverage ratio | | 7.59 |
| | 7.74 |
| | (15 | ) | | | 7.59 |
| | 7.74 |
| | (15 | ) | | | 7.21 |
| | 8.38 |
| | (117 | ) | |
Bank tangible common equity to tangible assets (5) | | 7.47 |
| | 7.98 |
| | (51 | ) | | | 7.47 |
| | 7.98 |
| | (51 | ) | | |
Bank tangible common equity to risk-weighted assets (5) | | 12.44 |
| | 13.14 |
| | (70 | ) | | | 12.44 |
| | 13.14 |
| | (70 | ) | | |
Bank tangible common equity to tangible assets (6) | | | 7.63 |
| | 7.99 |
| | (36 | ) | |
Bank tangible common equity to risk-weighted assets (6) | | | 11.99 |
| | 12.32 |
| | (33 | ) | |
Other Ratios: | |
| | | | | |
| | | | | | |
| | | | | |
GAAP operating efficiency ratio (6) | | 48.38 | % | | 50.95 | % | | (5.0 | ) | % | | 52.15 | % | | 52.18 | % | | (0.1 | ) | % | |
Non-GAAP operating efficiency ratio (2) | | 48.82 |
| | 51.45 |
| | (5.1 | ) | | | 52.87 |
| | 52.28 |
| | 1.1 |
| | |
Book value per common share (7) | | $ | 77.00 |
| | $ | 69.02 |
| | 11.6 |
| | | $ | 77.00 |
| | $ | 69.02 |
| | 11.6 |
| | |
Operating efficiency ratio (7) | | | 48.37 | % | | 46.10 | % | | 4.9 |
| % |
Non-GAAP core operating efficiency ratio (2) | | | 47.71 |
| | 44.71 |
| | 6.7 |
| |
Total costs of deposits (annualized) (8) | | | 0.24 |
| | 0.23 |
| | 4.3 |
| |
Book value per common share (9) | | | $ | 130.02 |
| | $ | 102.11 |
| | 27.3 |
| |
Other Statistics: | |
| | | | | |
| | | | | | |
| | | | | |
Average full-time equivalent employees | | 2,434 |
| | 2,255 |
| | 7.9 |
| % | | 2,384 |
| | 2,199 |
| | 8.4 |
| % | | 3,672 |
| | 3,228 |
| | 13.8 |
| % |
Period-end full-time equivalent employees | | 2,433 |
| | 2,280 |
| | 6.7 |
| | | 2,433 |
| | 2,280 |
| | 6.7 |
| | | 3,710 |
| | 3,250 |
| | 14.2 |
| |
NM-Not meaningful
| |
(1) | See “Results of Operations–Noninterest Income” for a description and reconciliation of non-GAAP core fee income and noninterest income.non-GAAP core fee income plus investment banking revenue and commissions. |
| |
(2) | See “Results of Operations–Noninterest Expense” for a description and reconciliation of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio. |
| |
(3) | Ratio represents annualized consolidated net income available to common stockholders divided by quarterly and year-to-date average assets. |
| |
(4) | Ratio represents annualized consolidated net income available to common stockholders divided by quarterly and year-to-date average SVBFG stockholders’ equity. |
| |
(5) | For the quarter ended March 31, 2020, the ratios are calculated using the amortized cost basis for total loans as a result of the adoption of CECL. Prior period ratios were calculated using total gross loans in accordance with previous methodology. |
| |
(6) | See “Capital Resources–Capital Ratios” for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets. |
| |
(6)(7) | The operating efficiency ratio is calculated by dividing total noninterest expense by total taxable-equivalent net interest income plus noninterest income. |
| |
(7)(8) | Ratio represents annualized 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. |
For more information with respect to our capital ratios, please refer to “Capital Ratios” under “Consolidated Financial Condition-Capital Ratios” below.
Critical Accounting Policies and Estimates
The accompanying management’s discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates and assumptions on an ongoing basis. Management bases its 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.
ThereExcept as set forth below, there have been no significant changes during the ninethree months ended September 30, 2017March 31, 2020 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 20162019 Form 10-K.
We disclose our method and approach for the allowance for credit losses for loans, unfunded credit commitments and HTM securities critical accounting policy in Note 1 - “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements” under Part I, Item 1 of this report.
Allowance for Credit Losses
We consider this accounting policy to be critical as estimation of expected credit losses involves material management estimates and is susceptible to significant changes in the near-term. Determining the allowance for credit losses for loans, unfunded credit commitments and HTM securities 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 allowance for credit losses for loans, which includes review of loan portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
Expected Credit Losses Estimate for Loans
The methodology for estimating the amount of ECL reported in the allowance for credit losses has 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 our 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 derive an estimated ECL assumption from a non-discounted cash flow approach based on our portfolio segments discussed above. This approach incorporates: (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 judgement. 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 gradually over the remaining contractual lives, 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 relevant qualitative factors that relate to the environment in which the entity operates and are specific to the borrower. These adjustments are based upon our assessment of the risks that may lead to a future loan loss experience different from our historical loan loss experience. These risks are aggregated to become our qualitative allocation.Based on our qualitative assessment and
prediction or estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period. Refer to Note 1 - “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements” under Part I, Item I of this report for a summary of the factors we consider for its qualitative adjustments as part of our estimate of the changing risks in the lending environment.
We monitor our loan pools to ensure all assets therein continue to share similar risk characteristics with other financial assets inside the pool. Changes in credit risk, borrower circumstances, or the recognition of write-offs may indicate that a loan's risk profile has changed, and the asset should be removed from its current pool. For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ECL is measured as the difference between the amortized cost basis of the loan and 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.
Expected Credit Losses Estimate for Unfunded Credit Commitments
We maintain a separate allowance for credit losses for unfunded credit commitments which 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 and derive historical lifetime expected loss factors for each portfolio segment similar to our funded loan ECL. The collectively assessed ECL for unfunded credit commitments also includes the same qualitative allocations applied for our funded loan ECL. For unfunded credit commitments related to loans that do not share similar risk characteristics with other loans, where applicable, a separate estimate of ECL will be included in our total allowance for credit losses on unfunded credit commitments. Loan commitments that are determined to be unconditionally cancellable by the Bank do not require an allowance for credit losses.
Expected Credit Losses Estimate for Held-to-Maturity Investments
We measure ECL on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the exception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ECL. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for current conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year.
Recent Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which is part of the FASB’s initiative to reduce cost and complexity related to accounting for income taxes. The ASU eliminates certain exceptions to the general principles of ASC 740, Income Taxes, and simplifies income tax accounting in several areas. The amendments are effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2020, with early adoption permitted. The ASU allows entities to adopt this provision on a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact this ASU will have on our financial position, results of operations, cash flows and disclosures.
In March 2020, the FASB issued a new Accounting Standard Update (ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting). This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. For instance, entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination; (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met; and (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. This guidance became effective on March 12, 2020 and an entity may elect to prospectively apply each category of exemption independently, either in the interim period that includes March 12, 2020, or in a subsequent period through December 31, 2022. We have implemented a process to assess the population of contracts that will be impacted by this ASU and to evaluate
expedients we will use and when we might apply them. We are currently evaluating the impact this guidance will have on our financial position, results of operations, cash flows and disclosures.
Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis)
Net interest income is defined as the difference betweenbetween: (i) interest earned on loans, fixed income investment portfolio (available-for-saleinvestments in our available-for-sale and held-to-maturity securities),securities portfolios and short-term investment securities and (ii) interest paid on funding sources. Net interest income is our principal source of revenue. Net interest margin is defined as the amount of annualized net interest income, on a fully taxable equivalent basis, expressed as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the federal statutory tax rate of 3521.0 percent.
Analysis of Net Interest Income Changes Due to Volume and Rate (Fully Taxable Equivalent Basis)
Net interest income is affected by changes in the amount and compositionmix of interest-earning assets and interest-bearing liabilities, referred to as “volume change.” Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.” The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the amount of simultaneous changes attributable to both volume and rate changes for the periods indicated. For this table, changes that are not solely due to either volume or rate are allocated in proportion to the percentage changes in average volume and average rate.
| | | | 2017 Compared to 2016 | | 2017 Compared to 2016 | | 2020 Compared to 2019 |
| | Three months ended September 30, increase (decrease) due to change in | | Nine months ended September 30, increase (decrease) due to change in | | Three months ended March 31, increase (decrease) due to change in |
(Dollars in thousands) | | Volume | | Rate | | Total | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest income: | | | | | | | | | | | | | | | | | | |
Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell, trade receivables purchased and other short-term investment securities | | $ | 1,678 |
| | $ | 2,337 |
| | $ | 4,015 |
| | $ | 5,788 |
| | $ | 5,089 |
| | $ | 10,877 |
| |
Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities | | | $ | 6,876 |
| | $ | (8,468 | ) | | $ | (1,592 | ) |
Fixed income investment portfolio (taxable) | | 15,325 |
| | 10,650 |
| | 25,975 |
| | 6,655 |
| | 26,992 |
| | 33,647 |
| | 25,287 |
| | 2,381 |
| | 27,668 |
|
Fixed income investment portfolio (non-taxable) | | 1,342 |
| | (342 | ) | | 1,000 |
| | 2,620 |
| | (1,067 | ) | | 1,553 |
| | 2,801 |
| | (412 | ) | | 2,389 |
|
Loans, net of unearned income | | 37,814 |
| | 16,404 |
| | 54,218 |
| | 98,851 |
| | 29,676 |
| | 128,527 |
| |
Increase in interest income, net | | 56,159 |
| | 29,049 |
| | 85,208 |
| | 113,914 |
| | 60,690 |
| | 174,604 |
| |
Loans, amortized cost | | | 60,839 |
| | (72,414 | ) | | (11,575 | ) |
Increase (decrease) in interest income, net | | | 95,803 |
| | (78,913 | ) | | 16,890 |
|
Interest expense: | | | | | | | | | | | | | | | | | | |
Interest bearing checking and savings accounts | | 25 |
| | 1 |
| | 26 |
| | 63 |
| | (2 | ) | | 61 |
| | — |
| | (6 | ) | | (6 | ) |
Money market deposits | | 65 |
| | 698 |
| | 763 |
| | (219 | ) | | 2,466 |
| | 2,247 |
| | 16,082 |
| | (4,900 | ) | | 11,182 |
|
Money market deposits in foreign offices | | (1 | ) | | 2 |
| | 1 |
| | 10 |
| | (1 | ) | | 9 |
| | 10 |
| | (2 | ) | | 8 |
|
Time deposits | | — |
| | 5 |
| | 5 |
| | (8 | ) | | 6 |
| | (2 | ) | | 296 |
| | 103 |
| | 399 |
|
Sweep deposits in foreign offices | | (23 | ) | | (3 | ) | | (26 | ) | | (75 | ) | | (6 | ) | | (81 | ) | | 426 |
| | (2,518 | ) | | (2,092 | ) |
Total increase (decrease) in deposits expense | | 66 |
| | 703 |
| | 769 |
| | (229 | ) | | 2,463 |
| | 2,234 |
| | 16,814 |
| | (7,323 | ) | | 9,491 |
|
Short-term borrowings | | (1,558 | ) | | 1,059 |
| | (499 | ) | | (1,851 | ) | | 1,081 |
| | (770 | ) | | 1,725 |
| | (1,214 | ) | | 511 |
|
3.50% Senior Notes | | 5 |
| | (2 | ) | | 3 |
| | 4 |
| | 4 |
| | 8 |
| | 3 |
| | — |
| | 3 |
|
5.375% Senior Notes | | 12 |
| | (5 | ) | | 7 |
| | 15 |
| | 9 |
| | 24 |
| | (4,868 | ) | | — |
| | (4,868 | ) |
Junior Subordinated Debentures | | 1 |
| | — |
| | 1 |
| | (9 | ) | | 10 |
| | 1 |
| |
6.05% Subordinated Notes | | (236 | ) | | — |
| | (236 | ) | | (405 | ) | | 224 |
| | (181 | ) | |
Total (decrease) increase in borrowings expense | | (1,776 | ) | | 1,052 |
| | (724 | ) | | (2,246 | ) | | 1,328 |
| | (918 | ) | |
(Decrease) increase in interest expense, net | | (1,710 | ) | | 1,755 |
| | 45 |
| | (2,475 | ) | | 3,791 |
| | 1,316 |
| |
Increase in net interest income | | $ | 57,869 |
| | $ | 27,294 |
| | $ | 85,163 |
| | $ | 116,389 |
| | $ | 56,899 |
| | $ | 173,288 |
| |
Total decrease in borrowings expense | | | (3,140 | ) | | (1,214 | ) | | (4,354 | ) |
Increase (decrease) in interest expense, net | | | 13,674 |
| | (8,537 | ) | | 5,137 |
|
Increase (decrease) in net interest income | | | $ | 82,129 |
| | $ | (70,376 | ) | | $ | 11,753 |
|
Net Interest Income (Fully Taxable Equivalent Basis)
Three months ended September 30, 2017March 31, 2020 and 20162019
Net interest income increased by $85.2$11.8 million to $374.6$527.5 million for the three months ended September 30, 2017,March 31, 2020, compared to $289.4$515.8 million for the comparable 20162019 period. Overall, our net interest income increased primarily from interest earned on loans, reflective of higher average loan balances driven by strong loan growth from our private equity/venture capital and SVB Private Bank loan portfolios and rate increases subsequent to September 30, 2016. In addition, we saw an increase in interest earned on our fixed income investment securities portfolio reflective of higher average fixed income investment securitiessecurities. This increase was partially offset by a decrease in interest income from loans, reflective of lower gross loan yields partially offset by an increase in average loan balances driven by higher average deposit balances
as well as an increase in yield from rate increases.
The main factors affecting interest income for the three months ended September 30, 2017, comparedpaid on our interest-bearing deposits due to the comparable 2016 period are discussed below:
Interest income for the three months endedSeptember 30, 2017 increasedincrease in average interest-bearing deposits partially offset by $85.2 million due primarily to:market interest rate decreases.
| |
◦ | A $54.2 million increase in interest income on loans to $268.4 million for the three months endedSeptember 30, 2017, compared to $214.2 million for the comparable 2016 period. The increase was reflective of an increase in average loan balances of $2.9 billion and an increase in the overall loan yield of 36 basis points to 4.93 percent from 4.57 percent. Gross loan yields, excluding loan interest recoveries and loan fees, increased 37 basis points to 4.30 percent from 3.93 percent, reflective primarily of the benefit of interest rate increases. Loan fee yields were flat at 61 basis points for both the three months ended September 30, 2017 and 2016.
|
| |
◦ | A $27.0 million increase in interest income on fixed income investment securities to $111.2 million for the three months endedSeptember 30, 2017, compared to $84.3 million for the comparable 2016 period. The increase was reflective of an increase in average fixed income investments of $2.4 billion due to growth in average deposit balances and an increase in our fixed income investment securities yield of 29 basis points to 1.91 percent from 1.62 percent resulting primarily from higher reinvestment yields on maturing fixed income investments as well as higher yields on new purchases due to interest rate increases.
|
| |
◦ | A $4.0 million increase in interest income from our interest earning cash and short-term investment securities. The increase was due primarily to an increase of $0.9 billion in average interest-earning cash balances as a result of a $6.1 billion increase in average deposit balances and from the impact of the recent increases in the Federal Funds target rate. |
The main factors affecting interest income and interest expense for the ninethree months ended September 30, 2017,March 31, 2020, compared to the comparable 20162019 period are discussed below:
Interest income for the nine months endedSeptember 30, 2017 increased by $174.6 million due primarily to:
| |
• | Interest income for the three months endedMarch 31, 2020 increased by $16.9 million due primarily to: |
| |
◦ | A $30.1 million increase in interest income from our fixed income investment securities. The increase was due primarily to the increase of $5.0 billion in average fixed income investment securities, partially offset by |
| |
◦ | A $128.5An $11.6 million increasedecrease in interest income on loans to $746.0$382.6 million for the ninethree months endedSeptember 30, 2017March 31, 2020, compared to $617.5$394.1 million for the comparable 20162019 period. The increasedecrease was reflective of a decrease in the overall loan yields of 106 basis points to 4.57 percent from 5.63 percent partially offset by an increase in average loan balances of $2.8$5.3 billion and an increase in the overall loan yield of 22 basis points to 4.81 percent from 4.59 percent.. Gross loan yields, excluding loan interest recoveries and loan fees, increaseddecreased 97 basis points to 4.184.13 percent from 3.995.10 percent, reflective primarily of the benefitimpact of interest rate increases,the decreases in Federal Funds rates in the latter half of 2019 as well as March 2020, partially offset by an increase reflective of gains on the strong growthtermination and net settlement of our lower yielding private equity/venture capitalinterest rate swap cash flow hedges. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the termination and Private Bank loan portfolios. Our private equity/venture capital loan portfolio represented 43.1 percent and 38.8 percentnet settlement of our total gross loan portfolio at September 30, 2017 and 2016, respectively. Our Private Bank loan portfolio represented 11.2 percent and 10.8 percent of our total gross loan portfolio at September 30, 2017 and 2016, respectively.interest rate swap cash flow hedges.
|
Loan fee yields increased two basis points to 60 basis points from 58 basis points in the comparable 2016 period. The increase in loan fee yields was primarily a result of higher income from loan prepayments.
| |
◦• | A $35.2 million increase in interest income on fixed income investment securities to $298.9 million Interest expense for the ninethree months endedSeptember 30, 2017, compared to $263.7March 31, 2020 increased by $5.1 million for the comparable 2016 period. The increase wasdue primarily reflective of an increase in our fixed income investment securities yield of 21 basis points to 1.82 percent from 1.61 percent resulting primarily from higher reinvestment yields on maturing fixed income investments as well as higher yields on new purchases due to interest rate increases.to:
|
| |
◦ | A $10.9$9.5 million increase in interest income from our interest earning cash and short-term investment securities. The increase was due primarily to an increase of $1.1 billion in average interest-earning cash balances as a result of a $3.6 billion increase in average deposit balances. We also saw a benefit from the impact of the recent increases in the Federal Funds target rate. |
Interest expense for the nine months endedSeptember 30, 2017 increased by $1.3 million primarily due to:
| |
◦ | An increase inexpense on deposits interest expense of $2.2 million, due primarily to an increase in interest paid on our interest-bearing money market deposits as a resultdue to the growth in average interest-bearing deposits of $9.0 billion partially offset by decreases in market rate adjustments.rates, partially offset by |
| |
◦ | A $4.4 million decrease in interest expense on borrowings expense due primarily to the extinguishment of our 5.375% Senior Notes in December 2019. |
Net Interest Margin (Fully Taxable Equivalent Basis)
Three months ended September 30, 2017March 31, 2020 and 20162019
| |
• | Our net interest margin decreased by 69 basis points to 3.12 percent for the three months endedMarch 31, 2020, compared to 3.81 percent for the comparable 2019 period. The lower margin for the three months ended March 31, 2020 was due primarily to a decrease in yields on loans reflective of the three 25 basis point Federal Funds rate decreases in the latter half of 2019 as well as the aggregate 150 basis point decrease in March 2020. The decrease in our net interest margin was partially offset by increases from balance sheet growth as well as increases from our interest rate swap cash flow hedges and effective loan floors. Average loans represented 49.4 percent of average interest earnings assets for the three months ended March 31, 2020, compared to 51.7 percent for the comparable 2019 period. |
Our net interest margin increased by 35 basis points to 3.10 percent for the three months endedSeptember 30, 2017, compared to 2.75 percent for the comparable 2016 period. The higher margin during the third quarter of 2017 was reflective primarily of the increases in the Federal Funds target rate since the third quarter of 2016.
Nine months ended September 30, 2017 and 2016
Our net interest margin increased by 27 basis points to 2.99 percent for the nine months endedSeptember 30, 2017, compared to 2.72 percent for the comparable 2016 period. Our net interest margin increased primarily as a result of the impact of rising interest rates and a higher level of loans as a percentage of our interest-earning assets portfolio during the nine months ended September 30, 2017. Average loans represented 45 percent of year-to-date interest earning assets compared to 43 percent for the comparable 2016 period.
Average Balances, Yields and Rates Paid (Fully Taxable Equivalent Basis)
The average yield earned on interest-earning assets is the amount of annualized 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 annualized interest expense expressed as a percentage of average funding sources. The following tables set forth average assets, liabilities, noncontrolling interests, preferred stock, and SVBFG stockholders’ equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three and nine months ended September 30, 2017March 31, 2020 and 20162019:
Average Balances, Rates and Yields for the Three Months Ended September 30, 2017March 31, 2020 and 20162019
| | | | Three months ended September 30, | | Three months ended March 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
(Dollars in thousands) | | Average Balance | | Interest Income/ Expense | | Yield/ Rate | | 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) | | $ | 3,291,908 |
| | $ | 6,211 |
| | 0.75 | % | | $ | 2,404,006 |
| | $ | 2,196 |
| | 0.36 | % | | $ | 7,308,705 |
| | $ | 17,624 |
| | 0.97 | % | | $ | 4,460,378 |
| | $ | 19,216 |
| | 1.75 | % |
Investment securities: (2) | | | | | | | | | | | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | 12,674,610 |
| | 52,825 |
| | 1.65 |
| | 12,743,715 |
| | 44,741 |
| | 1.40 |
| | 13,565,908 |
| | 77,024 |
| | 2.28 |
| | 6,870,168 |
| | 35,422 |
| | 2.09 |
|
Held-to-maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | 10,249,131 |
| | 56,618 |
| | 2.19 |
| | 7,947,983 |
| | 38,727 |
| | 1.94 |
| | 11,675,421 |
| | 77,361 |
| | 2.66 |
| | 13,651,311 |
| | 91,295 |
| | 2.71 |
|
Non-taxable (3) | | 218,339 |
| | 1,803 |
| | 3.28 |
| | 55,842 |
| | 803 |
| | 5.72 |
| | 1,900,640 |
| | 16,233 |
| | 3.44 |
| | 1,572,647 |
| | 13,844 |
| | 3.57 |
|
Total loans, net of unearned income (4) (5) | | 21,584,892 |
| | 268,445 |
| | 4.93 |
| | 18,647,194 |
| | 214,227 |
| | 4.57 |
| |
Total loans, amortized cost (4) (5) | | | 33,660,728 |
| | 382,569 |
| | 4.57 |
| | 28,388,072 |
| | 394,144 |
| | 5.63 |
|
Total interest-earning assets | | 48,018,880 |
| | 385,902 |
| | 3.19 |
| | 41,798,740 |
| | 300,694 |
| | 2.86 |
| | 68,111,402 |
| | 570,811 |
| | 3.37 |
| | 54,942,576 |
| | 553,921 |
| | 4.09 |
|
Cash and due from banks | | 371,373 |
| | | | | | 317,044 |
| | | | | | 797,462 |
| | | | | | 527,109 |
| | | | |
Allowance for loan losses | | (246,210 | ) | | | | | | (247,657 | ) | | | | | |
Allowance for credit losses for loans | | | (327,812 | ) | | | | | | (288,927 | ) | | | | |
Other assets (6) | | 1,651,323 |
| | | | | | 1,583,202 |
| | | | | | 3,826,116 |
| | | | | | 2,347,679 |
| | | | |
Total assets | | $ | 49,795,366 |
| | | | | | $ | 43,451,329 |
| | | | | | $ | 72,407,168 |
| | | | | | $ | 57,528,437 |
| | | | |
Funding sources: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing checking and savings accounts | | $ | 442,518 |
| | $ | 86 |
| | 0.08 | % | | $ | 308,345 |
| | $ | 60 |
| | 0.08 | % | | $ | 546,428 |
| | $ | 108 |
| | 0.08 | % | | $ | 545,238 |
| | $ | 114 |
| | 0.08 | % |
Money market deposits | | 5,774,281 |
| | 2,079 |
| | 0.14 |
| | 5,592,603 |
| | 1,316 |
| | 0.09 |
| | 17,613,578 |
| | 33,013 |
| | 0.75 |
| | 9,073,622 |
| | 21,831 |
| | 0.98 |
|
Money market deposits in foreign offices | | 187,183 |
| | 21 |
| | 0.04 |
| | 199,539 |
| | 20 |
| | 0.04 |
| | 266,045 |
| | 24 |
| | 0.04 |
| | 148,342 |
| | 16 |
| | 0.04 |
|
Time deposits | | 51,406 |
| | 17 |
| | 0.13 |
| | 50,351 |
| | 12 |
| | 0.09 |
| | 163,343 |
| | 429 |
| | 1.06 |
| | 50,691 |
| | 30 |
| | 0.24 |
|
Sweep deposits in foreign offices | | 1,008,675 |
| | 101 |
| | 0.04 |
| | 1,236,602 |
| | 127 |
| | 0.04 |
| | 1,882,853 |
| | 3,824 |
| | 0.82 |
| | 1,673,629 |
| | 5,916 |
| | 1.43 |
|
Total interest-bearing deposits | | 7,464,063 |
| | 2,304 |
| | 0.12 |
| | 7,387,440 |
| | 1,535 |
| | 0.08 |
| | 20,472,247 |
| | 37,398 |
| | 0.73 |
| | 11,491,522 |
| | 27,907 |
| | 0.98 |
|
Short-term borrowings | | 48,614 |
| | 164 |
| | 1.34 |
| | 513,446 |
| | 663 |
| | 0.51 |
| | 969,896 |
| | 2,716 |
| | 1.13 |
| | 353,389 |
| | 2,205 |
| | 2.53 |
|
3.50% Senior Notes | | 347,168 |
| | 3,144 |
| | 3.59 |
| | 346,848 |
| | 3,141 |
| | 3.60 |
| | 348,018 |
| | 3,151 |
| | 3.64 |
| | 347,669 |
| | 3,148 |
| | 3.67 |
|
5.375% Senior Notes | | 347,934 |
| | 4,854 |
| | 5.53 |
| | 347,345 |
| | 4,847 |
| | 5.55 |
| | — |
| | — |
| | — |
| | 348,882 |
| | 4,868 |
| | 5.66 |
|
Junior Subordinated Debentures | | 54,391 |
| | 831 |
| | 6.06 |
| | 54,566 |
| | 830 |
| | 6.05 |
| |
6.05% Subordinated Notes | | — |
| | — |
| | — |
| | 47,421 |
| | 236 |
| | 1.98 |
| |
Total interest-bearing liabilities | | 8,262,170 |
| | 11,297 |
| | 0.54 |
| | 8,697,066 |
| | 11,252 |
| | 0.51 |
| | 21,790,161 |
| | 43,265 |
| | 0.80 |
| | 12,541,462 |
| | 38,128 |
| | 1.23 |
|
Portion of noninterest-bearing funding sources | | 39,756,710 |
| | | | | | 33,101,674 |
| | | | | | 46,321,241 |
| | | | | | 42,401,114 |
| | | | |
Total funding sources | | 48,018,880 |
| | 11,297 |
| | 0.09 |
| | 41,798,740 |
| | 11,252 |
| | 0.11 |
| | 68,111,402 |
| | 43,265 |
| | 0.25 |
| | 54,942,576 |
| | 38,128 |
| | 0.28 |
|
Noninterest-bearing funding sources: | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | 36,578,779 |
| | | | | | 30,522,314 |
| | | | | | 41,335,984 |
| | | | | | 38,222,687 |
| | | | |
Other liabilities | | 773,586 |
| | | | | | 517,066 |
| | | | | | 2,277,031 |
| | | | | | 1,330,037 |
| | | | |
SVBFG stockholders’ equity | | 4,041,218 |
| | | | | | 3,586,196 |
| | | | | |
Preferred stock | | | 340,169 |
| | | | | | — |
| | | | |
SVBFG common stockholders’ equity | | | 6,512,946 |
| | | | | | 5,283,808 |
| | | | |
Noncontrolling interests | | 139,613 |
| | | | | | 128,687 |
| | | | | | 150,877 |
| | | | | | 150,443 |
| | | | |
Portion used to fund interest-earning assets | | (39,756,710 | ) | | | | | | (33,101,674 | ) | | | | | | (46,321,241 | ) | | | | | | (42,401,114 | ) | | | | |
Total liabilities, noncontrolling interest, and SVBFG stockholders’ equity | | $ | 49,795,366 |
| | | | | | $ | 43,451,329 |
| | | | | | $ | 72,407,168 |
| | | | | | $ | 57,528,437 |
| | | | |
Net interest income and margin | | | | $ | 374,605 |
| | 3.10 | % | | | | $ | 289,442 |
| | 2.75 | % | | | | $ | 527,546 |
| | 3.12 | % | | | | $ | 515,793 |
| | 3.81 | % |
Total deposits | | $ | 44,042,842 |
| | | | | | $ | 37,909,754 |
| | | | | | $ | 61,808,231 |
| | | | | | $ | 49,714,209 |
| | | | |
Reconciliation to reported net interest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments for taxable equivalent basis | | | | (631 | ) | | | | | | (281 | ) | | | | | | (3,409 | ) | | | | | | (2,907 | ) | | |
Net interest income, as reported | | | | $ | 373,974 |
| | | | | | $ | 289,161 |
| | | | | | $ | 524,137 |
| | | | | | $ | 512,886 |
| | |
| |
(1) | Includes average interest-earning deposits in other financial institutions of $1.30.9 billion and $0.8 billion for the three months endedSeptember 30, 2017March 31, 2020 and 20162019, respectively. For the three months endedSeptember 30, 2017March 31, 2020 and 20162019, balances also include $1.95.5 billion and $1.62.8 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 areis presented on a fully taxable-equivalenttaxable equivalent basis using the federal statutory income tax rate of 35.021.0 percent for all periods presented. |
| |
(4) | Nonaccrual loans are reflected in the average balances of loans. |
| |
(5) | Interest income includes loan fees of $33.436.7 million and $28.4 million for both the three months ended September 30, 2017March 31, 2020 and 2016, respectively.2019. |
| |
(6) | Average investment securities of $692 million1.6 billion and $804913 million for the three months ended September 30, 2017March 31, 2020 and 20162019, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted primarily of non-marketable and other equity securities. |
Average Balances, Rates and Yields for the Nine Months Ended September 30, 2017 and 2016
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
(Dollars in thousands) | | 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) | | $ | 3,235,628 |
| | $ | 16,670 |
| | 0.69 | % | | $ | 2,111,619 |
| | $ | 5,793 |
| | 0.37 | % |
Investment securities: (2) | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | |
Taxable | | 12,539,773 |
| | 146,803 |
| | 1.57 |
| | 13,608,722 |
| | 140,932 |
| | 1.38 |
|
Held-to-maturity securities: | | | | | | | | | | | | |
Taxable |
| 9,242,953 |
| | 147,965 |
| | 2.14 |
| | 8,287,043 |
| | 120,189 |
| | 1.94 |
|
Non-taxable (3) |
| 162,572 |
| | 4,158 |
| | 3.42 |
| | 60,147 |
| | 2,605 |
| | 5.79 |
|
Total loans, net of unearned income (4) (5) | | 20,726,467 |
| | 745,983 |
| | 4.81 |
| | 17,955,497 |
| | 617,456 |
| | 4.59 |
|
Total interest-earning assets | | 45,907,393 |
| | 1,061,579 |
| | 3.09 |
| | 42,023,028 |
| | 886,975 |
| | 2.82 |
|
Cash and due from banks | | 361,041 |
| | | | | | 326,144 |
| | | | |
Allowance for loan losses | | (243,594 | ) | | | | | | (237,613 | ) | | | | |
Other assets (6) | | 1,540,211 |
| | | | | | 1,558,157 |
| | | | |
Total assets | | $ | 47,565,051 |
| | | | | | $ | 43,669,716 |
| | | | |
Funding sources: | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest bearing checking and savings accounts | | $ | 420,680 |
| | $ | 242 |
| | 0.08 | % | | $ | 310,505 |
| | $ | 181 |
| | 0.08 | % |
Money market deposits | | 5,664,082 |
| | 5,544 |
| | 0.13 |
| | 5,887,627 |
| | 3,297 |
| | 0.07 |
|
Money market deposits in foreign offices | | 183,040 |
| | 59 |
| | 0.04 |
| | 153,593 |
| | 50 |
| | 0.04 |
|
Time deposits | | 50,855 |
| | 49 |
| | 0.13 |
| | 59,069 |
| | 51 |
| | 0.12 |
|
Sweep deposits in foreign offices | | 1,089,714 |
| | 324 |
| | 0.04 |
| | 1,339,077 |
| | 405 |
| | 0.04 |
|
Total interest-bearing deposits | | 7,408,371 |
| | 6,218 |
| | 0.11 |
| | 7,749,871 |
| | 3,984 |
| | 0.07 |
|
Short-term borrowings | | 39,523 |
| | 295 |
| | 1.00 |
| | 287,735 |
| | 1,065 |
| | 0.49 |
|
3.5% Senior Notes | | 347,088 |
| | 9,429 |
| | 3.63 |
| | 346,771 |
| | 9,421 |
| | 3.63 |
|
5.375% Senior Notes | | 347,786 |
| | 14,558 |
| | 5.60 |
| | 347,205 |
| | 14,534 |
| | 5.59 |
|
Junior Subordinated Debentures | | 54,434 |
| | 2,494 |
| | 6.13 |
| | 54,610 |
| | 2,493 |
| | 6.10 |
|
6.05% Subordinated Notes | | 25,641 |
| | 467 |
| | 2.44 |
| | 47,859 |
| | 648 |
| | 1.81 |
|
Total interest-bearing liabilities | | 8,222,843 |
| | 33,461 |
| | 0.54 |
| | 8,834,051 |
| | 32,145 |
| | 0.49 |
|
Portion of noninterest-bearing funding sources | | 37,684,550 |
| | | | | | 33,188,977 |
| | | | |
Total funding sources | | 45,907,393 |
| | 33,461 |
| | 0.10 |
| | 42,023,028 |
| | 32,145 |
| | 0.10 |
|
Noninterest-bearing funding sources: | | | | | | | | | | | | |
Demand deposits | | 34,653,264 |
| | | | | | 30,694,119 |
| | | | |
Other liabilities | | 668,417 |
| | | | | | 556,568 |
| | | | |
SVBFG stockholders’ equity | | 3,883,876 |
| | | | | | 3,453,904 |
| | | | |
Noncontrolling interests | | 136,651 |
| | | | | | 131,074 |
| | | | |
Portion used to fund interest-earning assets | | (37,684,550 | ) | | | | | | (33,188,977 | ) | | | | |
Total liabilities, noncontrolling interest, and SVBFG stockholders’ equity | | $ | 47,565,051 |
| | | | | | $ | 43,669,716 |
| | | | |
Net interest income and margin | | | | $ | 1,028,118 |
| | 2.99 | % | | | | $ | 854,830 |
| | 2.72 | % |
Total deposits | | $ | 42,061,635 |
| | | | | | $ | 38,443,990 |
| | | | |
Reconciliation to reported net interest income: | | | | | | | | | | | | |
Adjustments for taxable equivalent basis | | | | (1,455 | ) | | | | | | (912 | ) | | |
Net interest income, as reported | | | | $ | 1,026,663 |
| | | | | | $ | 853,918 |
| | |
| |
(1) | Includes average interest-earning deposits in other financial institutions of $1.0 billion and $0.7 billion for the nine months ended September 30, 2017 and 2016, respectively. The balance also includes $2.1 billion and $1.4 billion deposited at the FRB, earning interest at the Federal Funds target rate for the nine months ended September 30, 2017 and 2016, respectively.
|
| |
(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 available-for-sale securities is presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35.0 percent for all periods presented. |
| |
(4) | Nonaccrual loans are reflected in the average balances of loans. |
| |
(5) | Interest income includes loan fees of $93.5 million and $78.1 million for the nine months ended September 30, 2017 and 2016, respectively.
|
| |
(6) | Average investment securities of $674 million and $803 million for the nine months ended September 30, 2017 and 2016, respectively, were classified as other assets as they were noninterest-earning assets. These investments consisted primarily of non-marketable securities.
|
Provision for Credit Losses
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 appropriate allowance for loan losses for the period. Our reserve methodology is based on our evaluation of the existing allowance for loan losses in relation to total gross loans using historical and other objective information, and on our qualitative assessment of the inherent and identified credit risk of the loan portfolio. Our provision for unfunded credit commitments is determined using a methodology that is similar to the methodology used for calculating the allowance for loan losses, adjusted for factors specific to binding commitments, including the probability of funding and exposure at funding.HTM securities. Our provision for credit losses equals our best estimate of probable credit losses that are inherent in the portfolios at the balance sheet date.
The following table summarizes our allowance for loancredit losses and the allowance for loans, unfunded credit commitments and HTM securities for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands, except ratios) | | 2017 | | 2016 | | 2017 | | 2016 |
Allowance for loan losses, beginning balance | | $ | 236,496 |
| | $ | 244,723 |
| | $ | 225,366 |
| | $ | 217,613 |
|
Provision for loan losses (1) | | 22,409 |
| | 18,950 |
| | 67,273 |
| | 88,624 |
|
Gross loan charge-offs | | (12,338 | ) | | (24,616 | ) | | (51,449 | ) | | (71,466 | ) |
Loan recoveries | | 1,828 |
| | 2,084 |
| | 6,155 |
| | 8,158 |
|
Foreign currency translation adjustments | | 615 |
| | (576 | ) | | 1,665 |
| | (2,364 | ) |
Allowance for loan losses, ending balance | | $ | 249,010 |
| | $ | 240,565 |
| | $ | 249,010 |
| | $ | 240,565 |
|
| | | | | | | | |
Allowance for unfunded credit commitments, beginning balance | | $ | 47,000 |
| | $ | 34,889 |
| | $ | 45,265 |
| | $ | 34,415 |
|
Provision for unfunded credit commitments (1) | | 1,113 |
| | 1,054 |
| | 2,789 |
| | 1,601 |
|
Foreign currency translation adjustments | | 59 |
| | (19 | ) | | 118 |
| | (92 | ) |
Allowance for unfunded credit commitments, ending balance (2) | | $ | 48,172 |
| | $ | 35,924 |
| | $ | 48,172 |
| | $ | 35,924 |
|
Ratios and other information: | | | | | | | | |
Provision for loan losses as a percentage of period-end total gross loans (annualized) | | 0.40 | % | | 0.39 | % | | 0.40 | % | | 0.62 | % |
Gross loan charge-offs as a percentage of average total gross loans (annualized) | | 0.23 |
| | 0.52 |
| | 0.33 |
| | 0.53 |
|
Net loan charge-offs as a percentage of average total gross loans (annualized) | | 0.19 |
| | 0.48 |
| | 0.29 |
| | 0.47 |
|
Allowance for loan losses as a percentage of period-end total gross loans | | 1.12 |
| | 1.25 |
| | 1.12 |
| | 1.25 |
|
Provision for credit losses (1) | | $ | 23,522 |
| | $ | 20,004 |
| | $ | 70,062 |
| | $ | 90,225 |
|
Period-end total gross loans | | 22,329,829 |
| | 19,228,928 |
| | 22,329,829 |
| | 19,228,928 |
|
Average total gross loans | | 21,712,866 |
| | 18,762,144 |
| | 20,850,468 |
| | 18,067,893 |
|
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands, except ratios) | | 2020 | | 2019 |
Allowance for credit losses for loans, beginning balance | | $ | 304,924 |
| | $ | 280,903 |
|
Day one impact of adopting ASC 326 | | 25,464 |
| | — |
|
Provision for loans | | 248,901 |
| | 25,821 |
|
Gross loan charge-offs | | (36,896 | ) | | (9,000 | ) |
Loan recoveries | | 7,755 |
| | 1,425 |
|
Foreign currency translation adjustments | | (1,185 | ) | | 1,002 |
|
Allowance for credit losses for loans, ending balance | | $ | 548,963 |
| | $ | 300,151 |
|
Allowance for credit losses for unfunded credit commitments, beginning balance | | 67,656 |
| | 55,183 |
|
Day one impact of adopting ASC 326 | | 22,826 |
| | — |
|
(Reduction of) provision for unfunded credit commitments | | (5,477 | ) | | 2,730 |
|
Foreign currency translation adjustments | | (315 | ) | | 57 |
|
Allowance for credit losses for unfunded credit commitments, ending balance (1) | | $ | 84,690 |
| | $ | 57,970 |
|
Allowance for credit losses for HTM securities, beginning balance | | — |
| | — |
|
Day one impact of adopting ASC 326 | | 174 |
| | — |
|
Provision for HTM securities | | 56 |
| | — |
|
Allowance for credit losses for HTM securities, ending balance (2) | | $ | 230 |
| | $ | — |
|
Ratios and other information: | | | | |
Provision for loans as a percentage of period-end total loans (annualized) (3) | | 2.78 | % | | 0.36 | % |
Allowance for credit losses for loans as a percentage of period-end total loans (3) | | 1.53 |
| | 1.03 |
|
Provision for credit losses | | $ | 243,480 |
| | $ | 28,551 |
|
Period-end total loans (3) | | 35,968,085 |
| | 29,020,519 |
|
Average total loans (3) | | 33,660,728 |
| | 28,555,655 |
|
| |
(1) | Our consolidated statements of income were modified from prior periods’ presentation to conform to the current period presentation, which reflect our provision for loan losses and provision for unfunded credit commitments together as our “provisionThe “allowance for credit losses.” |
| |
(2) | The “allowancelosses for unfunded credit commitments” is included as a component of “other liabilities.”“Other liabilities” on our consolidated balance sheets. |
| |
(2) | The "allowance for credit losses for HTM securities" is included as a component of HTM securities and presented net in our consolidated financial statements. |
| |
(3) | For the three months ended March 31, 2020, loan amounts are disclosed, and ratios are calculated, using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed, and ratios are calculated, using the gross basis. |
Three months ended September 30, 2017March 31, 2020 and 20162019
Our provision for credit losses was $23.5$243.5 million for the three months ended September 30, 2017,March 31, 2020, consisting of a provision for loanloans of $248.9 million, a reduction of our expected credit losses for unfunded credit commitments of $22.4$5.5 million and a $0.1 million provision for our HTM securities. Our provision for credit losses was $28.6 million for the three months ended March 31, 2019, consisting of a provision for loans of $25.8 million and a provision for unfunded credit commitments of $1.1$2.7 million. Our
The provision for credit losses for loans of $248.9 million was $20.0driven primarily by $190.7 million in additional reserves for our performing loans based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic, as well as changes in loan composition within our portfolio segments, $40.9 million in additional reserves for period-end loan growth, $13.1 million for charge-offs not specifically reserved for at December 31, 2019 and $10.7 million in net new nonaccrual loans, partially offset by $7.8 million of recoveries.
A reduction of our expected credit losses for unfunded credit commitments of $5.5 million was driven primarily by a decrease in the expected future commitments for milestone tranches, which are tied to company performance or additional funding rounds, based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic.
The provision for loans of $25.8 million for the three months ended September 30, 2016, consistingMarch 31, 2019 reflects primarily an increase of a provision for loan losses of $19.0 million and a provision for unfunded credit commitments of $1.0 million.
The provision for loan losses of $22.4 million for the three months ended September 30, 2017 primarily reflects $13.8$27.4 million in net new specific reserves for nonaccrual loans, and a $10.9$4.1 million increase in additional reserves for period-end loan growth
offset by a benefit from overall improved credit quality of our loan portfolio and the continued shift in our loan portfolio to private equity/venture capital loans, which tend to be of higher credit quality.
The provision for loan losses of $19.0 million for the three months ended September 30, 2016, was reflective primarily of $8.0 million increase in reserves for performing loans, $5.5$4.9 million for charge-offs that did not previously have a specific reserve, $4.0 million net reserves for nonaccrual loans and $2.8 million for loan growth. The net increase in reserves for nonaccrual loans included a $5.5 million partial reserve release for one of our non-performing sponsored buyout loans due to credit improvement.
Gross loan charge-offs were $12.3 million for three months ended September 30, 2017, of which $6.3 million was not specifically previously reserved for. Gross loan charge-offs were primarily from four clients consisting of $8.7 million from two clients in our software/internet loan portfolio, of which $5.9 million was a late-stage client loan, and two early-stage client loan charge-offs of $3.5 million from our hardware and life science/healthcare portfolios.
Gross loan charge-offs of $24.6 million for, the three months ended September 30, 2016 included $14.2 million from two late-stage clients, all of which, previously, had been fully reserved. Remaining charge-offs were primarily from early-stage clients in our software/internet and hardware loan portfolios.
Nine months ended September 30, 2017 and 2016
Our provision for credit losses was $70.1 million for the nine months ended September 30, 2017, consisting of a provision for loan losses of $67.3 million and a provision for unfunded credit commitments of $2.8 million. Our provision for credit losses was $90.2 million for the third quarter of 2016, consisting of a provision for loan losses of $88.6 million and a provision for unfunded credit commitments of $1.6 million.
The provision for loan losses of $67.3 million for the nine months ended September 30, 2017 was reflective primarily of $51.9 million in net new specific reserves for nonaccrual loans and $20.9 million from period-end loan growth, partially offset by a benefit from overall improved credit qualitydecrease of our loan portfolio and the continued shift in our loan portfolio to private equity/venture capital loans, which tend to be of higher credit quality.
The provision for loan losses of $88.6$8.2 million for the nine months ended September 30, 2016 was reflective of $33.0 million for charge-offs that did not previously have a specific reserve and $23.0 million from period-end loan growth, with the remaining provision due primarily to reserves for new nonaccrual loans.our performing loans reserve.
The provision for unfunded credit commitments of $2.8$2.7 million for nine months ended September 30, 2017 was driven primarily by qualitative allocations based on our loan portfolio being comprised of larger loans. Our provision forgrowth in unfunded credit commitments was $1.6 millionof $1.4 billion for ninethree months ended September 30, 2016.March 31, 2019.
Gross loan charge-offs of $51.4were $36.9 million for the ninefirst quarter of 2020, of which $13.1 million was not specifically reserved for at December 31, 2019. Gross loan charge-offs were primarily driven by a $33.4 million charge-off for our investor dependent clients with one $10.7 million charge-off related to a later-stage life sciences/healthcare client. The remaining charge-offs came primarily from our Sponsor Led Buyout risk-based segment.
Gross loan charge-offs were $9.0 million for the three months ended September 30, 2017 included $27.8March 31, 2019, of which $4.9 million from our early-stagewas not specifically reserved for at December 31, 2018. Gross loan portfolio and $13.0 million from two Corporate Finance client loans. These charge-offs were primarily due to $8.3 million from our software/internet loan portfolio. Gross loan charge-offs of $71.5 million for the nine months ended September 30, 2016 included $35.4 million from ourportfolio driven by three mid-stage clients and one early-stage portfolio and $27.6 million from four late-stage client loans. These charge-offs were primarily from our software/internet loan portfolio.client.
See “Consolidated Financial Condition—Credit Quality and Allowance for Loan Losses”Credit Losses for Loans and for Unfunded Credit Commitments” below and Note 7—“Loans7 — “Loans and Allowance for Loan LossesCredit Losses: Loans and Allowance for Unfunded Credit Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for further details on our allowance for loan losses.credit losses for loans and unfunded credit commitments.
Noninterest Income
For the three and nine months ended September 30, 2017,March 31, 2020, noninterest income was $158.8$301.9 million and $405.0 million, respectively, compared to $144.1 million and $343.1$280.4 million for the comparable 2016 periods.2019 period. For the three and nine months ended September 30, 2017,March 31, 2020, non-GAAP noninterest income, net of noncontrolling interests was $153.2$303.8 million and $383.3 million, respectively, compared to $139.5 million and $339.4$277.1 million for the comparable 2016 periods.2019 period. For the three and nine months ended September 30, 2017,March 31, 2020, non-GAAP core fee income plus investment banking revenue and commissions was $231.3 million compared to $218.1 million for the comparable 2019 period. For the three months ended March 31, 2020, non-GAAP core fee income was $102.7$168.5 million and $272.6 million, respectively, compared to $80.5 million and $231.5$154.2 million for the comparable 2016 periods.2019 period. (See reconciliations of non-GAAP measures used below under “Use of Non-GAAP Financial Measures”.)
Use of Non-GAAP Financial Measures
To supplement our unaudited interim 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 core fee income plus investment banking revenue and commissions, non-GAAP noninterest income, and non-GAAP net gains on investment securities). These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable
measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.
We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding items that represent income attributable to investors other than us and our subsidiaries and other certain non-recurring items.subsidiaries. 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 net income is income and expense attributable to noncontrolling interests. We recognize, as part of our investment funds management business through SVB Capital and SVB Leerink, the entire income or loss from funds consolidated in accordance with ASC Topic 810 as discussed in Note 1—“Basis1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 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) certain line items where performance is typically subject to market or other conditions beyond our control.control, primarily our net gains (losses)
on investment securities and equity warrant assets, (ii) our investment banking revenue and commissions, and (iii) other noninterest income. Core fee income includes client investment fees, foreign exchange fees, credit card fees, deposit service charges, credit card fees, lending related fees, client investment fees and letters of credit and standby letters of credit fees.
Core fee income plus investment banking revenue and commissions is a non-GAAP measure, which represents GAAP noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control, primarily our net gains (losses) on investment securities and equity warrant assets, and other noninterest income. Core fee income plus investment banking revenue and commissions includes core fee income plus investment banking revenue and commissions.
The following table provides a reconciliation of GAAP noninterest income to non-GAAP noninterest income, net of noncontrolling interests, for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
GAAP noninterest income | | $ | 158,778 |
|
| $ | 144,140 |
| | 10.2 | % | | $ | 404,965 |
|
| $ | 343,050 |
| | 18.0 | % |
Less: income attributable to noncontrolling interests, including carried interest allocation | | 5,614 |
| | 4,679 |
| | 20.0 |
| | 21,709 |
| | 3,627 |
| | NM |
|
Non-GAAP noninterest income, net of noncontrolling interests | | $ | 153,164 |
| | $ | 139,461 |
| | 9.8 |
| | $ | 383,256 |
| | $ | 339,423 |
| | 12.9 |
|
NM—Not meaningful |
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 | | % Change |
GAAP noninterest income | | $ | 301,934 |
|
| $ | 280,376 |
| | 7.7 | % |
Less: (loss) income attributable to noncontrolling interests, including carried interest allocation | | (1,854 | ) | | 3,248 |
| | (157.1 | ) |
Non-GAAP noninterest income, net of noncontrolling interests | | $ | 303,788 |
| | $ | 277,128 |
| | 9.6 |
|
The following table provides a reconciliation of GAAP noninterest income to non-GAAP core fee income for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
GAAP noninterest income | | $ | 158,778 |
| | $ | 144,140 |
| | 10.2 | % | | $ | 404,965 |
| | $ | 343,050 |
| | 18.0 | % | | $ | 301,934 |
| | $ | 280,376 |
| | 7.7 | % |
Less: gains on investment securities, net | | 15,238 |
| | 23,178 |
| | (34.3 | ) | | 48,838 |
| | 41,764 |
| | 16.9 |
| | 46,055 |
| | 29,028 |
| | 58.7 |
|
Less: gains on equity warrant assets, net | | 24,922 |
| | 21,558 |
| | 15.6 |
| | 42,432 |
| | 33,253 |
| | 27.6 |
| | 13,395 |
| | 21,305 |
| | (37.1 | ) |
Less: other noninterest income | | 15,896 |
| | 18,878 |
| | (15.8 | ) | | 41,128 |
| | 36,511 |
| | 12.6 |
| | 11,137 |
| | 11,897 |
| | (6.4 | ) |
Non-GAAP core fee income (1) | | $ | 102,722 |
| | $ | 80,526 |
| | 27.6 |
| | $ | 272,567 |
| | $ | 231,522 |
| | 17.7 |
| |
Non-GAAP core fee income plus investment banking revenue and commissions (1) | | | $ | 231,347 |
| | $ | 218,146 |
| | 6.1 |
|
Less: investment banking revenue | | | 46,867 |
| | 49,795 |
| | (5.9 | ) |
Less: commissions | | | 16,022 |
| | 14,108 |
| | 13.6 |
|
Non-GAAP core fee income (2) | | | $ | 168,458 |
| | $ | 154,243 |
| | 9.2 |
|
| |
(1) | Non-GAAP core fee income plus investment banking revenue and commissions 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 investment banking revenue and commissions is Non-GAAP core fee income (as defined in the subsequent footnote) with the addition of investment banking revenue and commissions. |
| |
(2) | 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, 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. |
Gains on Investment Securities, Net
Net gains and losses on investment securities include 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 available-for-saleAFS debt securities portfolio, when applicable.
Our available-for-sale 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 the guidelines of our investment policy related to the
management of our liquidity position and interest rate risk. Though infrequent, sales of investment securities in our available-for-sale securities portfolio may result in net gains or losses and are also conducted pursuant to the guidelines of our investment policy.
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies and investments in qualified affordable housing projects. We experience variability in the performance of our non-marketable and other equity securities from quarterperiod to quarter,period, which results in net gains or losses on investment securities (both realized and unrealized). This variability is due to a number of factors, including unrealized changes in the values of our investments, changes in the amount of realized gains and losses from distributions, changes in liquidity events and general economic and market conditions. Unrealized gains or losses from non-marketable and other equity securities for any single period are typically driven by valuation changes, and are therefore subject to potential increases or decreases in future periods. Such variability may
lead to volatility in the gains or losses from investment securities. As such, our results for a particular period are not necessarily indicative of our expected performance in a future period.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of certain sales restrictions to which these equity securities may be subject to (i.e.(e.g. lock-up agreements), changes in prevailing market prices, market conditions, the actual sales or distributions of securities, and the timing of such actual sales or distributions, which, to the extent such securities are managed by our managed funds, are subject to our funds' separate discretionary sales/distributions and governance processes.
Our AFS securities portfolio is a fixed income investment portfolio that is managed with the objective of earning an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. Though infrequent, sales of debt securities in our AFS securities portfolio may result in net gains or losses and are conducted pursuant to the guidelines of our investment policy related to the management of our liquidity position and interest rate risk.
Three months ended September 30, 2017March 31, 2020 and 20162019
For the three months ended September 30, 2017,March 31, 2020, we had net gains on investment securities of $15.2$46.1 million, compared to $23.2$29.0 million for the comparable 20162019 period. Non-GAAP net gains on investment securities, net of noncontrolling interests, were $9.7$47.6 million for the three months ended September 30, 2017,March 31, 2020, compared to $18.4non-GAAP net gains, net of controlling interest of $25.6 million for the comparable 20162019 period.
Non-GAAP net gains on investment securities, net of noncontrolling interests, of $9.7$47.6 million for the three months ended September 30, 2017March 31, 2020 were driven by the following:
| |
• | Gains of $61.2 million from our AFS debt securities portfolio, resulting from the sale of $2.6 billion of U.S. Treasury securities during the quarter, offset by |
| |
• | Losses of $4.2 million from our public equity securities investments, primarily driven by unrealized losses due to decreases in the value of public equity securities held, and |
GainsLosses of $3.7$7.5 million from our SVB Capital managed funds and strategic and otherdirect investments comprised primarily(comprised of realized gains from distributions from our strategic venture capital fund investments reflective of M&A activity,
Gains of $3.1 million from our managed funds of funds, portfolio, relatedmanaged direct venture funds, debt funds and strategic and other investments components below) primarily driven by a downward valuation adjustment of $17.1 million for illiquid investments held in the private managed funds and companies of our portfolios due to the current market volatility. The downward valuation adjustment was offset by unrealized net unrealized valuation increases in thefrom private company investments held byin these portfolios.
Notwithstanding the funds driven by IPO and M&A activity, and
Gains of $2.4 milliongains from our sale of U.S. Treasury securities in our AFS debt fundssecurities portfolio, related primarily to net unrealized valuation increases in the investments held by the funds driven by IPO activity during the third quarter of 2017.
Nine months ended September 30, 2017 and 2016
For the nine months ended September 30, 2017, we had netour total gains on investment securities of $48.8 million, compared to $41.8 million for the comparable 2016 period. Non-GAAP net gainsremaining portfolio were negatively impacted by COVID-19 market conditions towards the end of the first quarter of 2020. We expect continued pressure on our investment securities net of noncontrolling interests, were $27.4 million for the nine months endedSeptember 30, 2017, comparedin 2020 as we anticipate public markets to net gains of $38.1 million for the comparable 2016 period.
Non-GAAP net gains, net of noncontrolling interests, of $27.4 million for the nine months ended September 30, 2017 were driven by the following:
Gains of $14.2 million from our strategic and other investments, attributable primarilycontinue to distribution gains from our strategic venture capital funds investments and $3.4 million related to the partial sale of shares of one of our direct equity investments,
Gains of $9.4 million from our managed funds of funds portfolio, related primarily to net unrealized valuation increasesfluctuate, as well as a slowdown in the investments held by the funds driven by IPO, M&A and other private equity-backed financing activity, and
market activities, due to the COVID-19 pandemic.
Gains of $2.7 million from our debt funds portfolio, related primarily to net unrealized valuation increases in the investments held by the funds driven by IPO activity during the nine months ended September 30, 2017.
The following table providestables provide 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 the three and nine months ended September 30, 2017March 31, 2020 and 2016:
2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Managed Funds of Funds | | Managed Direct Venture Funds | | Debt Funds | | Available- For-Sale Securities | | Strategic and Other Investments | | Total |
Three months ended September 30, 2017 | | | | | | | | | | | | |
Total gains (losses) on investment securities, net | | $ | 8,446 |
| | $ | 729 |
| | $ | 2,445 |
| | $ | (101 | ) | | $ | 3,719 |
| | $ | 15,238 |
|
Less: income attributable to noncontrolling interests, including carried interest allocation | | 5,335 |
| | 161 |
| | — |
| | — |
| | — |
| | 5,496 |
|
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 3,111 |
| | $ | 568 |
| | $ | 2,445 |
| | $ | (101 | ) | | $ | 3,719 |
| | $ | 9,742 |
|
| | | | | | | | | | | | |
Three months ended September 30, 2016 | | | | | | | | | | | | |
Total gains (losses) on investment securities, net | | $ | 8,931 |
| | $ | 390 |
| | $ | 166 |
| | $ | (15 | ) | | $ | 13,706 |
| | $ | 23,178 |
|
Less: income attributable to noncontrolling interests, including carried interest allocation | | 4,615 |
| | 130 |
| | — |
| | — |
| | — |
| | 4,745 |
|
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 4,316 |
| | $ | 260 |
| | $ | 166 |
| | $ | (15 | ) | | $ | 13,706 |
| | $ | 18,433 |
|
| | | | | | | | | | | | |
Nine months ended September 30, 2017 | | | | | | | | | | | | |
Total gains on investment securities, net | | $ | 30,624 |
| | $ | 894 |
| | $ | 2,696 |
| | $ | 384 |
| | $ | 14,240 |
| | $ | 48,838 |
|
Less: income attributable to noncontrolling interests, including carried interest allocation | | 21,245 |
| | 178 |
| | — |
| | — |
| | — |
| | 21,423 |
|
Non-GAAP net gains on investment securities, net of noncontrolling interests | | $ | 9,379 |
| | $ | 716 |
| | $ | 2,696 |
| | $ | 384 |
| | $ | 14,240 |
| | $ | 27,415 |
|
| | | | | | | | | | | | |
Nine months ended September 30, 2016 | | | | | | | | | | | | |
Total gains (losses) on investment securities, net | | $ | 5,830 |
| | $ | (411 | ) | | $ | 801 |
| | $ | 11,567 |
| | $ | 23,977 |
| | $ | 41,764 |
|
Less: income (losses) attributable to noncontrolling interests, including carried interest allocation | | 3,668 |
| | (17 | ) | | — |
| | — |
| | — |
| | 3,651 |
|
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | 2,162 |
| | $ | (394 | ) | | $ | 801 |
| | $ | 11,567 |
| | $ | 23,977 |
| | $ | 38,113 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Managed Funds of Funds | | Managed Direct Venture Funds | | Public Equity Securities | | Debt Funds | | Sales of AFS Securities | | Strategic and Other Investments | | SVB Leerink | | Total |
Three months ended March 31, 2020 | | | | | | | | | | | | | | | | |
Total gains (losses) on investment securities, net |
| $ | (2,464 | ) | | $ | (2,272 | ) |
| $ | (4,206 | ) |
| $ | (362 | ) |
| $ | 61,165 |
|
| $ | (4,017 | ) | | $ | (1,789 | ) | | $ | 46,055 |
|
Less: (loss) income attributable to noncontrolling interests, including carried interest allocation |
| (306 | ) | | (1,327 | ) |
| — |
|
| — |
|
| — |
|
| — |
| | 98 |
| | (1,535 | ) |
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests | | $ | (2,158 | ) | | $ | (945 | ) | | $ | (4,206 | ) | | $ | (362 | ) | | $ | 61,165 |
| | $ | (4,017 | ) | | $ | (1,887 | ) | | $ | 47,590 |
|
| | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | | | | | | | | |
Total gains (losses) on investment securities, net | | $ | 6,229 |
| | $ | (634 | ) | | $ | 9,636 |
| | $ | — |
| | $ | (3,630 | ) | | $ | 15,002 |
| | $ | 2,425 |
| | $ | 29,028 |
|
Less: income (loss) attributable to noncontrolling interests, including carried interest allocation | | 3,745 |
| | (309 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | $ | 3,436 |
|
Non-GAAP net gains (loss) on investment securities, net of noncontrolling interests | | $ | 2,484 |
| | $ | (325 | ) | | $ | 9,636 |
| | $ | — |
| | $ | (3,630 | ) | | $ | 15,002 |
| | $ | 2,425 |
| | $ | 25,592 |
|
Gains on Equity Warrant Assets, Net
Three months ended March 31, 2020 and 2019
Net gains on equity warrant assets were $13.4 million for the three months ended March 31, 2020, compared to net gains of $21.3 million for the comparable 2019 period. Net gains on equity warrant assets for the three months ended March 31, 2020 consisted of:
| |
• | Net gains of $19.2 million from the exercise of equity warrant assets, partially offset by |
| |
• | Net losses of $5.5 million from warrant valuations in our private company warrant portfolio consisting of an overall downward valuation adjustment of $8.2 million due to the current market volatility, partially offset by net valuation increases. |
Our equity warrant assets were also negatively impacted by COVID-19 market conditions towards the end of the first quarter of 2020. We expect continued pressure on our equity warrant asset valuations and warrant activities in 2020 as we anticipate a slowdown in IPO, M&A and other private market activities due to the COVID-19 pandemic.
A summary of gains on equity warrant assets, net, for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Equity warrant assets (1) | | | | | | | | | | | | | |
Equity warrant assets (1): | | | | | | | |
Gains on exercises, net | | $ | 7,449 |
| | $ | 5,931 |
| | 25.6 | % | | $ | 22,482 |
| | $ | 13,808 |
| | 62.8 | % | | $ | 19,193 |
| | $ | 5,482 |
| | NM |
|
Cancellations and expirations | | (757 | ) | | (1,161 | ) | | (34.8 | ) | | (3,614 | ) | | (2,544 | ) | | 42.1 |
| |
Terminations | | | (326 | ) | | (415 | ) | | (21.4 | )% |
Changes in fair value, net | | 18,230 |
| | 16,788 |
| | 8.6 |
| | 23,564 |
| | 21,989 |
| | 7.2 |
| | (5,472 | ) | | 16,238 |
| | (133.7 | ) |
Gains on equity warrant assets, net | | $ | 24,922 |
| | $ | 21,558 |
| | 15.6 |
| | $ | 42,432 |
| | $ | 33,253 |
| | 27.6 |
| |
Total gains on equity warrant assets, net | | | $ | 13,395 |
| | $ | 21,305 |
| | (37.1 | ) |
NM—Not meaningful
| |
(1) | At September 30, 2017,March 31, 2020, we held warrants in 1,8422,342 companies, compared to 1,7192,149 companies at September 30, 2016.March 31, 2019. The total fair value of our warrant portfolio was $142 million at September 30, 2017 and $145$152.7 million at September 30, 2016.March 31, 2020 and $162.2 million at March 31, 2019. Warrants in 1619 companies each had fair values greater than $1.0 million and collectively represented $51.7$46.7 million, or 36.530.6 percent, of the fair value of the total warrant portfolio at September 30, 2017. March 31, 2020. Warrants in 26 companies each had fair values greater than $1.0 million and collectively represented $56.8 million, or 35.0 percent, of the fair value of the total warrant portfolio at March 31, 2019. |
Three months ended September 30, 2017 and 2016
Net gains on equity warrant assets were $24.9 million for the three months ended September 30, 2017, compared to net gains of $21.6 million for the comparable 2016 period. Net gains on equity warrant assets for the three months ended September 30, 2017 consisted of:
Net gains of $18.2 million from changes in warrant valuations for the three months endedSeptember 30, 2017, compared to net gains of $16.8 million for the comparable 2016 period, driven by an increase of $15.9 million in the valuation of one company in our portfolio associated with its IPO during the third quarter of 2017, and
Net gains of $7.4 million from the exercise of equity warrant assets during the three months ended September 30, 2017, compared to net gains of $5.9 million for the comparable 2016 period, reflective of increased M&A activity in the third quarter of 2017.
Nine months ended September 30, 2017 and 2016
Net gains on equity warrant assets were $42.4 million for the nine months ended September 30, 2017, compared to net gains of $33.3 million for the comparable 2016 period. Net gains on equity warrant assets for the nine months ended September 30, 2017 consisted of:
Net gains of $22.5 million from the exercise of equity warrant assets for the nine months endedSeptember 30, 2017, compared to net gains of $13.8 million for the comparable 2016 period, reflective primarily of increased M&A and IPO activity during the nine months endedSeptember 30, 2017, and
Net gains of $23.6 million from changes in warrant valuations for the nine months endedSeptember 30, 2017, compared to net gains of $22.0 million for the comparable 2016 period, driven primarily by an increase in the valuation of one company in our portfolio associated with its IPO during the third quarter of 2017 as mentioned above as well as increases in valuation in our private company warrant portfolio reflective of M&A exit activity during the nine months endedSeptember 30, 2017.
Non-GAAP Core Fee Income
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Non-GAAP core fee income (1): | | | | | | | | | | | | | | | | | | |
Client investment fees | | | $ | 43,393 |
| | $ | 44,482 |
| | (2.4 | )% |
Foreign exchange fees | | $ | 29,671 |
| | $ | 25,944 |
| | 14.4 | % | | $ | 82,026 |
| | $ | 76,998 |
| | 6.5 | % | | 47,505 |
| | 38,048 |
| | 24.9 |
|
Credit card fees | | 20,270 |
| | 18,295 |
| | 10.8 |
| | 56,099 |
| | 49,226 |
| | 14.0 |
| | 28,304 |
| | 27,483 |
| | 3.0 |
|
Deposit service charges | | 14,508 |
| | 13,356 |
| | 8.6 |
| | 43,046 |
| | 39,142 |
| | 10.0 |
| | 24,589 |
| | 20,939 |
| | 17.4 |
|
Client investment fees | | 15,563 |
| | 7,952 |
| | 95.7 |
| | 37,571 |
| | 23,959 |
| | 56.8 |
| |
Lending related fees | | 15,404 |
| | 8,168 |
| | 88.6 |
| | 32,874 |
| | 23,783 |
| | 38.2 |
| | 13,125 |
| | 13,937 |
| | (5.8 | ) |
Letters of credit and standby letters of credit fees | | 7,306 |
| | 6,811 |
| | 7.3 |
| | 20,951 |
| | 18,414 |
| | 13.8 |
| | 11,542 |
| | 9,354 |
| | 23.4 |
|
Total non-GAAP core fee income (1) | | $ | 102,722 |
| | $ | 80,526 |
| | 27.6 |
| | $ | 272,567 |
| | $ | 231,522 |
| | 17.7 |
| | $ | 168,458 |
| | $ | 154,243 |
| | 9.2 |
|
Investment banking revenue | | | 46,867 |
| | 49,795 |
| | (5.9 | ) |
Commissions | | | 16,022 |
| | 14,108 |
| | 13.6 |
|
Total non-GAAP core fee income plus investment banking revenue and commissions (2) | | | $ | 231,347 |
| | $ | 218,146 |
| | 6.1 |
|
| |
(1) | This non-GAAP measure represents noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control.control, (ii) our investment banking revenue and commissions and (iii) other noninterest income. See “Use of Non-GAAP Measures” above. |
Foreign Exchange Fees
Foreign exchange fees were $29.7 million and $82.0 million for the three and nine months ended September 30, 2017, compared to $25.9 million and $77.0 million for the comparable 2016 periods. The increases in foreign exchange fees were driven by our continued investments in people, expertise and focused client engagement, largely from our focus on our foreign exchange business as a key area targeted for growth, resulting in increased client count and higher trade volumes from existing clients across all of our client portfolios.
Credit Card Fees
Credit card fees were $20.3 million and $56.1 million for the three and nine months endedSeptember 30, 2017, compared to $18.3 million and $49.2 million for the comparable 2016 periods. The increases were primarily due to higher interchange fee income driven by an increase in transaction volume reflective of higher spend by our commercial clients and our focus on our credit card business as a key area targeted for growth. The increases in interchange fee income were partially offset by increases in rebate/rewards expense for the three and nine months ended September 30, 2017.
Deposit Service Charges
Deposit service charges were $14.5 million and $43.0 million for the three and nine months ended September 30, 2017, compared to $13.4 million and $39.1 million for the comparable 2016 periods. The increases were reflective of higher deposit client counts, as well as an increase in transaction volumes, during the three and nine months ended September 30, 2017.
Lending Related Fees
Lending related fees were $15.4 million and $32.9 million for the three and nine months ended September 30, 2017, compared to $8.2 million and $23.8 million for the comparable 2016 periods. The increases were due primarily to an adjustment of $4.5 million related to fees earned in prior periods from unused lines of credit with the remaining increase attributable primarily to higher loan syndication fee income for the three and nine months ended September 30, 2017.
| |
(2) | Non-GAAP core fee income plus investment banking revenue and commissions 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. See “Use of Non-GAAP Measures” above. |
Client Investment Fees
Client investment fees were $15.6 million and $37.6$43.4 million for the three and nine months ended September 30, 2017,March 31, 2020, compared to $8.0 million and $24.0$44.5 million for the comparable 2016 periods.2019 period. The increases were attributable primarilydecrease was reflective of lower spreads due to increasesdecreases in the Federal Funds interest rates, offset by growth in average client investment fund balances driven by our clients’ increased utilization of off-balance sheet products managed by SVB Asset Management and third-party sweep money market funds, as well as from improved spreads on our client investment funds due to increases in general market rates and the reintroduction of fees that had been previously waived due to the$16.2 billion from March 31, 2019. Given our expectations of a continued low rate environment.environment, we generally expect client investment fees in 2020 to be lower than 2019. A summary of client investment fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 | | % Change |
Client investment fees by type: | | | | | | |
Sweep money market fees | | $ | 23,049 |
| | $ | 26,544 |
| | (13.2 | )% |
Asset management fees | | 9,137 |
| | 6,671 |
| | 37.0 |
|
Repurchase agreement fees | | 11,207 |
| | 11,267 |
| | (0.5 | ) |
Total client investment fees | | $ | 43,393 |
| | $ | 44,482 |
| | (2.4 | ) |
The following table summarizes average client investment funds for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in millions) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Client directed investment assets (1) | | $ | 6,985 |
| | $ | 6,846 |
| | 2.0 | % | | $ | 6,190 |
| | $ | 7,137 |
| | (13.3 | )% | |
Sweep money market funds | | | $ | 43,045 |
| | $ | 39,805 |
| | 8.1 | % |
Client investment assets under management (2)(1) | | 26,123 |
| | 20,692 |
| | 26.2 |
| | 24,531 |
| | 21,215 |
| | 15.6 |
| | 50,746 |
| | 39,247 |
| | 29.3 |
|
Sweep money market funds | | 20,165 |
| | 15,567 |
| | 29.5 |
| | 18,783 |
| | 14,468 |
| | 29.8 |
| |
Repurchase agreements | | | 9,799 |
| | 8,362 |
| | 17.2 |
|
Total average client investment funds (3)(2) | | $ | 53,273 |
| | $ | 43,105 |
| | 23.6 |
| | $ | 49,504 |
| | $ | 42,820 |
| | 15.6 |
| | $ | 103,590 |
| | $ | 87,414 |
| | 18.5 |
|
| |
(1) | Comprised of mutual funds and Repurchase Agreement Program assets. |
| |
(2) | These funds represent investments in third partythird-party money market mutual funds and fixed-income securities managed by SVB Asset Management. |
| |
(3)(2) | Client investment funds are maintained at third partythird-party financial institutions and are not recorded on our balance sheet. |
The following table summarizes period-end client investment funds at September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | (Dollars in millions) | | September 30, 2017 | | December 31, 2016 | | % Change | | March 31, 2020 | | December 31, 2019 | | % Change |
Client directed investment assets (1) | | $ | 6,860 |
| | $ | 5,510 |
| | 24.5 | % | |
Sweep money market funds | | | $ | 44,833 |
| | $ | 43,226 |
| | 3.7 | % |
Client investment assets under management (2)(1) | | 26,718 |
| | 23,115 |
| | 15.6 |
| | 51,020 |
| | 46,904 |
| | 8.8 |
|
Sweep money market funds | | 20,664 |
| | 17,173 |
| | 20.3 |
| |
Repurchase agreements | | | 11,099 |
| | 9,062 |
| | 22.5 |
|
Total period-end client investment funds (3)(2) | | $ | 54,242 |
| | $ | 45,798 |
| | 18.4 |
| | $ | 106,952 |
| | $ | 99,192 |
| | 7.8 |
|
| |
(1) | Comprised of mutual funds and Repurchase Agreement Program assets. |
| |
(2) | These funds represent investments in third partythird-party money market mutual funds and fixed-income securities managed by SVB Asset Management. |
| |
(3)(2) | Client investment funds are maintained at third partythird-party financial institutions and are not recorded on our balance sheet. |
Foreign Exchange Fees
Other Noninterest Income
Foreign exchange fees were $47.5 million for the three months ended March 31, 2020, compared to $38.0 million for the comparable 2019 period. The increase in foreign exchange fees was driven primarily by increases in spot contract commissions driven by increased volume of trades for the three months ended March 31, 2020 compared to the 2019 period. The volume of trades for spot contracts increased 16.0 percent for the three months ended March 31, 2020, compared to the comparable 2019 period reflective primarily of our global expansion initiative and increased client engagement efforts. Despite a strong first quarter 2020 for foreign exchange fees, we expect foreign exchange activity to subside in 2020 given a general slowdown in business activity. A summary of other noninterestforeign exchange fee income by instrument type for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Fund management fees | | $ | 5,198 |
| | $ | 5,231 |
| | (0.6 | )% | | $ | 15,903 |
| | $ | 14,149 |
| | 12.4 | % |
Service-based fee income | | 469 |
| | 2,029 |
| | (76.9 | ) | | 3,860 |
| | 6,270 |
| | (38.4 | ) |
Gains on revaluation of client foreign currency instruments, net (1) | | 3,760 |
| | 3,488 |
| | 7.8 |
| | 8,889 |
| | 7,009 |
| | 26.8 |
|
Losses on client foreign exchange forward contracts, net (1) | | (3,871 | ) | | (3,194 | ) | | 21.2 |
| | (8,350 | ) | | (8,780 | ) | | (4.9 | ) |
Gains (losses) on revaluation of internal foreign currency instruments, net (2) | | 10,561 |
| | (1,406 | ) | | NM |
| | 29,265 |
| | (4,222 | ) | | NM |
|
(Losses) gains on internal foreign exchange contracts, net (2) | | (10,550 | ) | | 1,352 |
| | NM |
| | (28,349 | ) | | 3,067 |
| | NM |
|
Other (3) | | 10,329 |
| | 11,378 |
| | (9.2 | ) | | 19,910 |
| | 19,018 |
| | 4.7 |
|
Total other noninterest income | | $ | 15,896 |
| | $ | 18,878 |
| | (15.8 | ) | | $ | 41,128 |
| | $ | 36,511 |
| | 12.6 |
|
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 |
| 2019 |
| % Change |
Foreign exchange fees by instrument type: | | | | | | |
Spot contract commissions | | $ | 40,934 |
| | $ | 35,029 |
| | 16.9 | % |
Forward contract commissions | | 6,339 |
| | 2,995 |
| | 111.7 |
|
Option premium fees | | 232 |
| | 24 |
| | NM |
|
Total foreign exchange fees | | $ | 47,505 |
| | $ | 38,048 |
| | 24.9 |
|
NM—Not meaningful
| |
(1) | Represents the net revaluation of client foreign currency denominated financial instruments. We enter into client foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client foreign currency denominated financial instruments. |
| |
(2) | Represents the net revaluation of foreign currency denominated financial instruments issued and held by us, primarily loans, deposits and cash. We enter into internal foreign exchange forward contracts to economically reduce our foreign exchange exposure related to these foreign currency denominated financial instruments issued and held by us. |
| |
(3) | Includes dividends on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest and other fee income. |
Three months ended September 30, 2017 and 2016Credit Card Fees
Total other noninterest income was $15.9Credit card fees were $28.3 million for the three months ended September 30, 2017,March 31, 2020, compared to $18.9 million for the comparable 2016 period. The decrease of $3.0 million in other noninterest income was due to the following:
Service-based fee income of $0.5 million compared to $2.0$27.5 million for the comparable
20162019 period. The
$1.5 million decreaseincrease was primarily due to
the sale of our equity valuation services businesshigher net interchange fees during the
third quarterfirst two months of
2017,2020, offset by a decrease in March 2020 from lower transactions reflective of interrupted normal business activity from the COVID-19 pandemic. Given the general slowdown in business activities due to the COVID-19 pandemic which impacts card activities, we expect credit card fees in 2020 to be lower than 2019 in anticipation of reduced transaction volume. A summary of credit card fees by instrument type for the three months ended March 31, 2020 and
2019 is as follows:Other noninterest income of $10.3 |
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 | | % Change |
Credit card fees by instrument type: | | | | | | |
Card interchange fees, net | | $ | 21,775 |
| | $ | 21,393 |
| | 1.8 | % |
Merchant service fees | | 5,027 |
| | 4,534 |
| | 10.9 |
|
Card service fees | | 1,502 |
| | 1,556 |
| | (3.5 | ) |
Total credit card fees | | $ | 28,304 |
| | $ | 27,483 |
| | 3.0 |
|
Deposit Service Charges
Deposit service charges were $24.6 million for the three months ended March 31, 2020, compared to $11.4$20.9 million for the comparable 2016 period. The $1.1 million decrease was primarily attributable to higher carried interest income earned from one of our unconsolidated fund investments during the third quarter of 2016 as compared to the third quarter of 2017.
Nine months ended September 30, 2017 and 2016
Total other noninterest income was $41.1 million for the nine months endedSeptember 30, 2017, compared $36.5 million for the comparable 2016 period. The increase of $4.6 million in other noninterest income was due to the following:
Fund management fees of $15.9 million compared to fees of $14.1 million for the comparable 20162019 period. The increase was reflective of higher deposit client counts as well as higher volumes of our transaction-based fee products during the three months ended March 31, 2020. We generally expect deposit service charges to be lower in 2020 than 2019 due primarily to lower volumes of transaction-based fee products and higher earnings credit rates.
Lending Related Fees
Lending related fees were $13.1 million for the addition of new managed funds at SVB Capital,
Service-based fee income of $3.9 millionthree months ended March 31, 2020, compared to $6.3 million for the comparable 2016 period. The $2.4 million decrease was primarily due to the sale of our equity valuation services business during the third quarter of 2017,
Net gains of $0.5 million on client foreign exchange forward contracts and the revaluation of client foreign currency denominated cash for the nine months ended September 30, 2017, compared to net losses of $1.8$13.9 million for the comparable 20162019 period. The net lossesdecrease was reflective of a decrease in unused commitment fees, reflective of increased utilization of unfunded credit commitments, partially offset by an increase in loan servicing fees. A summary of lending related fees by type for the ninethree months ended September 30, 2016March 31, 2020 and 2019 is as follows:
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 | | % Change |
Lending related fees by instrument type: | | | | | | |
Unused commitment fees | | $ | 8,406 |
| | $ | 9,670 |
| | (13.1 | )% |
Other | | 4,719 |
| | 4,267 |
| | 10.6 |
|
Total lending related fees | | $ | 13,125 |
| | $ | 13,937 |
| | (5.8 | ) |
Letters of Credit and Standby Letters of Credit Fees
Letters of credit and standby letters of credit fees were $11.5 million for the three months ended March 31, 2020, compared to $9.4 million for the comparable 2019 period. The increase was primarily driven by an increase in deferred fee income reflective of larger letter of credit issuances. We generally expect lower fees in 2020 due to a reclassification of $2.8reduced international trade activities.
Investment Banking Revenue
Investment banking revenue was $46.9 million in unrealized gains on forward contracts to foreign exchange fee income reflecting fees earned on forward contracts executed on behalf of our clients that were previously recorded in gains on derivative instruments, and
Net gains of $0.9 million on internal foreign exchange forward contracts and the revaluation of internal foreign currency denominated cash for the ninethree months ended September 30, 2017,March 31, 2020, compared to net losses of $1.2$49.8 million for the comparable 20162019 period. The net lossesdecrease is primarily attributable to lower levels of $1.2exit activity in the life science/healthcare IPO market which began to decline significantly starting in March of 2020 due to the COVID-19 pandemic. We generally expect investment banking revenues to be lower in 2020 than 2019 due to a slowdown in IPO and M&A activities due to COVID-19 market conditions. A summary of investment banking revenue by type for the three months ended March 31, 2020 and 2019 is as follows:
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 | | % Change |
Investment banking revenue: | | | | | | |
Underwriting fees | | $ | 31,290 |
| | $ | 35,772 |
| | (12.5 | )% |
Advisory fees | | 15,487 |
| | 12,273 |
| | 26.2 |
|
Private placements and other | | 90 |
| | 1,750 |
| | (94.9 | ) |
Total investment banking revenue | | $ | 46,867 |
| | $ | 49,795 |
| | (5.9 | ) |
Commissions
Commissions for the three months ended March 31, 2020 were $16.0 million, compared to $14.1 million for the nine months ended September 30, 2016 were primarilycomparable 2019 period. The increase was driven by client trading activity, consistent with market volumes. Commissions include commissions received from clients for the execution of agency-based brokerage transactions in listed and over-the-counter equities. As a result of volatility in market conditions due to the strengtheningeffects of the U.S. dollar against various foreign currencies during the nine months ended September 30, 2016.
COVID-19, sales and trading activities and underlying commissions may be positively impacted in 2020.Noninterest Expense
A summary of noninterest expense for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 |
| 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 |
| 2019 | | % Change |
Compensation and benefits | | $ | 153,263 |
| | $ | 136,568 |
| | 12.2 | % | | $ | 449,412 |
| | $ | 374,410 |
| | 20.0 | % | | $ | 255,586 |
| | $ | 238,061 |
| | 7.4 | % |
Professional services | | 32,987 |
| | 23,443 |
| | 40.7 |
| | 86,331 |
| | 67,959 |
| | 27.0 |
| | 38,705 |
| | 36,986 |
| | 4.6 |
|
Premises and equipment | | 18,937 |
| | 16,291 |
| | 16.2 |
| | 53,753 |
| | 47,861 |
| | 12.3 |
| | 26,940 |
| | 21,700 |
| | 24.1 |
|
Net occupancy | | | 18,346 |
| | 16,048 |
| | 14.3 |
|
Business development and travel | | 10,329 |
| | 8,504 |
| | 21.5 |
| | 30,913 |
| | 30,077 |
| | 2.8 |
| | 14,071 |
| | 15,354 |
| | (8.4 | ) |
Net occupancy | | 12,660 |
| | 9,525 |
| | 32.9 |
| | 35,437 |
| | 28,919 |
| | 22.5 |
| |
FDIC and state assessments | | 8,359 |
| | 7,805 |
| | 7.1 |
| | 26,354 |
| | 21,624 |
| | 21.9 |
| | 5,234 |
| | 3,979 |
| | 31.5 |
|
Correspondent bank fees | | 3,162 |
| | 3,104 |
| | 1.9 |
| | 9,770 |
| | 9,469 |
| | 3.2 |
| |
Other | | 18,064 |
| | 15,533 |
| | 16.3 |
| | 54,670 |
| | 44,292 |
| | 23.4 |
| | 40,703 |
| | 33,536 |
| | 21.4 |
|
Total noninterest expense (1) | | $ | 257,761 |
| | $ | 220,773 |
| | 16.8 |
| | $ | 746,640 |
| | $ | 624,611 |
| | 19.5 |
| |
Total noninterest expense | | | $ | 399,585 |
| | $ | 365,664 |
| | 9.3 |
|
| |
(1) | Our consolidated statements of income were modified from prior periods' presentation to the current period presentation, which reflects our provision for loan losses and provision for unfunded credit commitments together as our “provision for credit losses”. In prior periods, our provision for unfunded credit commitments were reported separately as a component of noninterest expense. |
Included in noninterest expense is expense attributable to noncontrolling interests. See below for a description and reconciliation of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio, both of which exclude noncontrolling interests.
Non-GAAP Noninterest Expense
We use and report non-GAAP noninterest expense, non-GAAP taxable equivalent revenue and non-GAAP core operating efficiency ratio, which excludes noncontrolling interests.interests and SVB Leerink. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by: (i) excluding certain items that represent expenses attributable to investors other than us and our subsidiaries, or certain items that do not occur every reporting period; or (ii) providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.
The table below provides a summary of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio both net of noncontrolling interests for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands, except ratios) | | 2017 |
| 2016 | | % Change | | 2017 | | 2016 | | % Change | |
Non-GAAP core operating efficiency ratio (Dollars in thousands, except ratios) | | | 2020 |
| 2019 | | % Change |
GAAP noninterest expense | | $ | 257,761 |
| | $ | 220,773 |
| | 16.8 | % | | $ | 746,640 |
| | $ | 624,611 |
| | 19.5 | % | | $ | 399,585 |
| | $ | 365,664 |
| | 9.3 | % |
Less: amounts attributable to noncontrolling interests | | 125 |
| | 117 |
| | 6.8 |
| | 517 |
| | 284 |
| | 82.0 |
| |
Less: expense attributable to noncontrolling interests | | | 140 |
| | 379 |
| | (63.1 | ) |
Non-GAAP noninterest expense, net of noncontrolling interests | | $ | 257,636 |
| | $ | 220,656 |
| | 16.8 |
| | $ | 746,123 |
| | $ | 624,327 |
| | 19.5 |
| | 399,445 |
| | 365,285 |
| | 9.4 |
|
Less: expense attributable to SVB Leerink | | | 62,037 |
| | 60,540 |
| | 2.5 |
|
Non-GAAP noninterest expense, net of noncontrolling interests and SVB Leerink | | | $ | 337,408 |
| | $ | 304,745 |
| | 10.7 |
|
| | | | | | | | | | | | | | | | | | |
GAAP net interest income | | $ | 373,974 |
| | $ | 289,161 |
| | 29.3 |
| | $ | 1,026,663 |
| | $ | 853,918 |
| | 20.2 |
| | $ | 524,137 |
| | $ | 512,886 |
| | 2.2 |
|
Adjustments for taxable equivalent basis | | 631 |
| | 281 |
| | 124.6 |
| | 1,455 |
| | 912 |
| | 59.5 |
| | 3,409 |
| | 2,907 |
| | 17.3 |
|
Non-GAAP taxable equivalent net interest income | | $ | 374,605 |
| | $ | 289,442 |
| | 29.4 |
| | $ | 1,028,118 |
| | $ | 854,830 |
| | 20.3 |
| | 527,546 |
| | 515,793 |
| | 2.3 |
|
Less: income attributable to noncontrolling interests | | 9 |
| | 4 |
| | 125.0 |
| | 26 |
| | 62 |
| | (58.1 | ) | | 21 |
| | 11 |
| | 90.9 |
|
Non-GAAP taxable equivalent net interest income, net of noncontrolling interests | | $ | 374,596 |
| | $ | 289,438 |
| | 29.4 |
| | $ | 1,028,092 |
| | $ | 854,768 |
| | 20.3 |
| | 527,525 |
| | 515,782 |
| | 2.3 |
|
Less: net interest income attributable to SVB Leerink | | | 201 |
| | 442 |
| | (54.5 | ) |
Non-GAAP taxable equivalent net interest income, net of noncontrolling interests and SVB Leerink | | | $ | 527,324 |
| | $ | 515,340 |
| | 2.3 |
|
| | | | | | | | | | | | | | | | | | |
GAAP noninterest income | | $ | 158,778 |
| | $ | 144,140 |
| | 10.2 |
| | $ | 404,965 |
| | $ | 343,050 |
| | 18.0 |
| | $ | 301,934 |
| | $ | 280,376 |
| | 7.7 |
|
Less: income attributable to noncontrolling interests | | 5,614 |
| | 4,679 |
| | 20.0 |
| | 21,709 |
| | 3,627 |
| | NM |
| |
Less: (loss) income attributable to noncontrolling interests, including carried interest allocation | | | (1,854 | ) | | 3,248 |
| | (157.1 | ) |
Non-GAAP noninterest income, net of noncontrolling interests | | $ | 153,164 |
| | $ | 139,461 |
| | 9.8 |
| | $ | 383,256 |
| | $ | 339,423 |
| | 12.9 |
| | 303,788 |
| | 277,128 |
| | 9.6 |
|
Less: non-GAAP net gains on investment securities, net of noncontrolling interests | | | 47,590 |
| | 25,592 |
| | 86.0 |
|
Less: net gains on equity warrant assets | | | 13,395 |
| | 21,305 |
| | (37.1 | ) |
Less: investment banking revenue | | | 46,867 |
| | 49,795 |
| | (5.9 | ) |
Less: commissions | | | 16,022 |
| | 14,108 |
| | 13.6 |
|
Non-GAAP noninterest income, net of noncontrolling interests and net of net gains on investment securities, net gains on equity warrant assets, investment banking revenue and commissions | | | $ | 179,914 |
| | $ | 166,328 |
| | 8.2 |
|
| | | | | | | | | | | | | | | | | | |
GAAP total revenue | | $ | 532,752 |
| | $ | 433,301 |
| | 23.0 |
| | $ | 1,431,628 |
| | $ | 1,196,968 |
| | 19.6 |
| | $ | 826,071 |
| | $ | 793,262 |
| | 4.1 |
|
Non-GAAP taxable equivalent revenue, net of noncontrolling interests | | $ | 527,760 |
| | $ | 428,899 |
| | 23.0 |
| | $ | 1,411,348 |
| | $ | 1,194,191 |
| | 18.2 |
| |
GAAP operating efficiency ratio | | 48.38 | % | | 50.95 | % | | (5.0 | ) | | 52.15 | % | | 52.18 | % | | (0.1 | ) | |
Non-GAAP operating efficiency ratio (1) | | 48.82 |
| | 51.45 |
| | (5.1 | ) | | 52.87 |
| | 52.28 |
| | 1.1 |
| |
Non-GAAP taxable equivalent revenue, net of noncontrolling interests and SVB Leerink, net gains on investment securities, net gains on equity warrant assets, investment banking revenue and commissions | | | $ | 707,238 |
| | $ | 681,668 |
| | 3.8 |
|
| | | | | | | |
Operating efficiency ratio | | | 48.37 | % | | 46.10 | % | | 4.9 |
|
Non-GAAP core operating efficiency ratio (1) | | | 47.71 |
| | 44.71 |
| | 6.7 |
|
NM—Not meaningful
| |
(1) | The non-GAAP core operating efficiency ratio is calculated by dividing non-GAAP noninterest expense after adjusting for noninterest expense attributable to SVB Leerink by total revenue after adjusting for net ofinterest income attributable to SVB Leerink, net gains or losses on investment securities and equity warrant assets, investment banking revenue and commissions. Additionally, noninterest expense and total revenue are adjusted for income or losses and expenses attributable to noncontrolling interests by non-GAAP taxable-equivalent revenue,and adjustments to net of noncontrolling interests.interest income for a taxable equivalent basis. |
Compensation and Benefits Expense
The following table provides a summary of our compensation and benefits expense for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands, except employees) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Compensation and benefits: | | | | | | | | | | | | | | | | | | |
Salaries and wages | | $ | 72,799 |
| | $ | 62,636 |
| | 16.2 | % | | $ | 207,687 |
| | $ | 182,375 |
| | 13.9 | % | | $ | 115,614 |
| | $ | 101,200 |
| | 14.2 | % |
Incentive compensation & ESOP | | 37,668 |
| | 38,255 |
| | (1.5 | ) | | 108,310 |
| | 87,162 |
| | 24.3 |
| |
Incentive compensation plans | | | 66,674 |
| | 69,389 |
| | (3.9 | ) |
Other employee incentives and benefits (1) | | 42,796 |
| | 35,677 |
| | 20.0 |
| | 133,415 |
| | 104,873 |
| | 27.2 |
| | 73,298 |
| | 67,472 |
| | 8.6 |
|
Total compensation and benefits | | $ | 153,263 |
| | $ | 136,568 |
| | 12.2 |
| | $ | 449,412 |
| | $ | 374,410 |
| | 20.0 |
| | $ | 255,586 |
| | $ | 238,061 |
| | 7.4 |
|
Period-end full-time equivalent employees | | 2,433 |
| | 2,280 |
| | 6.7 |
| | 2,433 |
| | 2,280 |
| | 6.7 |
| | 3,710 |
| | 3,250 |
| | 14.2 |
|
Average full-time equivalent employees | | 2,434 |
| | 2,255 |
| | 7.9 |
| | 2,384 |
| | 2,199 |
| | 8.4 |
| | 3,672 |
| | 3,228 |
| | 13.8 |
|
| |
(1) | Other employee incentives and benefits includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), ESOP, warrant incentive and retention plans, agency fees and other employee-related expenses. |
Compensation and benefits expense was $153.3$255.6 million for the three months ended September 30, 2017,March 31, 2020, compared to $136.6$238.1 million for the comparable 20162019 period. The key changes in factors affecting compensation and benefits expense were as follows:
An increase of $10.2$14.4 million in salaries and wages reflective primarily of andue to the increase in the number of average FTE by 179444 to 2,434 FTEs3,672 for the thirdfirst quarter of 2017 compared to the same period in 2016, and2020, as well as annual pay raises. The increase in headcount was primarily to support our growth initiatives.raises,
An increase of $7.1 million in total other employee incentives and benefits, related to various expenses, particularly personnel contracting expenses, to support our growth both domestically and globally, and employer payroll taxes reflective of our increased headcount since the third quarter of 2016. The increase in other employee incentives and benefits also includes an increaseA decrease of $2.7 million in warrant incentive plan expenses reflective of our quarterly equity warrant portfolio performance as well as an increase of $0.7 million in share-based compensation expense, primarily due to our accruals based on our performance expectations for our outstanding performance-based restricted stock awards compared to our estimate for the third quarter of 2016, reflective of the increase in our stock price relative to our peers.
Compensation and benefits expense was $449.4 million for the nine months ended September 30, 2017, compared to $374.4 million for the comparable 2016 period. The key changes in factors affecting compensation and benefits expense were as follows:
An increase of $28.5 million in total other employee incentives 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 the nine months ended September 30, 2016. The increase in other employee incentives and benefits also includes an increase of $5.4 million in warrant incentive plan expenses reflective of our year-to-date equity warrant portfolio performance as well as an increase of $5.4 million in share-based compensation expense, primarily due to our accruals based on our performance expectations for our outstanding performance-based restricted stock awards as compared to our estimate for the nine months ended September 30, 2016, reflective of the increase in our stock price relative to our peers.
An increase of $25.3 million in salaries and wages, reflective primarily of an increase in the number of average FTE by 185 to 2,384 FTEs during the nine months ended September 30, 2017 compared to the same period in 2016, and annual pay raises.
An increase of $21.1 million in expenses related to incentive compensation plans and ESOP. Our incentive compensation expense was higher during the nine months ended September 30, 2017 primarily due to higher expected full yearthe decrease in our incentive accruals as a result of our revised 2020 full-year projected financial performance for 2017 relatedattributable to the trendprojected financial impact of our improving ROE relative to our peers, which is one of our key plan performance metrics.the COVID-19 pandemic, and
| |
• | An increase of $5.8 million in other employee incentives and benefits primarily driven byadditional 401(k) matching contributions as a result of the 2019 annual incentive compensation plan payments and an increase in employer payroll taxes reflective of our increased headcount since the first quarter of 2019. |
Our variable compensation plans consist primarily of our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, Deferred Compensation Plan, 401(k) and ESOP Plan, SVB Leerink Incentive Compensation Plan and SVB Leerink Retention Program and Warrant Incentive PlanAward (see descriptions in our 20162019 Form 10-K). Total costs incurred under these plans were $45.9 million and $133.3$85.2 million for the three and nine months ended September 30, 2017,March 31, 2020 compared to $43.7 million and $105.9$87.7 million for the comparable 2016 periods.2019 period. These amounts are included in total compensation and benefits expense discussed above.
In light of the expected slowdown in business activity in 2020 due to COVID-19, we anticipate lower incentive compensation expenses in 2020, compared to 2019.
Professional Services
Professional services expense was $33.0 million and $86.3$38.7 million for the three and nine months ended September 30, 2017,March 31, 2020, compared to $23.4 million and $68.0$37.0 million for the comparable 2016 periods.2019 period. The increases wereincrease was primarily related to enhancementsour continued effort towards investments in our regulatory, riskinfrastructure, initiatives, and compliance infrastructureoperating projects to support our momentum as we continue to growpresence both domestically and globally as well as investments madeglobally. In light of the expected slowdown in projects, systems and technologybusiness activity in 2020 due to support our revenue growth and related initiatives and other operating costs.COVID-19, we anticipate lower professional services expense in 2020, compared to 2019.
Premises and Equipment
Premises and equipment expense was $18.9 million and $53.8$26.9 million for the three and nine months ended September 30, 2017,March 31, 2020, compared to $16.3 million and $47.9$21.7 million for the comparable 2016 periods.2019 period. The increasesincrease related to investments toin projects, systems and technology to support our revenue growth and related initiatives as well as other operating costs.
costs since the first quarter of 2019.
Net Occupancy
Net occupancy expense was $12.7 million and $35.4$18.3 million for the three and nine months ended September 30, 2017,March 31, 2020, compared to $9.5 million and $28.9$16.0 million for the comparable 2016 periods.2019 period. The increases wereincrease was primarily due to lease renewals at higher costs, reflective of market conditions, and the expansion of certain offices to support our growth.
Business Development and Travel
Business development and travel expense was $14.1 million for the three months ended March 31, 2020, compared to $15.4 million for the comparable 2019 period. The decrease was primarily due to the impact of COVID-19 on the global economy and our restrictions placed on domestic and international travel beginning March 2020. In light of the economic impact of COVID-19 and the continuing travel restrictions, we expect our business development and travel expense to be lower in 2020 than 2019.
FDIC and State Assessments
FDIC and state assessments expense was $8.4 million and $26.4$5.2 million for the three and nine months ended September 30, 2017,March 31, 2020, compared to $7.8 million and $21.6$4.0 million for the comparable 2016 periods.2019 period. The increases wereincrease was due primarily to the increasesincrease in our average assets.
Other Noninterest Expense
Total other noninterest expense was $40.7 million for the three months ended March 31, 2020, compared to $33.5 million for the comparable2019 period. The $7.2 million increase was primarily attributable to higher credit card processing and merchant service card expenses of $3.9 million as well as higher charitable donations of $2.6 million primarily to aid in COVID-19 relief efforts. A summary of other noninterest expense for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Lending and other client related processing costs | | $ | 6,935 |
| | $ | 5,885 |
| | 17.8 | % | | $ | 18,806 |
| | $ | 13,721 |
| | 37.1 | % | | $ | 9,158 |
| | $ | 5,177 |
| | 76.9 | % |
Correspondent bank fees | | | 3,986 |
| | 3,744 |
| | 6.5 |
|
Investment banking activities | | | 3,030 |
| | 4,185 |
| | (27.6 | ) |
Trade order execution costs | | | 2,745 |
| | 2,516 |
| | 9.1 |
|
Data processing services | | | 3,454 |
| | 2,899 |
| | 19.1 |
|
Telephone | | 2,518 |
| | 2,460 |
| | 2.4 |
| | 7,892 |
| | 7,109 |
| | 11.0 |
| | 2,227 |
| | 2,741 |
| | (18.8 | ) |
Data processing services | | 2,244 |
| | 2,137 |
| | 5.0 |
| | 7,254 |
| | 6,353 |
| | 14.2 |
| |
Dues and publications | | 883 |
| | 809 |
| | 9.1 |
| | 2,355 |
| | 2,258 |
| | 4.3 |
| | 1,130 |
| | 1,524 |
| | (25.9 | ) |
Postage and supplies | | 612 |
| | 598 |
| | 2.3 |
| | 2,013 |
| | 2,172 |
| | (7.3 | ) | | 856 |
| | 770 |
| | 11.2 |
|
Other | | 4,872 |
| | 3,644 |
| | 33.7 |
| | 16,350 |
| | 12,679 |
| | 29.0 |
| | 14,117 |
| | 9,980 |
| | 41.5 |
|
Total other noninterest expense | | $ | 18,064 |
| | $ | 15,533 |
| | 16.3 |
| | $ | 54,670 |
| | $ | 44,292 |
| | 23.4 |
| | $ | 40,703 |
| | $ | 33,536 |
| | 21.4 |
|
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“net income attributable to noncontrolling interests” on our 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 the three and nine months ended September 30, 2017March 31, 2020 and 20162019 is as follows:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Net interest income (1) | | $ | (9 | ) | | $ | (4 | ) | | 125.0 | % | | $ | (26 | ) | | $ | (62 | ) | | (58.1 | )% | | $ | (21 | ) | | $ | (11 | ) | | 90.9 | % |
Noninterest income (1) | | (4,341 | ) | | (3,721 | ) | | 16.7 |
| | (19,059 | ) | | (1,144 | ) | | NM |
| |
Noninterest losses (income) (1) | | | 2,491 |
| | (2,270 | ) | | NM |
|
Noninterest expense (1) | | 125 |
| | 117 |
| | 6.8 |
| | 517 |
| | 284 |
| | 82.0 |
| | 140 |
| | 379 |
| | (63.1 | ) |
Carried interest allocation (2) | | (1,273 | ) | | (958 | ) | | 32.9 |
| | (2,650 | ) | | (2,483 | ) | | 6.7 |
| | (637 | ) | | (978 | ) | | (34.9 | ) |
Net income attributable to noncontrolling interests | | $ | (5,498 | ) | | $ | (4,566 | ) | | 20.4 |
| | $ | (21,218 | ) | | $ | (3,405 | ) | | NM |
| |
Net losses (income) attributable to noncontrolling interests | | | $ | 1,973 |
| | $ | (2,880 | ) | | (168.5 | ) |
NM—Not meaningful
| |
(1) | Represents noncontrolling interests’ share in net interest income, noninterest income or loss and noninterest expense. |
| |
(2) | Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds. |
Three months ended September 30, 2017March 31, 2020 and 20162019
Net incomelosses attributable to noncontrolling interests was $5.52.0 million for the three months ended September 30, 2017,March 31, 2020, compared to $4.6net income of $2.9 million for the comparable 20162019 period. Net incomelosses attributable to noncontrolling interests of $5.5$2.0 million for the three months ended September 30, 2017March 31, 2020 was primarily driven by a result of net gains on investment securities (including carried interest allocation) from our$7.2 million downward valuation adjustment for illiquid investments held in the private managed funds and companies of funds portfolioour portfolios due to the current market volatility. The downward valuation adjustment was offset by unrealized net unrealized valuation increases ofin the private company investments held by the funds driven primarily by IPO and M&A activity.in these portfolios. See “Results of Operations—Noninterest Income—Gains on Investment Securities, Net”.
Nine months ended September 30, 2017 and 2016
Net income attributable to noncontrolling interests was $21.2 million for the nine months ended September 30, 2017, compared to $3.4 million for the comparable 2016 period. Net income attributable to noncontrolling interests of $21.2 million for the nine months ended September 30, 2017 was primarily a result of net gains on investment securities (including carried interest allocation) from our managed funds of funds portfolio due to net unrealized valuation increases of investments held by the funds driven by IPO, M&A and private equity-backed financing activity. See “Results of Operations—Noninterest Income—Gains on Investment Securities, Net”.
Income Taxes
Our effective income tax expense rate was 39.6 percent and 37.126.7 percent for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to 40.9 percent and 40.827.1 percent for the three and nine months ended September 30, 2016, respectively.comparable 2019 period. 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 reductionsreduction in the effective tax rate for the three and nine months ended September 30, 2017 resultedMarch 31, 2020 was due primarily to an increase in tax-exempt interest and net tax benefits from the recognition of a tax benefit of $1.3 million and $14.4 million, respectively,our qualified affordable housing projects portfolio, partially offset by increases to unfavorable permanent items due to the adoption and implementation of Accounting Standards Update (“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 forour lower pre-tax net income taxes rather than additional paid-in-capital in stockholders' equity required under the previous guidance. Additionally, our effective income tax expense rate for the nine months ended September 30, 2017 included the recognition of a tax benefit of $4.7 million reflective of the return of tax funds related to a prior years' tax return.
Additionally, in early November 2017, draft tax reform legislation entitled the Tax Cuts and Jobs Act (the “TCJ Act”) was introduced. If enacted, the TCJ Act would make significant changes to the U.S. Internal Revenue Code of 1986, including corporate taxation provisions. Such changes under the TCJ Act or any other similar tax reform could have a material impact on our results of operations or financial condition.
Excluding the impact of the tax benefit items discussed above and any tax reform, we expect the annual effective tax rate for 2017 to be comparable to the full-year 2016 effective tax rate.period over period.
Operating Segment Results
We have threefour segments for which we report our financial information: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Capital.Leerink.
We report segment information based on the “management” approach. The management approach which designates the internal reporting used by management for making decisions and assessing performance as the source of our reporting segments. Please refer to Note 11—“Segment14 — “Segment Reporting” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
The following is our reportable segment information for the three and nine months ended September 30, 2017March 31, 2020 and 20162019:
Global Commercial Bank
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Net interest income | | $ | 337,860 |
| | $ | 262,484 |
| | 28.7 | % | | $ | 924,789 |
| | $ | 773,342 |
| | 19.6 | % | | $ | 463,835 |
| | $ | 445,876 |
| | 4.0 | % |
Provision for credit losses | | (20,874 | ) | | (16,974 | ) | | 23.0 |
| | (65,007 | ) | | (86,143 | ) | | (24.5 | ) | | (194,411 | ) | | (26,805 | ) | | NM |
|
Noninterest income | | 97,227 |
| | 79,226 |
| | 22.7 |
| | 260,650 |
| | 231,295 |
| | 12.7 |
| | 166,834 |
| | 152,861 |
| | 9.1 |
|
Noninterest expense | | (176,964 | ) | | (159,479 | ) | | 11.0 |
| | (525,043 | ) | | (462,234 | ) | | 13.6 |
| | (224,855 | ) | | (198,683 | ) | | 13.2 |
|
Income before income tax expense | | $ | 237,249 |
| | $ | 165,257 |
| | 43.6 |
| | $ | 595,389 |
| | $ | 456,260 |
| | 30.5 |
| | $ | 211,403 |
| | $ | 373,249 |
| | (43.4 | ) |
Total average loans, net of unearned income | | $ | 18,807,616 |
| | $ | 16,357,099 |
| | 15.0 |
| | $ | 18,125,020 |
| | $ | 15,769,964 |
| | 14.9 |
| |
Total average loans, amortized cost | | | $ | 29,137,484 |
| | $ | 24,798,197 |
| | 17.5 |
|
Total average assets | | 47,817,114 |
| | 40,828,549 |
| | 17.1 |
| | 45,414,432 |
| | 41,020,808 |
| | 10.7 |
| | 61,813,129 |
| | 50,132,098 |
| | 23.3 |
|
Total average deposits | | 42,376,024 |
| | 36,484,125 |
| | 16.1 |
| | 40,398,413 |
| | 37,002,027 |
| | 9.2 |
| | 59,217,433 |
| | 47,596,868 |
| | 24.4 |
|
NM—Not meaningful
Three months ended September 30, 2017March 31, 2020 and 20162019
Income before income tax expense from our Global Commercial Bank (“GCB”) increaseddecreased to $237.2$211.4 million for the three months ended September 30, 2017,March 31, 2020, compared to $165.3$373.2 million for the comparable 2016 period, which reflected the continued acquisition of new clients and growth of our core commercial business.2019 period. The key components of GCB's performance for the three months ended September 30, 2017March 31, 2020 compared to the comparable 20162019 period are discussed below.
Net interest income from GCB increased by $75.4$18.0 million for the three months ended September 30, 2017,March 31, 2020, due primarily to an increase in loan interest income resulting mainly from higher average loan balances, as well as from an increase in loan yields as a result of rate increases.balances.
GCB had a provision for credit losses of $20.9$194.4 million for the three months ended September 30, 2017,March 31, 2020, compared to $17.0$26.8 million for the comparable 20162019 period. The provision of $20.9$194.4 million for the three months ended September 30, 2017March 31, 2020 was driven primarily reflected $13.8by $140.4 million in additional reserves for our performing loans based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic, as well as changes in loan composition within our portfolio segments, $40.9 million in additional reserves for period-end loan growth, $13.1 million for charge-offs not specifically reserved for at December 31, 2019 and $10.7 million in net new nonaccrual loans, partially offset by $7.8 million of recoveries.
The provision of $26.8 million for the three months ended March 31, 2019 reflects primarily $27.4 million in net new specific reserves for nonaccrual loans, and a $10.9$4.1 million increase in additional reserves for period-end loan growth and $4.9 million for charge-offs not specifically reserved for, partially offset by a benefit from overall improveddecrease in the qualitative component of our performing loan reserves of $5.3 million reflective of the continued growth of larger, higher credit quality of our loan portfolio and the continued shift in our loan portfolio to private equity/venture capital loans which tend to beas a percentage of higher credit quality.total gross loans.
The provision of $17.0Noninterest income increased by $14.0 million for the three months ended September 30, 2016 primarily reflected $8.0 million of reserves for performing loans, $5.5 million in charge-offs that did not previously have a specific reserve, $3.0 million net reserves for nonaccrual loans and $2.8 million for loan growth.
Noninterest income increased by $18.0 million for the three months ended September 30, 2017,March 31, 2020 related primarily to an overall increase acrossin our non-GAAP core fee income (higher foreign exchange fees, client investment feesdeposit service charges and credit card fees). This increase wasThese increases were due primarily to the continued growth of our client base and work with larger global companies reflective of investments in our platform, capabilities and global reach.
Noninterest expense increased by $17.5$26.2 million for the three months ended September 30, 2017,March 31, 2020, due primarily to increased professional services expense and compensation and benefits expense. Professionalexpense, other noninterest expense and professional services expenses were higher due to enhancements in our risk and compliance infrastructure to support our momentum as we continue to grow 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.expense. Compensation and benefits expense increased $17.0 million as a result of increasedhigher salaries and wages expenses and higher other employee benefits.compensation and benefits, partially offset by a decrease in incentive compensation expense. The increase in GCB salaries and wages was due primarily to an increase in the average number of FTEs at GCB, which increased by 111439 to 1,8812,692 FTEs for the three months ended September 30, 2017,March 31, 2020, compared to 1,7702,252 FTEs for the comparable 20162019 period. The increase in total other employee benefits was related to various expenses, particularly personnel contracting expenses, to support our growth both domestically and globally, and employer payroll taxes reflective of ourOther noninterest expense increased headcount since the third quarter 2016.
Nine months ended September 30, 2017 and 2016
Net interest income from our GCB increased by $151.4$5.3 million for the nine months ended September 30, 2017, due primarily to an increase in loan interest income resulting mainly from higher average loan balances as well as from an increase in loan yieldscredit card processing and merchant services card expenses. Professional services expense increased $3.4 million as a result of rate increases.
GCB had a provision for credit losses of $65.0 million for the nine months ended September 30, 2017, compared to a provision of $86.1 million for the comparable 2016 period. The provision of $65.0 million for the nine months ended September 30, 2017 was reflective primarily of $51.9 million in net new specific reserves for nonaccrual loans and $20.9 million from period-end loan growth, partially offset by a benefit from overall improved credit quality of our loan portfolio and the continued shift in our loan portfolio to private equity/venture capital loans, which tend to be of higher credit quality.
The provision of $86.1 million for the nine months ended September 30, 2016 was reflective of $33.0 million in charge-offs that did not previously have a specific reserve and $23.0 million from period-end loan growth,increased consulting fees associated with the remaining provision due primarily to reserves for new nonaccrual loans.
Noninterest income increased by $29.4 million for the nine months ended September 30, 2017, related primarily to an increase across our non-GAAP core fee income (higher foreign exchange fees, credit card fees and client investment fees). This increase was due primarily to the continued growth of our client base and work with larger global companies reflective of investments in our platform, capabilities and global reach.
Noninterest expense increased by $62.8 million for the nine months ended September 30, 2017, due primarily to increased expenses for compensation and benefits and professional services. Compensation and benefits expense increased as a result of higher incentive compensation expenses, increased salaries and wages and higher other employee benefits. The increase in incentive compensation expenses was due to the expectation of our performance to exceed budget for 2017. The increase in our salaries and wages expenses was due primarily to an increase in the average number of FTEs at GCB, which increased by 124 to 1,857 FTEs for the nine months ended September 30, 2017, compared to 1,733 FTEs for the comparable 2016 period. The increase in total other employee incentives and benefits was related to various expenses, particularly personnel contracting expenses,project spend to support our growth both domesticallyglobal digital banking, and globally as well as group health and life insurance and employer payroll taxes reflective of our increased headcount since the nine months ended September 30, 2016. Professional services expenses were higher due to enhancements in our risk and compliancecontinued global infrastructure, to support our momentum as we continue to grow 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.initiatives.
SVB Private Bank
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Net interest income | | $ | 14,600 |
| | $ | 13,298 |
| | 9.8 | % | | $ | 42,952 |
| | $ | 40,508 |
| | 6.0 | % | | $ | 15,164 |
| | $ | 11,981 |
| | 26.6 | % |
Provision for credit losses | | (1,535 | ) | | (1,976 | ) | | (22.3 | ) | | (2,266 | ) | | (2,481 | ) | | (8.7 | ) | |
(Provision for) reduction of credit losses | | | (54,490 | ) | | 984 |
| | NM |
|
Noninterest income | | 460 |
| | 664 |
| | (30.7 | ) | | 1,715 |
| | 2,052 |
| | (16.4 | ) | | 900 |
| | 510 |
| | 76.5 |
|
Noninterest expense | | (4,706 | ) | | (3,122 | ) | | 50.7 |
| | (12,675 | ) | | (9,481 | ) | | 33.7 |
| | (10,090 | ) | | (7,414 | ) | | 36.1 |
|
Income before income tax expense | | $ | 8,819 |
| | $ | 8,864 |
| | (0.5 | ) | | $ | 29,726 |
| | $ | 30,598 |
| | (2.8 | ) | |
Total average loans, net of unearned income | | $ | 2,499,507 |
| | $ | 2,074,982 |
| | 20.5 |
| | $ | 2,371,027 |
| | $ | 1,978,175 |
| | 19.9 |
| |
(Loss) income before income tax expense | | | $ | (48,516 | ) | | $ | 6,061 |
| | NM |
|
Total average loans, amortized cost | | | $ | 3,857,478 |
| | $ | 3,085,883 |
| | 25.0 |
|
Total average assets | | 2,538,400 |
| | 2,096,237 |
| | 21.1 |
| | 2,403,777 |
| | 1,999,455 |
| | 20.2 |
| | 3,892,400 |
| | 3,109,275 |
| | 25.2 |
|
Total average deposits | | 1,231,390 |
| | 1,115,446 |
| | 10.4 |
| | 1,289,990 |
| | 1,120,575 |
| | 15.1 |
| | 1,922,663 |
| | 1,491,234 |
| | 28.9 |
|
NM—Not meaningful
Three months ended September 30, 2017March 31, 2020 and 20162019
Net interest income from our SVB Private Bank increased by $1.3$3.2 million for the three months ended September 30, 2017,March 31, 2020, due primarily to higher interest income duethe increase in average loans for the three months ended March 31, 2020 as compared to loan growth, partially offset by a higher funding chargethe 2019 comparable period.
The provision for loans funded as loan growth exceeded deposit growth.
Noninterest expensecredit losses increased by $1.6$55.5 million for the three months ended September 30, 2017,March 31, 2020, due primarily to the adoption of CECL during the first quarter of 2020 attributable primarily to a $50.3 million increase in additional reserves for our performing loans. The increase for our performing loans is reflective of the increases in reserves required for longer duration mortgage loans as well as the additional reserves for our performing loans based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic.
Noninterest expense increased by $2.7 million for the three months ended March 31, 2020, due primarily to compensation and benefits expense. Compensation and benefits expense increased primarily as a result of the increase in average FTE which increased salaries and wages, reflective primarily of annual pay raises, and higher incentive compensation expenses dueby 40 to 130 FTEs for the expectation of our performance to exceed budget for 2017.
Ninethree months ended September 30, 2017 and 2016
Net interest income from our SVB Private Bank increased by $2.4 million for the nine months ended September 30, 2017, due primarily to higher interest income due to loan growth, partially offset by a higher funding charge for loans funded as loan growth exceeded deposit growth.
SVB Private Bank had a provision for credit losses of $2.3 million for the nine months ended September 30, 2017,March 31, 2020, compared to $2.5 million91 FTEs for the comparable 20162019 period. The provisions for both the nine months ended September 30, 2017 and 2016 were due primarily to reserves for period-end loan growth.
Noninterest expense increased by $3.2 million for the nine months ended September 30, 2017, due primarily to increased compensation and benefits expense. Compensation and benefits expense increased as a result of increased salaries and wages, reflective primarily of annual pay raises, and higher incentive compensation expenses due to the expectation of our performance to exceed budget for 2017.
SVB Capital
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2020 | | 2019 | | % Change |
Net interest income (expense) | | $ | 15 |
| | $ | 1 |
| | NM |
| | $ | 41 |
| | $ | (51 | ) | | (180.4 | )% | |
Net interest income | | | $ | 21 |
| | $ | 6 |
| | NM |
|
Noninterest income | | 13,913 |
| | 30,619 |
| | (54.6 | ) | | 45,707 |
| | 44,492 |
| | 2.7 |
| | 4,918 |
| | 24,845 |
| | (80.2 | ) |
Noninterest expense | | (4,873 | ) | | (3,924 | ) | | 24.2 |
| | (14,537 | ) | | (11,521 | ) | | 26.2 |
| | (8,585 | ) | | (5,782 | ) | | 48.5 |
|
Income before income tax expense | | $ | 9,055 |
| | $ | 26,696 |
| | (66.1 | ) | | $ | 31,211 |
| | $ | 32,920 |
| | (5.2 | ) | |
(Loss) income before income tax expense | | | $ | (3,646 | ) | | $ | 19,069 |
| | (119.1 | ) |
Total average assets | | $ | 323,417 |
| | $ | 325,321 |
| | (0.6 | ) | | $ | 333,439 |
| | $ | 334,328 |
| | (0.3 | ) | | $ | 447,201 |
| | $ | 378,732 |
| | 18.1 |
|
NM—Not meaningful
SVB Capital’s components of noninterest income primarily include net gains and losses on non-marketable and other equity securities, carried interest and fund management fees. All components of income before income tax expense and average assets discussed below are net of noncontrolling interests.
We experience variability in the performance of SVB Capital from quarter to quarter 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 has been, and may further be, impacted by the effects of the COVID-19 pandemic.
Three months endedSeptember 30, 2017March 31, 2020 and 20162019
SVB Capital had noninterest income of $13.9$4.9 million for the three months ended September 30, 2017,March 31, 2020, compared to $30.6$24.8 million for the comparable 20162019 period. The decrease in noninterest income was due primarily to lowerthe recording of net gainslosses on investment securities for the three months ended March 31, 2020, compared to net gains for the comparable 20162019 period. SVB Capital’s components of noninterest income primarily include the following:
Net gains | |
• | Net losses on investment securities of $5.9 million for the three months endedMarch 31, 2020, compared to net gains of $15.9 million for the comparable 2019 period. The net losses on investment securities of $5.9 million were primarily driven by a downward valuation adjustment for illiquid investments held in the private managed funds and companies of our portfolios due to the current market volatility. The downward valuation adjustment was offset by unrealized net valuation increases from private company investments held in our strategic venture capital funds as well as in our managed funds of funds portfolio, and |
| |
• | Fund management and lending related fees of $10.0 million for the three months endedMarch 31, 2020, compared to $8.8 million for the comparable 2019 period. |
SVB Capital had noninterest expense of $8.2 million for the three months endedSeptember 30, 2017, compared to net gains of $18.2 million for the comparable 2016 period. The gains on investment securities of $8.2 million for the three months endedSeptember 30, 2017 were primarily related to gains from distributions from our strategic venture capital fund investments and net unrealized valuation increases in the investments held by the funds driven by IPO and M&A activity during the third quarter of 2017. Investment security gains in the three months ended September 30, 2016 included $7.2 million from valuation increases for one of our equity method fund investments,
In 2016, we recognized $6.7 million in carried interest related to the equity method fund that drove the $7.2 million of investment gains, and
Fund management fees remained flat at $5.2$8.6 million for the three months ended September 30, 2017 and 2016.
Nine months ended September 30, 2017 and 2016
SVB Capital had noninterest income of $45.7 million for the nine months ended September 30, 2017,March 31, 2020, compared to $44.5$5.8 million for the comparable 20162019 period. The $2.8 million increase in noninterest incomeexpense was due primarily to higher net gains on investment securities compared to the comparable 2016 period. an increase of $0.8 million in compensation and benefits reflective of an increase in average FTE and merit increases and $0.7 million increases in both professional services expense and business development and travel expense.
SVB Capital’sLeerink
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 | | % Change |
Net interest income | | $ | 201 |
| | $ | 442 |
| | (54.5 | )% |
Noninterest income | | 62,677 |
| | 68,117 |
| | (8.0 | ) |
Noninterest expense | | (62,037 | ) | | (60,540 | ) | | 2.5 |
|
Income before income tax expense | | $ | 841 |
| | $ | 8,019 |
| | (89.5 | ) |
Total average assets | | $ | 483,648 |
| | $ | 300,332 |
| | 61.0 |
|
SVB Leerink’s components of noninterest income primarily include the following:investment banking revenue, commissions and net gains and losses on non-marketable and other equity securities, carried interest and fund management fees. All components of income before income tax expense discussed below are net of noncontrolling interests.
Three months ended March 31, 2020 and 2019
Net gains on investment securitiesSVB Leerink had noninterest income of $28.2$62.7 million for the ninethree months endedSeptember 30, 2017, March 31, 2020 compared to net gains of $23.0$68.1 million for the comparable 20162019 period. The $5.4 million decrease in noninterest income was primarily driven by the following:
| |
• | A $4.3 million decrease in gains on investment securities reflective of net losses on investment securities for the three months ended March 31, 2020, compared to net gains for the comparable 2019 period, driven by the COVID-19 market conditions towards the end of the first quarter of 2020, and |
A $2.9 million decrease in investment banking revenues reflective of a decrease in investment banking deals due to the impact of COVID-19 on investmentthe market, partially offset by
A $1.9 million increase in commissions due primarily to an increase in exchanges and trading volumes in derivatives and convertible securities driven by market volatility due to the impact of $28.2COVID-19.
SVB Leerink had noninterest expense of $62.0 million for the ninethree months endedSeptember 30, 2017 were related to gains from distributions from our strategic venture capital
fund investments and net unrealized valuation increases in the investments held by the funds driven by IPO and M&A activity during the nine months ended September 30, 2017, and
Fund management fees of $15.9 million March 31, 2020 compared to $14.1$60.5 million for the comparable 20162019 period. The $1.5 million increase in noninterest expense was primarily driven by an increase of $3.6 million in compensation and benefit expense due to an increase in salaries and wages reflective of merit increases as well as an increase in share-based compensation, partially offset by a $2.6 million decrease in other noninterest expense driven primarily to the addition of new managed funds at SVB Capital.
by a decrease in incentive compensation expense.Consolidated Financial Condition
Our total assets, and total liabilities and stockholders' equity, were $50.8$75.0 billion at September 30, 2017March 31, 2020 compared to $44.7$71.0 billion at December 31, 2016,2019, an increase of $6.1$6.0 billion, or 13.65.6 percent. 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 $3.6$9.6 billion at September 30, 2017,March 31, 2020, an increase of $1.1$2.8 billion, or 39.741.0 percent, compared to $2.5$6.8 billion at December 31, 2016. The increase in period-end cash balances was primarily due2019. In response to growth in our deposit balancesthe COVID-19 crisis during the nine months ended September 30, 2017.
first quarter, we prudently raised our cash target level to be between $7.0 billion to $9.0 billion. As of September 30, 2017 and DecemberMarch 31, 2016, $1.62020, $7.2 billion and $1.1 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate and interest-earning deposits in other financial institutions were $1.2$1.4 billion. As of December 31, 2019, $3.7 billion of our cash and $721 million, respectively.due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate and interest-earning deposits in other financial institutions were $2.1 billion.
Investment Securities
Investment securities totaled $24.3$27.4 billion at September 30, 2017, an increaseMarch 31, 2020, a decrease of $2.6$1.7 billion, or 12.15.7 percent,, compared to $21.7$29.1 billion at December 31, 2016.2019. Our investment securities portfolio consistsis comprised of: (i) an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent primarily 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.business, investments in qualified affordable housing projects, as well as public equity securities held as a result of equity warrant assets exercised.
The valuations of our nonmarketable and other equity securities were negatively impacted by COVID-19 market conditions towards the end of the first quarter. We expect continued pressure on the valuation of our nonmarketable and other equity securities in 2020 as we anticipate public markets to continue to fluctuate, as well as a slowdown in IPO, M&A and other private market activities, due to the COVID-19 pandemic.
Available-for-Sale Securities
Period-end available-for-sale securities were $12.6 billion at September 30, 2017March 31, 2020 compared to $12.6$14.0 billion at December 31, 2016,2019, a decrease of $17.1 million,$1.4 billion, or 0.19.8 percent.The $17.1 million$1.4 billion decrease in period-end AFS securities balances from the fourth quarter of 2016December 31, 2019 to the third quarter of 2017March 31, 2020, was due primarily to $2.4driven by the sale of $2.6 billion of U.S. Treasury securities during the three months-ended March 31, 2020 as well as $0.8 billion in portfolio paydowns and maturities, offset by $1.5 billion in purchases and a $0.5 billion increase in the fair value of $2.4 billionour remaining portfolio reflective of agency backed mortgage securities and U.S. Treasury securities.
the 150 basis point decrease in Federal Funds interest rates during the quarter. Securities classified as available-for-sale are carried at fair value with changes in fair value recorded as unrealized gains or losses in a separate component of stockholders' equity.
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income securities, carried at fair value, classified as available-for-sale as of September 30, 2017.March 31, 2020. The weighted average yield is computed using the amortized cost of fixed income investment securities, which are reported at fair value. For U.S. Treasury securities, and U.S. agency debentures and foreign government debt securities, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
| | | | September 30, 2017 | | March 31, 2020 |
| | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
(Dollars in thousands) | | 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 | | 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 | | $ | 7,498,340 |
| | 1.46 | % | | $ | 2,592,486 |
| | 1.19 | % | | $ | 4,905,854 |
| | 1.60 | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 4,043,840 |
| | 2.11 | % | | $ | 110,935 |
| | 1.76 | % | | $ | 1,626,096 |
| | 2.31 | % | | $ | 2,306,809 |
| | 1.98 | % | | $ | — |
| | — | % |
U.S. agency debentures | | 1,676,169 |
| | 1.71 |
| | 314,852 |
| | 1.45 |
| | 1,361,317 |
| | 1.77 |
| | — |
| | — |
| | — |
| | — |
| | 101,687 |
| | 2.28 |
| | — |
| | — |
| | — |
| | — |
| | 101,687 |
| | 2.28 |
| | — |
| | — |
|
Foreign government debt securities | | | 22,152 |
| | (0.82 | ) | | 22,152 |
| | (0.82 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Agency-issued collateralized mortgage obligations—fixed rate | | 3,012,695 |
| | 2.40 |
| | — |
| | — |
| | — |
| | — |
| | 487,285 |
| | 1.98 |
| | 2,525,410 |
| | 2.48 |
| |
Agency-issued collateralized mortgage obligations—variable rate | | 395,880 |
| | 0.71 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 395,880 |
| | 0.71 |
| |
Agency-issued mortgage-backed securities | | | 4,943,512 |
| | 2.76 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,943,512 |
| | 2.76 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | | 1,465,675 |
| | 2.58 |
| | — |
| | — |
| | 1,094 |
| | 3.26 |
| | — |
| | — |
| | 1,464,581 |
| | 2.58 |
|
Agency-issued commercial mortgage-backed securities | | | 2,071,198 |
| | 2.37 |
| | — |
| | — |
| | — |
| | — |
| | 803,536 |
| | 2.25 |
| | 1,267,662 |
| | 2.45 |
|
Total | | $ | 12,583,084 |
| | 1.69 |
| | $ | 2,907,338 |
| | 1.22 |
| | $ | 6,267,171 |
| | 1.64 |
| | $ | 487,285 |
| | 1.98 |
| | $ | 2,921,290 |
| | 2.24 |
| | $ | 12,648,064 |
| | 2.46 |
| | $ | 133,087 |
| | 1.33 |
| | $ | 1,627,190 |
| | 2.31 |
| | $ | 3,212,032 |
| | 2.06 |
| | $ | 7,675,755 |
| | 2.67 |
|
Held-to-Maturity Securities
Period-end held-to-maturity securities were $11.1$13.6 billion at September 30, 2017March 31, 2020 compared to $8.4$13.8 billion at December 31, 2016, an increase2019, a decrease of $2.7$0.2 billion, or 31.21.9 percent. The $2.7$0.2 billion increasedecrease in period-end HTM security balances from the fourth quarter of 2016December 31, 2019 to the third quarter of 2017March 31, 2020 was due primarily to new purchasespay downs and maturities of $3.9$0.6 billion, primarily in agency backed mortgage securities, partially offset by $1.2the purchase of $0.4 billion in portfolio paydowns and maturities.of securities.
Securities classified as held-to-maturity are accounted for at cost with no adjustments for changes in fair value. For securities previously re-designated as held-to-maturity from available-for-sale, the net unrealized gains at the date of transfer will continue to be reported as a separate component of shareholders' equity and amortized over the life of the securities in a manner consistent with the amortization of a premium or discount.
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income investment securities classified as held-to-maturity as of September 30, 2017.March 31, 2020. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 3521.0 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 remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as held-to-maturity typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
| | | | September 30, 2017 | | March 31, 2020 |
| | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years | | Total | | One Year or Less | | After One Year to Five Years | | After Five Years to Ten Years | | After Ten Years |
(Dollars in thousands) | | Amortized Cost | | Weighted- Average Yield | | Amortized Cost | | Weighted- Average Yield | | Amortized Cost | | Weighted- Average Yield | | Amortized Cost | | Weighted- Average Yield | | Amortized Cost | | Weighted- Average Yield | | 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 | | $ | 660,193 |
| | 2.37 | % | | $ | — |
| | — | % | | $ | 102,581 |
| | 2.73 | % | | $ | 557,612 |
| | 2.30 | % | | $ | — |
| | — | % | | $ | 453,353 |
| | 2.62 | % | | $ | 2,622 |
| | 4.07 | % | | $ | 142,990 |
| | 2.52 | % | | $ | 307,741 |
| | 2.69 | % | | $ | — |
| | — | % |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Agency-issued mortgage-backed securities | | 5,164,701 |
| | 2.47 |
| | 738 |
| | 7.52 |
| | 255,275 |
| | 2.20 |
| | 61,538 |
| | 2.06 |
| | 4,847,150 |
| | 2.49 |
| | 6,662,878 |
| | 2.90 |
| | 11,853 |
| | 2.77 |
| | 50,777 |
| | 1.88 |
| | 685,374 |
| | 2.47 |
| | 5,914,874 |
| | 2.96 |
|
Agency-issued collateralized mortgage obligations—fixed rate | | 3,025,421 |
| | 1.78 |
| | — |
| | — |
| | — |
| | — |
| | 437,865 |
| | 1.48 |
| | 2,587,556 |
| | 1.83 |
| | 1,482,205 |
| | 1.79 |
| | — |
| | — |
| | — |
| | — |
| | 661,217 |
| | 1.62 |
| | 820,988 |
| | 1.92 |
|
Agency-issued collateralized mortgage obligations—variable rate | | 269,495 |
| | 0.74 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 269,495 |
| | 0.74 |
| | 170,774 |
| | 0.74 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 170,774 |
| | 0.74 |
|
Agency-issued commercial mortgage-backed securities | | 1,554,220 |
| | 2.39 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,554,220 |
| | 2.39 |
| | 2,644,968 |
| | 3.05 |
| | — |
| | — |
| | — |
| | — |
| | 102,565 |
| | 3.56 |
| | 2,542,403 |
| | 3.03 |
|
Municipal bonds and notes | | 380,976 |
| | 2.24 |
| | 7,560 |
| | 4.04 |
| | 71,631 |
| | 3.06 |
| | 159,509 |
| | 3.24 |
| | 142,276 |
| | 0.59 |
| | 2,160,341 |
| | 3.54 |
| | 30,719 |
| | 2.22 |
| | 134,007 |
| | 2.63 |
| | 441,995 |
| | 3.05 |
| | 1,553,620 |
| | 3.78 |
|
Total | | $ | 11,055,006 |
| | 2.21 |
| | $ | 8,298 |
| | 4.35 |
| | $ | 429,487 |
| | 2.47 |
| | $ | 1,216,524 |
| | 2.12 |
| | $ | 9,400,697 |
| | 2.21 |
| | $ | 13,574,519 |
| | 2.87 |
| | $ | 45,194 |
| | 2.47 |
| | $ | 327,774 |
| | 2.47 |
| | $ | 2,198,892 |
| | 2.41 |
| | $ | 11,002,659 |
| | 2.98 |
|
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. OurThe estimated weighted-average duration of our fixed income investment securities portfolio duration was 2.73.1 years and 2.53.9 years at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
Non-Marketable and Other Equity Securities
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies, including public equity securities held as a result of equity warrant assets exercised, and investments in qualified affordable housing projects. Included in our non-marketable and other equity securities carried under fair value accounting are amounts that are attributable to noncontrolling interests. We are required under GAAP to consolidate 100% of these investments that we are deemed to control, even though we may own less than 100% of such entities. See below for a summary of the carrying value (as reported) of non-marketable and other equity securities compared to the amounts attributable to SVBFG.
Period-end non-marketable and other equity securities were $627.5 million$1.2 billion at September 30, 2017March 31, 2020 compared to $622.6 million$1.2 billion at December 31, 2016, an increase2019, a decrease of $4.9$13.2 million, or 0.81.1 percent. Non-marketable and other equity securities, net of noncontrolling interests were $506.1 million$1.1 billion at September 30, 2017, compared to $500.1 million atMarch 31, 2020 and December 31, 2016.2019.The decrease was primarily attributable to valuation decreases in our nonmarketable investment portfolio, including decreases in our managed funds of funds investments, strategic investments and other public companies' valuations, as well as exercised equity warrant assets, offset by an increase in new investments within our qualified housing projects portfolio. 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 September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
(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 | | Carrying value (as reported) | | Amount attributable to SVBFG |
Non-marketable and other equity securities: | | | | | | | | | |
Non-marketable securities (fair value accounting): | | | | | | | | | | | | | | | | |
Venture capital and private equity fund investments (1) | | $ | 128,768 |
| | $ | 33,092 |
| | $ | 141,649 |
| | $ | 40,464 |
| |
Other venture capital investments (2) | | 1,897 |
| | 203 |
| | 2,040 |
| | 218 |
| |
Other securities (fair value accounting) (3) | | 392 |
| | 114 |
| | 753 |
| | 138 |
| |
Non-marketable securities (equity method accounting): | | | | | | | | | |
Consolidated venture capital and private equity fund investments (1) | | | $ | 85,336 |
| | $ | 22,025 |
| | $ | 87,180 |
| | $ | 22,482 |
|
Unconsolidated venture capital and private equity fund investments (2) | | | 171,930 |
| | 171,930 |
| | 178,217 |
| | 178,217 |
|
Other investments without a readily determinable fair value (3) | | | 52,666 |
| | 52,666 |
| | 55,255 |
| | 55,255 |
|
Other equity securities in public companies (fair value accounting (4) | | | 26,899 |
| | 26,391 |
| | 59,200 |
| | 59,056 |
|
Non-marketable securities (equity method accounting) (5): | | | | | | | | | |
Venture capital and private equity fund investments | | 87,218 |
| | 63,465 |
| | 82,823 |
| | 64,030 |
| | 206,495 |
| | 126,035 |
| | 215,367 |
| | 131,403 |
|
Debt funds | | 17,889 |
| | 17,889 |
| | 17,020 |
| | 17,020 |
| | 6,910 |
| | 6,910 |
| | 7,271 |
| | 7,271 |
|
Other investments (4) | | 113,478 |
| | 113,478 |
| | 123,514 |
| | 123,514 |
| |
Non-marketable securities (cost method accounting): | | | | | | | | | |
Venture capital and private equity fund investments | | 102,956 |
| | 102,956 |
| | 114,606 |
| | 114,606 |
| |
Other investments | | 26,835 |
| | 26,835 |
| | 27,700 |
| | 27,700 |
| | 149,557 |
| | 149,557 |
| | 152,863 |
| | 152,863 |
|
Investments in qualified affordable housing projects, net | | 148,036 |
| | 148,036 |
| | 112,447 |
| | 112,447 |
| | 500,802 |
| | 500,802 |
| | 458,476 |
| | 458,476 |
|
Total non-marketable and other securities | | $ | 627,469 |
| | $ | 506,068 |
| | $ | 622,552 |
| | $ | 500,137 |
| |
Total non-marketable and other equity securities | | | $ | 1,200,595 |
| | $ | 1,056,316 |
| | $ | 1,213,829 |
| | $ | 1,065,023 |
|
| |
(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 September 30, 2017March 31, 2020 and December 31, 20162019: |
| | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
(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 | | Carrying value (as reported) | | Amount attributable to SVBFG |
Strategic Investors Fund, LP | | $ | 15,624 |
| | $ | 1,963 |
| | $ | 18,459 |
| | $ | 2,319 |
| | $ | 5,337 |
| | $ | 670 |
| | $ | 5,729 |
| | $ | 720 |
|
Capital Preferred Return Fund, LP | | 55,685 |
| | 12,001 |
| | 57,627 |
| | 12,420 |
| | 44,696 |
| | 9,633 |
| | 45,341 |
| | 9,772 |
|
Growth Partners, LP | | 57,459 |
| | 19,128 |
| | 59,718 |
| | 19,880 |
| | 35,169 |
| | 11,708 |
| | 35,976 |
| | 11,976 |
|
Other private equity fund (i) | | — |
| | — |
| | 5,845 |
| | 5,845 |
| |
Total venture capital and private equity fund investments | | $ | 128,768 |
| | $ | 33,092 |
| | $ | 141,649 |
| | $ | 40,464 |
| |
CP I, LP | | | 134 |
| | 14 |
| | 134 |
| | 14 |
|
Total consolidated venture capital and private equity fund investments | | | $ | 85,336 |
| | $ | 22,025 |
| | $ | 87,180 |
| | $ | 22,482 |
|
| |
(i) | On January 3, 2017, the other private equity fund was closed resulting in an immaterial impact on the Company's financial statements. |
| |
(2) | The following table shows the amounts of othercarrying value represents investments in 196 and 205 funds (primarily venture capital investments held by the following consolidated fundsfunds) at March 31, 2020 and amounts attributable to SVBFG for each fund at September 30, 2017 and December 31, 2016:2019, respectively, where our ownership interest is typically less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships' operating activities and financial policies. Our unconsolidated venture capital and private equity fund investments are carried at fair value based |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG |
CP I, LP | | $ | 1,897 |
| | $ | 203 |
| | $ | 2,040 |
| | $ | 218 |
|
Total other venture capital investments | | $ | 1,897 |
| | $ | 203 |
| | $ | 2,040 |
| | $ | 218 |
|
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, December 31st, for our March 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 6 — “Investment Securities" of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 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. |
| |
(4)(5) | The following table shows the amountscarrying value and our ownership percentage of our other investmentseach investment at March 31, 2020 and December 31, 2019 (equity method accounting) at September 30, 2017 and December 31, 2016: |
|
| | | | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | 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 | | $ | 3,277 |
| | $ | 3,086 |
| | $ | 3,612 |
| | $ | 3,387 |
|
Strategic Investors Fund III, LP | | 14,487 |
| | 11,787 |
| | 15,668 |
| | 12,701 |
|
Strategic Investors Fund IV, LP | | 25,037 |
| | 21,141 |
| | 27,064 |
| | 22,780 |
|
Strategic Investors Fund V, LP | | 44,815 |
| | 23,528 |
| | 46,830 |
| | 24,586 |
|
CP II, LP (i) | | 5,103 |
| | 3,073 |
| | 5,907 |
| | 3,567 |
|
Other venture capital and private equity fund investments | | 113,776 |
| | 63,420 |
| | 116,286 |
| | 64,382 |
|
Total venture capital and private equity fund investments | | $ | 206,495 |
| | $ | 126,035 |
| | $ | 215,367 |
| | $ | 131,403 |
|
Debt funds: | | | | | | | | |
Gold Hill Capital 2008, LP (ii) | | $ | 5,255 |
| | $ | 5,255 |
| | $ | 5,525 |
| | $ | 5,525 |
|
Other debt funds | | 1,655 |
| | 1,655 |
| | 1,746 |
| | 1,746 |
|
Total debt funds | | $ | 6,910 |
| | $ | 6,910 |
| | $ | 7,271 |
| | $ | 7,271 |
|
Other investments: | | | | | | | | |
SPD Silicon Valley Bank Co., Ltd. | | $ | 73,453 |
| | $ | 73,453 |
| | $ | 74,190 |
| | $ | 74,190 |
|
Other investments | | 76,104 |
| | 76,104 |
| | 78,673 |
| | 78,673 |
|
Total other investments | | $ | 149,557 |
| | $ | 149,557 |
| | $ | 152,863 |
| | $ | 152,863 |
|
| |
(i) | Our ownership includes direct ownership interest of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP. |
| |
(ii) | Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent. |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Carrying value (as reported) | | Amount attributable to SVBFG | | Carrying value (as reported) | | Amount attributable to SVBFG |
Other investments: | | | | | | | | |
SPD Silicon Valley Bank Co., Ltd. | | $ | 75,511 |
| | $ | 75,511 |
| | $ | 75,296 |
| | $ | 75,296 |
|
Other investments | | 37,967 |
| | 37,967 |
| | 48,218 |
| | 48,218 |
|
Total other investments | | $ | 113,478 |
| | $ | 113,478 |
| | $ | 123,514 |
| | $ | 123,514 |
|
Volcker Rule
On June 6, 2017, we received notice that the Board of Governors of the Federal Reserve System approved the Company’s application for an extension of the permitted conformance period for the Company’s investments in “illiquid” covered funds. The approval extends the deadline by which the Company must sell, divest, restructure or otherwise conform such investments to the provisions of the Volcker Rule until the earlier of (i) July 21, 2022, or (ii) the date by which each fund matures by its terms or is otherwise conformed to the Volcker Rule.
As implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule prohibits, subject to certain exceptions, a banking entity, such as the Company, from sponsoring or investing in covered funds, defined to include many venture capital and private equity funds. As noted above, the Company currently maintains certain investments deemed to be prohibited investments in “illiquid” covered funds whichthat are now covered under the approved extension. As of September 30, 2017,March 31, 2020, such prohibited investments had an estimated aggregate carrying value of approximately $147 million (and an aggregateand fair value of approximately $249 million).$205 million. (For more information about the Volcker Rule, see “Business—Supervision and Regulation” under Part 1, Item 1 of Part 1 of our 20162019 Form 10-K.)
Loans
Loans, net of unearned incomeamortized cost basis, increased by $2.3$2.8 billion to $22.2$36.0 billion at September 30, 2017,March 31, 2020, compared to $19.9$33.2 billion at December 31, 2016.2019. Unearned income was $141$169 million at September 30, 2017March 31, 2020 and $125$163 million at December 31, 2016. Total gross loans were $22.3 billion at September 30, 2017, an increase of $2.3 billion, compared to $20.0 billion at December 31, 2016.2019. Period-end loans increased compared to December 31, 2016,2019, driven primarily by our Private Equity/Venture Capital, Investor Dependent and Balance Sheet Dependent loan growth inportfolios driven by increased credit line utilization. Our Investor Dependent and Balance Sheet Dependent loan portfolios are primarily made up of our private equity/venture capital portfolio. technology and life sciences/healthcare clients.
The breakdown of total gross loans and total loans as a percentage of total gross loans by categoryindustry sector is as follows:
|
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | Percentage | | Amount | | Percentage |
Private equity/venture capital | | $ | 18,868,875 |
| | 52.5 | % | | $ | 17,712,797 |
| | 53.1 | % |
Investor dependent: | | | |
|
| | | |
|
|
Early stage | | 1,806,011 |
| | 5.0 |
| | 1,653,425 |
| | 5.0 |
|
Mid stage | | 1,399,209 |
| | 3.9 |
| | 1,066,783 |
| | 3.2 |
|
Later stage | | 2,031,490 |
| | 5.7 |
| | 1,698,676 |
| | 5.1 |
|
Total investor dependent | | 5,236,710 |
| | 14.6 |
| | 4,418,884 |
| | 13.3 |
|
Cash flow dependent: | | | |
|
| | | |
|
|
Sponsor led buyout | | 2,121,007 |
| | 5.9 |
| | 2,203,020 |
| | 6.6 |
|
Other | | 2,756,295 |
| | 7.7 |
| | 2,252,847 |
| | 6.8 |
|
Total cash flow dependent | | 4,877,302 |
| | 13.6 |
| | 4,455,867 |
| | 13.4 |
|
Private bank | | 3,669,295 |
| | 10.2 |
| | 3,489,219 |
| | 10.4 |
|
Balance sheet dependent | | 1,850,941 |
| | 5.1 |
| | 1,297,304 |
| | 3.9 |
|
Premium wine | | 1,056,927 |
| | 2.9 |
| | 1,063,512 |
| | 3.2 |
|
Other | | 408,035 |
| | 1.1 |
| | 890,121 |
| | 2.7 |
|
Total loans (1) | | $ | 35,968,085 |
| | 100.0 |
| | $ | 33,327,704 |
| | 100.0 |
|
|
| | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Amount | | Percentage | | Amount | | Percentage |
Commercial loans: | | | | | | | | |
Software/internet | | $ | 5,851,323 |
| | 26.2 | % | | $ | 5,668,578 |
| | 28.3 | % |
Hardware | | 1,122,024 |
| | 5.0 |
| | 1,189,114 |
| | 5.9 |
|
Private equity/venture capital | | 9,634,928 |
| | 43.1 |
| | 7,747,911 |
| | 38.7 |
|
Life science/healthcare | | 1,779,200 |
| | 8.0 |
| | 1,866,685 |
| | 9.3 |
|
Premium wine | | 211,822 |
| | 1.0 |
| | 201,634 |
| | 1.0 |
|
Other | | 395,091 |
| | 1.8 |
| | 396,458 |
| | 2.0 |
|
Total commercial loans | | 18,994,388 |
| | 85.1 |
| | 17,070,380 |
| | 85.2 |
|
Real estate secured loans: | | | | | | | | |
Premium wine | | 713,467 |
| | 3.2 |
| | 678,745 |
| | 3.5 |
|
Consumer | | 2,203,877 |
| | 9.9 |
| | 1,925,620 |
| | 9.6 |
|
Other | | 42,671 |
| | 0.2 |
| | 43,807 |
| | 0.2 |
|
Total real estate secured loans | | 2,960,015 |
| | 13.3 |
| | 2,648,172 |
| | 13.3 |
|
Construction loans | | 75,644 |
| | 0.3 |
| | 64,957 |
| | 0.3 |
|
Consumer loans | | 299,782 |
| | 1.3 |
| | 241,153 |
| | 1.2 |
|
Total gross loans | | $ | 22,329,829 |
| | 100.0 |
| | $ | 20,024,662 |
| | 100.0 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
Loan Concentration
The following table provides a summary of total loans by size and category.risk-based segment. The breakout of the categoriesbelow is based on total client balances (individually or in the aggregate) as of September 30, 2017March 31, 2020 (These amounts reflect corrections to the loan concentration balances (categorized by size) previously reported in our earnings release, filed with the SEC on our Form 8-K report on April 23, 2020 (“Q1 Earnings Release”), for loans (individually or in the aggregate) to any single client: (i) equal to or greater than $20 million; and (ii) less than $20 million. No corrections were necessary for the total loan portfolio amount or the total amounts by risk-based segment.):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 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 | | $ | 1,484,316 |
| | $ | 859,890 |
| | $ | 1,485,139 |
| | $ | 1,144,494 |
| | $ | 877,484 |
| | $ | 5,851,323 |
|
Hardware | | 240,941 |
| | 185,029 |
| | 215,278 |
| | 272,862 |
| | 207,914 |
| | 1,122,024 |
|
Private equity/venture capital | | 656,327 |
| | 766,075 |
| | 1,563,788 |
| | 971,708 |
| | 5,677,030 |
| | 9,634,928 |
|
Life science/healthcare | | 330,412 |
| | 456,618 |
| | 500,453 |
| | 325,108 |
| | 166,609 |
| | 1,779,200 |
|
Premium wine | | 73,551 |
| | 42,149 |
| | 39,630 |
| | 48,492 |
| | 8,000 |
| | 211,822 |
|
Other | | 150,103 |
| | 8,000 |
| | 50,885 |
| | 69,521 |
| | 116,582 |
| | 395,091 |
|
Commercial loans | | 2,935,650 |
| | 2,317,761 |
| | 3,855,173 |
| | 2,832,185 |
| | 7,053,619 |
| | 18,994,388 |
|
Real estate secured loans: | | | | | | | | | | | | |
Premium wine | | 165,085 |
| | 191,436 |
| | 222,088 |
| | 95,440 |
| | 39,418 |
| | 713,467 |
|
Consumer | | 1,886,402 |
| | 234,167 |
| | 83,308 |
| | — |
| | — |
| | 2,203,877 |
|
Other | | 7,826 |
| | — |
| | 14,312 |
| | 20,533 |
| | — |
| | 42,671 |
|
Real estate secured loans | | 2,059,313 |
| | 425,603 |
| | 319,708 |
| | 115,973 |
| | 39,418 |
| | 2,960,015 |
|
Construction loans | | 6,587 |
| | 46,164 |
| | — |
| | 22,893 |
| | — |
| | 75,644 |
|
Consumer loans | | 131,676 |
| | 49,404 |
| | 32,097 |
| | 51,755 |
| | 34,850 |
| | 299,782 |
|
Total gross loans | | $ | 5,133,226 |
| | $ | 2,838,932 |
| | $ | 4,206,978 |
| | $ | 3,022,806 |
| | $ | 7,127,887 |
| | $ | 22,329,829 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 |
(Dollars in thousands) | | Less than Five Million | | Five to Ten Million | | Ten to Twenty Million | | Twenty to Thirty Million | | Thirty Million or More | | Total |
Private equity/venture capital | | $ | 981,072 |
| | $ | 1,267,382 |
| | $ | 2,387,759 |
| | $ | 2,141,652 |
| | $ | 12,091,010 |
| | $ | 18,868,875 |
|
Investor dependent: | | | | | | | | | | | |
|
Early stage | | 1,295,261 |
| | 255,585 |
| | 160,511 |
| | 55,721 |
| | 38,933 |
| | 1,806,011 |
|
Mid stage | | 638,456 |
| | 409,596 |
| | 266,471 |
| | 49,686 |
| | 35,000 |
| | 1,399,209 |
|
Later stage | | 176,617 |
| | 408,542 |
| | 732,854 |
| | 328,332 |
| | 385,145 |
| | 2,031,490 |
|
Total investor dependent | | 2,110,334 |
| | 1,073,723 |
| | 1,159,836 |
| | 433,739 |
| | 459,078 |
| | 5,236,710 |
|
Cash flow dependent: | | | | | | | | | | | | |
Sponsor led buyout | | 20,906 |
| | 72,495 |
| | 510,951 |
| | 700,091 |
| | 816,564 |
| | 2,121,007 |
|
Other | | 154,084 |
| | 147,981 |
| | 339,014 |
| | 693,555 |
| | 1,421,661 |
| | 2,756,295 |
|
Total cash flow dependent | | 174,990 |
| | 220,476 |
| | 849,965 |
| | 1,393,646 |
| | 2,238,225 |
| | 4,877,302 |
|
Private bank | | 2,939,208 |
| | 397,068 |
| | 169,544 |
| | 50,576 |
| | 112,899 |
| | 3,669,295 |
|
Balance sheet dependent | | 295,227 |
| | 371,825 |
| | 406,629 |
| | 296,573 |
| | 480,687 |
| | 1,850,941 |
|
Premium wine | | 244,732 |
| | 246,379 |
| | 277,142 |
| | 138,486 |
| | 150,188 |
| | 1,056,927 |
|
Other | | 60,953 |
| | 62,374 |
| | 95,791 |
| | 119,109 |
| | 69,808 |
| | 408,035 |
|
Total loans (1) | | $ | 6,806,516 |
| | $ | 3,639,227 |
| | $ | 5,346,666 |
| | $ | 4,573,781 |
| | $ | 15,601,895 |
| | $ | 35,968,085 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
At September 30, 2017, grossMarch 31, 2020, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $10.2$20.2 billion, or 45.556.1 percent of our total loan portfolio. (This percentage of our total loan portfolio also reflects a correction to the percentage previously reported in our Q1 Earnings Release.) These loans represented 257455 clients, and of these loans, $71.6 millionnone were on nonaccrual status as of both September 30, 2017 and DecemberMarch 31, 2016.2020.
The following table provides a summary of loans by size and category.risk-based segment. The breakout of the categoriesbelow is based on total client balances (individually or in the aggregate) as of December 31, 20162019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(Dollars in thousands) | | Less than Five Million | | Five to Ten Million | | Ten to Twenty Million | | Twenty to Thirty Million | | Thirty Million or More | | Total |
Private equity/venture capital | | $ | 1,016,051 |
| | $ | 1,082,201 |
| | $ | 2,559,384 |
| | $ | 2,029,547 |
| | $ | 11,025,614 |
| | $ | 17,712,797 |
|
Investor dependent | | | | | | | | | | | | |
Early stage | | 1,090,852 |
| | 260,685 |
| | 191,661 |
| | 76,542 |
| | 33,685 |
| | 1,653,425 |
|
Mid stage | | 544,167 |
| | 316,617 |
| | 156,418 |
| | 49,581 |
| | — |
| | 1,066,783 |
|
Later stage | | 167,500 |
| | 348,832 |
| | 648,382 |
| | 304,373 |
| | 229,589 |
| | 1,698,676 |
|
Total investor dependent | | 1,802,519 |
| | 926,134 |
| | 996,461 |
| | 430,496 |
| | 263,274 |
| | 4,418,884 |
|
Cash flow dependent | | | | | | | | | | | | |
Sponsor led buyout | | 16,034 |
| | 97,458 |
| | 550,753 |
| | 723,737 |
| | 815,038 |
| | 2,203,020 |
|
Other | | 206,209 |
| | 86,929 |
| | 465,304 |
| | 463,073 |
| | 1,031,332 |
| | 2,252,847 |
|
Total cash flow dependent | | 222,243 |
| | 184,387 |
| | 1,016,057 |
| | 1,186,810 |
| | 1,846,370 |
| | 4,455,867 |
|
Private bank | | 2,791,587 |
| | 359,429 |
| | 191,979 |
| | 49,996 |
| | 96,228 |
| | 3,489,219 |
|
Balance sheet dependent | | 256,247 |
| | 269,744 |
| | 404,356 |
| | 78,197 |
| | 288,760 |
| | 1,297,304 |
|
Premium wine | | 243,094 |
| | 267,389 |
| | 261,951 |
| | 148,469 |
| | 142,609 |
| | 1,063,512 |
|
Other | | 526,850 |
| | 40,511 |
| | 106,247 |
| | 112,764 |
| | 103,749 |
| | 890,121 |
|
Total loans (1) | | $ | 6,858,591 |
| | $ | 3,129,795 |
| | $ | 5,536,435 |
| | $ | 4,036,279 |
| | $ | 13,766,604 |
| | $ | 33,327,704 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
At December 31, 2016, gross2019, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $8.9$17.8 billion, or 44.453.4 percent of our total loan portfolio. These loans represented 233397 clients, and of these loans, $79.7$37.3 million were on nonaccrual status as of December 31, 2016.2019.
The credit profile of our loan portfolio clients varies based on the nature of the lending we do for different market segments. Our three main market segments include (i) technology (software/internet and hardware) and life science/healthcare, (ii) private equity/venture capital, and (iii) SVB Private Bank.
(i) Technology and Life Science/Healthcare
Our technology and life science/healthcare loan portfolios include loans to clients at allthe various stages of their life cycles and represent the largest segments of our loan portfolio. The primary underwriting method for our technology and life science/healthcare portfolios are classified as investor dependent, balance sheet dependent or cash flow dependent.
Investor dependent loans represent a relatively small percentage of our overall portfolio at 1114.6 percent of total gross loans at both September 30, 2017March 31, 2020 and 13.3 percent at December 31, 2016.2019. These loans are made to companies in both our Accelerator (early-stage) and Growth practices. Investor dependent loans typically have modest or negative cash flowspractices (mid-stage and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or others, or in some cases, a successful sale to a third party or an IPO. Venture capital firms may provide financing selectively, at reduced amounts, or on less favorable terms, which may have an adverse effect on our borrowers' ability to repay their loans to us. When repayment is dependent upon the next round of venture investment and there is an indication that further investment is unlikely or will not occur, it is often likely that the company would need to be sold to repay debt in full. If reasonable efforts have not yielded a likely buyer willing to repay all debt at the close of the sale or on commercially viable terms, the account will most likely be deemed to be impaired.later-stage).
Balance sheet dependent loans, which includesinclude asset-based loans, represented 10five percent of total gross loans at September 30, 2017 compared to 13March 31, 2020 and four percent at December 31, 2016. Balance sheet dependent loans are structured to require constant current asset coverage (i.e. cash, cash equivalents, accounts receivable and, to a much lesser extent, inventory) in an amount that exceeds the outstanding debt. These loans are generally made to companies in our Growth and Corporate Finance practices.2019. Our asset-based lending, which includes working capital lines and accounts receivable financing, both represented threetwo and one percent of total gross loans as of September 30, 2017 and five percent and two percent of total gross loans at both March 31, 2020 and December 31, 2016, respectively. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business.2019.
Cash flow dependent loans, which include sponsoredsponsor led buyout lending, represent our largest source of repayment within our technology and life science/healthcare loan portfolios at approximately 19represented 14 percent of total gross loans at September 30, 2017, compared to 22March 31, 2020 and 13 percent at December 31, 2019. Sponsor led buyout loans represented six percent of total gross loans at March 31, 2020, compared to seven percent at December 31, 2016. Cash flow dependent loans require the borrower2019.
to maintain cash flow from operations that is sufficient to service all debt. Borrowers must demonstrate normalized cash flow in excess of all fixed charges associated with operating the business. Sponsored buyout loans represented 10 percent of total gross loans at September 30, 2017, compared to 11 percent of total gross loans at December 31, 2016. These loans are typically used to assist a select group of experienced private equity sponsors with the acquisition of businesses, are larger in size, and repayment is generally dependent upon the cash flows of the acquired company. The acquired companies are typically established, later-stage businesses of scale and characterized by reasonable levels of leverage and loan structures that include meaningful financial covenants. The sponsor's equity contribution is often 50 percent or more of the acquisition price.
(ii) Private Equity/Venture Capital
We also provide financial services to clients in the private equity/venture capital community. At September 30, 2017, ourOur lending to private equity/venture capital firms and funds represented 4353 percent of total gross loans, compared to 39 percent of total gross loans at both March 31, 2020 and December 31, 2016.2019. The vast majority of this portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds' remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are often secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.
(iii) SVB Private Bank
Our SVB Private Bank clients are primarily private equity/venture capital professionals and executive leaderssenior executives of the innovation companies they support. Our lending to SVB Private Bank clients represented 1110 percent of total gross loans at both September 30, 2017March 31, 2020 and December 31, 2016.2019. Many of these clients have mortgages, which represented 85 percent of this portfolio at September 30, 2017;March 31, 2020; the balance of this portfolio consisted of home equity lines of credit, restricted stock purchase loans, capital call lines of credit and other secured and unsecured lending. In addition, we provide real estate secured loans to eligible employees through our Employee Home Ownership Program.
We expect lending activity in 2020 to be impacted by strong borrowing from technology and life science/healthcare companies looking to bolster their liquidity positions, and prepayment or reduced utilization of capital call lines of credit by private equity/venture capital firms due to a slowdown in investment activities.
Paycheck Protection Program
In April 2020, we started accepting applications under the Paycheck Protection Program ("PPP") administered by the Small Business Association (“SBA”) under the CARES Act and began to originate loans to qualified small businesses. Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage, rent and utility payments. To the extent not forgiven, loans are subject to certain terms including, among others, the following: maximum two-year term; interest rate of 1.0%; six-month deferral of loan payments; 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.
As of May 5, 2020, we have over 4,400 outstanding loans recorded in the amount of approximately $2.0 billion of PPP loans as approved by the SBA and expect to continue funding additional loans as they become approved under the program. This funded amount reflects repayments received as of such date. We expect additional repayments from PPP borrowers, particularly on or prior to May 14, 2020 (subject to any extension permitted by the SBA), in connection with their reliance on certain regulatory “safe harbors” relating to their necessity certification pursuant to SBA guidance.
Additionally, we announced in April 2020 that we intend to donate any processing fees we receive from the SBA, net of our costs incurred, to charitable relief efforts relating to COVID-19. We are also considering participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”), which extends credit to eligible PPP loan originators, taking the PPP loans as collateral at face value. (See “Capital Resources - Liquidity.”)
State Concentrations
Approximately 31 percent and 1126 percent of our outstanding total gross loan balances at both September 30, 2017 and Decemberas of March 31, 20162020 were to borrowers based in California compared to 27 percent as of December 31, 2019. Additionally, as of March 31, 2020, borrowers in New York and New York.Massachusetts increased to 12 percent and 10 percent of our outstanding total loan balances as of March 31, 2020, respectively, compared to nine percent each as of December 31, 2019. Other than California, and New York and Massachusetts, as of March 31, 2020, there are no states with gross loan balances greater than or equal to 10 percent. In October 2017, wildfires impacted regions of Northern California where some of our premium wine clients are located. As of September 30, 2017, our total loans outstanding for our wine portfolio was $925 million (4% of total loan portfolio) with loans outstanding to clients in the impacted regions of approximately $700 million. We do not currently believe there will be a material effect on the credit quality of our wine portfolio in the near term; however, we will continue to monitor this segment of our portfolio closely.
See generally “Risk Factors–Credit Risks” set forth under Part I, Item 1A Part I in our 20162019 Form 10-K.10-K and including "Risk Factors" under Part II, Item 1A of this report.
Credit Quality Indicators
As of September 30, 2017both March 31, 2020 and December 31, 2016,2019, our total criticized loans and impairednonaccrual loans represented four percent and sixthree percent of our total gross loans, respectively.loans. Criticized and impairednonaccrual loans to early-stage clients represented 1718 and 23 percent of our total criticized and impairednonaccrual loan balances at both September 30, 2017March 31, 2020 and December 31, 2016.2019, respectively. Loans to early-stage clients represent a relatively small percentage of our overall portfolio at sixfive percent of total gross loans at September 30, 2017.both March 31, 2020 and December 31, 2019. It is common for an early-stage client’s remaining liquidity to fall temporarily below the threshold for a pass-rated credit during its capital-raising period for a new round of funding. Based on our experience, for most early-stage clients, this situation typically lasts one to two quarters and generally resolves itself with a subsequent round of venture funding, though there are exceptions, from time to time. As a result, we expect that each of our early-stage clients will reside in our criticized portfolio during a portion of their life cycle.
More specifically, given the economic environment in light of the COVID-19 pandemic, we are closely monitoring our loan portfolio. Notwithstanding the increase of our allowance for credit losses in the first quarter which was largely attributable to longer duration mortgage loans based on our forecast models, we currently expect particularly for 2020 continued strong credit performance for our Private Bank and private equity/venture portfolios, consistent with the historic low credit losses we have typically experienced. However, we expect that our technology, life science/healthcare and premium wine portfolios will be
likelier to be impacted negatively by the challenging economic environment in 2020. Particular areas of credit focus include: early-stage companies; Sponsor Finance clients; consumer internet and advertising technology clients; life science/healthcare companies that require clinical trials or provide elective services; and wine clients who are dependent on tasting room or restaurant sales.
Credit Quality and Allowance for LoanCredit Losses for Loans and for Unfunded Credit Commitments
Nonperforming assets consist of loans on nonaccrual status, loans past due 90 days or more still accruing interest, and Other Real Estate Owned (“OREO”) and other foreclosed assets. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows. The table below sets forth certain data and ratios between nonperforming loans, nonperforming assets and the allowance for loan losses:
credit losses for loans and unfunded credit commitments:
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Gross nonaccrual, past due, and restructured loans: | | | | |
Nonaccrual loans | | $ | 124,672 |
| | $ | 118,979 |
|
Loans past due 90 days or more still accruing interest | | 764 |
| | 33 |
|
Total nonperforming loans | | 125,436 |
| | 119,012 |
|
OREO and other foreclosed assets | | — |
| | — |
|
Total nonperforming assets | | $ | 125,436 |
| | $ | 119,012 |
|
Performing TDRs | | $ | 22,946 |
| | $ | 33,732 |
|
Nonperforming loans as a percentage of total gross loans | | 0.56 | % | | 0.59 | % |
Nonperforming assets as a percentage of total assets | | 0.25 |
| | 0.27 |
|
Allowance for loan losses | | $ | 249,010 |
| | $ | 225,366 |
|
As a percentage of total gross loans | | 1.12 | % | | 1.13 | % |
As a percentage of total gross nonperforming loans | | 198.52 |
| | 189.36 |
|
Allowance for loan losses for nonaccrual loans | | $ | 43,824 |
| | $ | 37,277 |
|
As a percentage of total gross loans | | 0.20 | % | | 0.19 | % |
As a percentage of total gross nonperforming loans | | 34.94 |
| | 31.32 |
|
Allowance for loan losses for total gross performing loans | | $ | 205,186 |
| | $ | 188,089 |
|
As a percentage of total gross loans | | 0.92 | % | | 0.94 | % |
As a percentage of total gross performing loans | | 0.92 |
| | 0.94 |
|
Total gross loans | | $ | 22,329,829 |
| | $ | 20,024,662 |
|
Total gross performing loans | | 22,204,393 |
| | 19,905,650 |
|
Allowance for unfunded credit commitments (1) | | 48,172 |
| | 45,265 |
|
As a percentage of total unfunded credit commitments | | 0.29 | % | | 0.27 | % |
Total unfunded credit commitments (2) | | $ | 16,341,930 |
| | $ | 16,743,196 |
|
|
| | | | | | | | |
(Dollars in thousands) | | March 31, 2020 | | December 31, 2019 |
Nonperforming, past due, and restructured loans: | | | | |
Nonaccrual loans | | $ | 50,607 |
| | $ | 102,669 |
|
Loans past due 90 days or more still accruing interest | | 4,918 |
| | 3,515 |
|
Total nonperforming loans (1) | | 55,525 |
| | 106,184 |
|
OREO and other foreclosed assets | | — |
| | — |
|
Total nonperforming assets | | $ | 55,525 |
| | $ | 106,184 |
|
Performing TDRs | | $ | 23,460 |
| | $ | 31,990 |
|
Nonperforming loans as a percentage of total loans (1) | | 0.15 | % | | 0.32 | % |
Nonperforming assets as a percentage of total assets | | 0.07 |
| | 0.15 |
|
Allowance for credit losses for loans | | $ | 548,963 |
| | $ | 304,924 |
|
As a percentage of total loans (1) | | 1.53 | % | | 0.91 | % |
As a percentage of total nonperforming loans (1) | | 988.68 |
| | 287.17 |
|
Allowance for credit losses for nonaccrual loans | | $ | 34,876 |
| | $ | 44,859 |
|
As a percentage of total loans (1) | | 0.10 | % | | 0.13 | % |
As a percentage of total nonperforming loans (1) | | 62.81 |
| | 42.25 |
|
Allowance for credit losses for total performing loans | | $ | 514,087 |
| | $ | 260,065 |
|
As a percentage of total loans (1) | | 1.43 | % | | 0.78 | % |
As a percentage of total performing loans (1) | | 1.43 |
| | 0.78 |
|
Total loans (1) | | $ | 35,968,085 |
| | $ | 33,327,704 |
|
Total performing loans (1) | | 35,912,560 |
| | 33,221,520 |
|
Allowance for credit losses for unfunded credit commitments (2) | | 84,690 |
| | 67,656 |
|
As a percentage of total unfunded credit commitments | | 0.34 | % | | 0.28 | % |
Total unfunded credit commitments (3) | | $ | 24,668,310 |
| | $ | 24,521,920 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed, and ratios are calculated, using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed, and ratios calculated, using the gross basis. |
| |
(2) | The “allowance for credit losses for unfunded credit commitments” is included as a component of other liabilities and any provision is included in the “provision for credit losses” in the statement of income. See “Provision for credit losses”Credit Losses” for a discussion of the changes to the allowance. |
| |
(2)(3) | Includes unfunded loan commitments and letters of credit. |
Our allowance for loancredit losses as a percentage of total gross loans decreased one basis point to 1.12 percent at September 30, 2017, compared to 1.13 percent at December 31, 2016. The decrease of one basis point was reflective primarily of the decrease in our allowance for performing loans as a percentage of total gross loans which decreased by twoincreased 62 basis points to 0.921.53 percent partially offset by anat March 31, 2020, compared to 0.91 percent at December 31, 2019. The 62 basis points increase of onewas due primarily to a 58 basis point in the allowancepoints increase for nonaccrual loansour performing loan reserve as a percentage of total gross loans at September 30, 2017.and an eight basis points increase due to the day one impact of adopting CECL, partially offset by a four basis points decrease for nonaccrual loans.
Our allowance for credit losses for performing loans was $514.1 million at March 31, 2020, compared to $260.1 million at December 31, 2019. Included in the allowance for credit losses at March 31, 2020 is the day one impact of adopting CECL of
$22.4 million driven by an increase in our expected credit loss for our Investor Dependent loan portfolio given the higher relative risk and longer-duration, which is taken into account under the CECL methodology, partially offset by a decrease for our Private Equity/Venture Capital loan portfolio, given its higher historical credit quality and shorter duration. The remaining $231.6 million increase was due primarily to an increase of $190.7 million related to the expected credit losses for our performing loan reserves based on our forecast models of the current economic environment and $40.9 million related to period-end loan growth of $2.8 billion.
Our allowance for credit losses for nonaccrual loans was $43.8$34.9 million at September 30, 2017,March 31, 2020, compared to $37.3$44.9 million at December 31, 2016.2019. The $6.5$10.0 million increasedecrease was due primarily to $21.1 million in the allowance for nonaccrual loans included $48.0repayments, $18.3 million of new nonaccrual loan reserves,in charge-offs, partially offset by $41.4$26.3 million in new nonaccrual loans as noted above and $3.1 million due to the day one impact of charge-offs and reserve releases. Newadopting CECL. Repayments were primarily driven by $12.9 million for one Sponsor Led Buyout client that was added to our nonaccrual loan reservesportfolio during the third quarter of $48.0 million were mostly attributable to our software/internet loan portfolio.2019.
The following table presents a summary of changes in nonaccrual loans for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | |
| | Three months ended March 31, |
(Dollars in thousands) | | 2020 | | 2019 |
Balance, beginning of period (1) | | $ | 102,669 |
| | $ | 94,142 |
|
Additions | | 36,346 |
| | 50,857 |
|
Paydowns and other reductions | | (62,677 | ) | | (6,481 | ) |
Charge-offs | | (25,731 | ) | | (4,895 | ) |
Balance, end of period (1) | | $ | 50,607 |
| | $ | 133,623 |
|
| |
(1) | For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis. |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Balance, beginning of period | | $ | 120,172 |
| | $ | 124,319 |
| | $ | 118,979 |
| | $ | 123,392 |
|
Additions | | 29,650 |
| | 15,940 |
| | 85,990 |
| | 73,680 |
|
Paydowns | | (14,183 | ) | | (14,941 | ) | | (43,995 | ) | | (58,376 | ) |
Charge-offs | | (10,967 | ) | | (19,102 | ) | | (36,299 | ) | | (31,348 | ) |
Other reductions | | — |
| | — |
| | (3 | ) | | (1,132 | ) |
Balance, end of period | | $ | 124,672 |
| | $ | 106,216 |
| | $ | 124,672 |
| | $ | 106,216 |
|
Nonaccrual loans were $50.6 million at March 31, 2020, compared to $103.0 million at December 31, 2019. Our nonaccrual loans as of September 30, 2017 included $98.0loan balance decreased $52.4 million from seven clients (software/internet clients represent $61.3primarily driven by $62.7 million two life science/healthcare clients represent $25.0in paydowns and other reductions and $25.7 million andcharge-offs, partially offset by $36.3 million in new nonaccrual loans. Repayments were primarily driven by $34.5 million for one hardwareSponsor Led Buyout client represents $11.7 million). Two of these loans are sponsored buyout loans that werewas added to our nonaccrual loan portfolio in 2015, another is a Corporate Finance client that was added during 2016 and four are newthe third quarter of 2019. New nonaccrual loans added during 2017 spread across our Accelerator and Growth practices. The total credit exposure for these seven largest nonaccrual loans is $99.0were driven primarily by $12.3 million for whichtwo growth stage Investor Dependent technology clients. As of March 31, 2020, we have specifically reserved $30.4 million.$34.9 million for our nonaccrual loans.
Average nonaccrual loans for the three and nine months ended September 30, 2017March 31, 2020 were $119.5$71.6 million and $124.6 million, respectively, compared to $111.8 million and $113.1$106.4 million for the comparable 2016 periods.2019 period. The $7.7$34.8 million increasedecrease in average nonaccrual loans for the three months ended September 30, 2017March 31, 2020 compared to September 30, 2016March 31, 2019 was primarily from our software/internet and hardware loan portfolios, partially offsetdriven by a decrease in our life sciences loan portfolio.one large recovery of $34.5 million for one Sponsor Led Buyout client as mentioned above. If the nonaccrual loans had not been impaired, $1.8 million and $5.6nonperforming, $0.4 million in interest income would have been recorded for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to $1.1 million and $3.8$1.7 million for the comparable 2016 periods.2019 period.
Accrued Interest Receivable and Other Assets
A summary of accrued interest receivable and other assets at September 30, 2017March 31, 2020 and December 31, 20162019 is as follows:
| | (Dollars in thousands) | | September 30, 2017 |
| December 31, 2016 | | % Change | | March 31, 2020 |
| December 31, 2019 | | % Change |
Derivative assets, gross (1) | | $ | 248,556 |
| | $ | 210,070 |
| | 18.3 | % | |
Derivative assets (1) | | | $ | 472,525 |
| | $ | 332,814 |
| | 42.0 | % |
Foreign exchange spot contract assets, gross | | 147,304 |
| | 53,058 |
| | 177.6 |
| | 945,762 |
| | 810,275 |
| | 16.7 |
|
Accrued interest receivable | | 129,451 |
| | 111,222 |
| | 16.4 |
| | 190,100 |
| | 216,962 |
| | (12.4 | ) |
FHLB and Federal Reserve Bank stock | | 58,012 |
| | 57,592 |
| | 0.7 |
| | 116,323 |
| | 60,258 |
| | 93.0 |
|
Net deferred tax assets (2) | | | — |
| | 28,433 |
| | — |
|
Accounts receivable | | 78,242 |
| | 62,569 |
| | 25.0 |
| | 92,485 |
| | 47,663 |
| | 94.0 |
|
Net deferred tax assets | | 75,043 |
| | 71,840 |
| | 4.5 |
| |
Other assets | | 113,153 |
| | 106,337 |
| | 6.4 |
| | 241,860 |
| | 248,828 |
| | (2.8 | ) |
Total accrued interest receivable and other assets | | $ | 849,761 |
| | $ | 672,688 |
| | 26.3 |
| | $ | 2,059,055 |
| | $ | 1,745,233 |
| | 18.0 |
|
| |
(1) | See “Derivatives”"Derivatives" section below. |
| |
(2) | See "Other Liabilities" section below. |
Foreign Exchange Spot Contract Assets
Foreign exchange spot contract assets represent unsettled client trades at the end of the period. The increase of $94.2$135.5 million was primarily due primarily to an overall increase in activitythe amount of unsettled spot trades at period-end as compared to December 31, 2016.2019.
Accrued Interest Receivable
The decrease of $26.7 million in accrued interest receivable is reflective of lower accrued interest receivables on loans and fixed income investments securities from lower overall market rates as well as the decrease in period-end fixed income securities of $1.6 billion at March 31, 2020 as compared to December 31, 2019.
FHLB and Federal Reserve Bank stock
The increase of $56.1 million in FHLB and Federal Reserve Bank stock is a result of an increase in the amount of stock required to be held by the Bank under the FHLB's membership guidelines relative to outstanding FHLB borrowings. Outstanding short-term FHLB advances were $2.7 billion at March 31, 2020 compared to zero at December 31, 2019.
Accounts Receivable
The increase of $44.8 million in accounts receivable was primarily driven by an increase of $47.0 million related to the unsettled transactions for the termination of our interest rate swap cash flow hedges as of March 31, 2020. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details of this transaction.
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 September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | % Change | | March 31, 2020 | | December 31, 2019 | | % Change |
Assets: | | | | | | | | | | | | |
Equity warrant assets | | $ | 141,785 |
| | $ | 131,123 |
| | 8.1 | % | | $ | 152,710 |
| | $ | 165,473 |
| | (7.7 | )% |
Foreign exchange forward and option contracts | | 94,947 |
| | 68,027 |
| | 39.6 |
| | 239,272 |
| | 115,854 |
| | 106.5 |
|
Client interest rate derivatives | | | 80,543 |
| | 28,811 |
| | 179.6 |
|
Interest rate swaps | | — |
| | 810 |
| | (100.0 | ) | | — |
| | 22,676 |
| | — |
|
Client interest rate derivatives | | 11,824 |
| | 10,110 |
| | 17.0 |
| |
Total derivative assets | | $ | 248,556 |
| | $ | 210,070 |
| | 18.3 |
| | $ | 472,525 |
| | $ | 332,814 |
| | 42.0 |
|
Liabilities: | | | | | | | | | | | | |
Foreign exchange forward and option contracts | | $ | (88,961 | ) | | $ | (54,668 | ) | | 62.7 |
| | $ | 195,891 |
| | $ | 98,207 |
| | 99.5 |
|
Client interest rate derivatives | | (11,955 | ) | | (9,770 | ) | | 22.4 |
| | 31,533 |
| | 14,154 |
| | 122.8 |
|
Interest rate swaps | | | — |
| | 25,623 |
| | — |
|
Total derivative liabilities | | $ | (100,916 | ) | | $ | (64,438 | ) | | 56.6 |
| | $ | 227,424 |
| | $ | 137,984 |
| | 64.8 |
|
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 September 30, 2017,March 31, 2020, we held warrants in 1,8422,342 companies, compared to 1,7392,268 companies at December 31, 2016.2019. Warrants in 1619 companies each had values greater than $1.0 million and collectively represented $51.7$46.7 million, or 36.530.6 percent, of the fair value of the total warrant portfolio at September 30, 2017.March 31, 2020. The change in fair value of equity warrant assets is recorded in gains"Gains on equity warrant assets, net" in noninterest income, a component of consolidated net income.
The following table provides a summary of transactions and valuation changes for equity warrant assets for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 |
Balance, beginning of period | | $ | 131,750 |
| | $ | 129,800 |
| | $ | 131,123 |
| | $ | 137,105 |
| | $ | 165,473 |
| | $ | 149,238 |
|
New equity warrant assets | | 3,622 |
| | 5,251 |
| | 11,114 |
| | 9,857 |
| | 4,519 |
| | 4,471 |
|
Non-cash changes in fair value, net | | 18,230 |
| | 16,788 |
| | 23,564 |
| | 21,989 |
| | (5,472 | ) | | 16,238 |
|
Exercised equity warrant assets | | (11,060 | ) | | (5,338 | ) | | (20,402 | ) | | (21,066 | ) | | (11,484 | ) | | (7,317 | ) |
Terminated equity warrant assets | | (757 | ) | | (1,161 | ) | | (3,614 | ) | | (2,545 | ) | | (326 | ) | | (415 | ) |
Balance, end of period | | $ | 141,785 |
| | $ | 145,340 |
| | $ | 141,785 |
| | $ | 145,340 |
| | $ | 152,710 |
| | $ | 162,215 |
|
Foreign Exchange Forward and Foreign Currency Option Contracts
We enter into foreign exchange forward contracts and foreign currency option contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients’ needs. For each forward or option contract entered into with our clients, we enter into an opposite way forward or option contract with a correspondent bank, which mitigates the risk of fluctuations in currency rates. We also enter into forward contracts with correspondent banks to economically reduce our foreign exchange exposure related to certain foreign currency denominated instruments. Net gains and losses on the revaluation of foreign currency denominated instruments are recorded in the line item “Other” as part of noninterest income, a component of consolidated net income. We have not experienced nonperformance by any of our counterparties and therefore have not incurred any related losses. Further, we anticipate performance by all counterparties. Our net exposure for foreign exchange forward and foreign currency option contracts, net of cash collateral, was zero at September 30, 2017 was $1.1March 31, 2020 and $22.2 million and our net exposure at December 31, 2016 was $0.8 million.2019. For additional information on our foreign exchange forward contracts and foreign currency option contracts, see Note 9—“Derivative11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 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$80.1 million at September 30, 2017March 31, 2020 and our net exposure$28.6 million at December 31, 2016 was $0.3 million.2019. For additional information on our client interest rate derivatives, see Note 9—“Derivative11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Interest Rate Swaps
To manage interest rate risk on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815 and record them in other assets and other liabilities. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the termination of our interest rate swap cash flow hedges at March 31, 2020.
Deposits
Deposits were $44.8$61.9 billion at September 30, 2017,March 31, 2020, an increase of $5.8$0.1 billion, or 15.00.2 percent, compared to $39.0$61.8 billion at December 31, 2016. The increase in deposits was driven primarily by funds coming from both new and existing clients in our Technology Early-Stage, Private Equity Services, and our Life Sciences portfolios during the nine months ended September 30, 2017 due to healthy venture capital funding and robust secondary public offering market activities.2019.
At September 30, 2017,March 31, 2020, the aggregate balance of time deposit accounts individually equal to or greater than $100,000 totaled $38.6$171 million, compared to $48.3$185 million at December 31, 2016.2019. At September 30, 2017, $38.6March 31, 2020, $167 million of the time deposit accounts individually equal to or greater than $100,000 were scheduled to mature within one year. No material portion of our deposits has been obtained from a single depositor and the loss of any one depositor would not materially affect our business. Approximately 1312 percent and 1213 percent of our total deposits at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, were from our clients in Asia.
We expect in 2020 that our deposit growth will be impacted by: slower cash burn rates as clients look to conserve cash; shifting of off-balance investments to on-balance deposits by clients to preserve flexibility; and a slowdown in investment and exit activities impacting client liquidity levels and potential private equity/venture capital firm distributions to their partners.
Short-Term Borrowings
WeAs of March 31, 2020, we had $4.8 million$3.1 billion in short-term borrowings, at September 30, 2017, compared to $512.7$17.4 million atas of December 31, 2016.2019. The decreaseincrease was due to cash management strategies related to the repayment, on January 6, 2017, of our short-term FHLB advances utilized and outstanding at December 31, 2016.
Long-Term Debt
Our long-term debt was $749.6 million at September 30, 2017 and $795.7 million at December 31, 2016.
As of September 30, 2017, long-term debt included our 3.50% Senior Notes, 5.375% Senior Notes, and 7.0% Junior Subordinated Debentures.COVID-19 pandemic. For more information on our long-termshort-term debt, see Note 8—“Short-Term10 — “Short-Term Borrowings and Long-Term Debt” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Long-Term Debt
Our 6.05% Subordinated Notes, issued by the Bank, were repaidlong-term debt was $348.1 million at March 31, 2020 and $348.0 million at December 31, 2019. As of March 31, 2020, long-term debt included our 3.50% Senior Notes. For more information on June 1, 2017. The interest rate swap agreement relating to this issuance was terminated upon repaymentour long-term debt, see Note 10 — “Short-Term Borrowings and Long-Term Debt” of the notes.“Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Other Liabilities
A summary of other liabilities at September 30, 2017March 31, 2020 and December 31, 20162019 is as follows:
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | % Change | | March 31, 2020 | | December 31, 2019 | | % Change |
Foreign exchange spot contract liabilities, gross | | $ | 249,175 |
| | $ | 68,018 |
| | NM |
| | $ | 1,011,264 |
| | $ | 888,360 |
| | 13.8 |
|
Accrued compensation | | 124,111 |
| | 135,842 |
| | (8.6 | ) | | 117,559 |
| | 354,393 |
| | (66.8 | ) |
Allowance for unfunded credit commitments | | 48,172 |
| | 45,265 |
| | 6.4 |
| | 84,690 |
| | 67,656 |
| | 25.2 |
|
Derivative liabilities, gross (1) | | 100,916 |
| | 64,438 |
| | 56.6 |
| |
Other | | 468,124 |
| | 304,820 |
| | 53.6 |
| |
Derivative liabilities (1) | | | 227,424 |
| | 137,984 |
| | 64.8 |
|
Net deferred tax liabilities | | | 92,782 |
| | — |
| | — |
|
Other liabilities | | | 667,234 |
| | 593,359 |
| | 12.5 |
|
Total other liabilities | | $ | 990,498 |
| | $ | 618,383 |
| | 60.2 |
| | $ | 2,200,953 |
| | $ | 2,041,752 |
| | 7.8 |
|
NM—Not meaningful
| |
(1) | See “Derivatives”��Derivatives” section above. |
Foreign Exchange Spot Contract Liabilities
Foreign exchange spot contract liabilities represent unsettled client trades at the end of the period. The increase of $181.2$122.9 million was due primarily to increased client trade activityan increase in the fair value of unsettled spot trades at period-endMarch 31, 2019 as compared to December 31, 2016.2019, due to increases in the mark-to-market valuations driven by increases in the U.S. dollar against other currencies.
Accrued Compensation
Accrued compensation includes amounts for our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, ESOP, SVB Leerink Incentive Compensation Plan, SVB Leerink Retention Award and other compensation arrangements. The decrease of $236.8 million was primarily the result of the payout of our 2019 incentive compensation plans during the first quarter of 2020, partially offset by the accrual for the three months ended March 31, 2020.
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 $17.0 million was due primarily to the day one impact of the adoption of CECL of $22.8 million partially offset by the reduction of credit losses of $5.5 million driven by a decrease in the expected future commitments for milestone tranches, which are tied to company performance or additional funding rounds, based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic.
Net Deferred Tax Liabilities
Net deferred tax liabilities increased due to the recording of pre-tax unrealized gains to accumulated other comprehensive income from the termination of our interest rate swap cash flow hedge contracts partially offset by timing differences related to warrants and unrealized losses on our foreign currency loans.
Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $163.3$73.9 million was reflective primarily of a $145.3$46.2 million increase in unsettlednew commitments for our qualified affordable tax credit funds, a $24.3 million increase in current taxes payable and a $23.5 million increase in investment securities purchases at September 30, 2017 as comparedpayable, partially offset by a decrease of $28.4 million in merchant services card payables due to December 31, 2016.the timing of settlements.
Noncontrolling Interests
Noncontrolling interests totaled $137.5$148.5 million and $134.5$150.8 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.The $3.0$2.3 million increasedecrease was due primarily to incomea loss attributable to noncontrolling interests of $21.2$2.0 million partially offset by net distributions of $18.2 million to limited partners from various managed funds of funds for the ninethree months ended September 30, 2017.March 31, 2020.
Fair Value Measurements
The following table summarizes our financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2017March 31, 2020 and December 31, 20162019:
| | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Total Balance | | Level 3 | | Total Balance | | Level 3 | | Total Balance | | Level 3 | | Total Balance | | Level 3 |
Assets carried at fair value | | $ | 12,982,950 |
| | $ | 140,972 |
| | $ | 12,974,923 |
| | $ | 130,853 |
| | $ | 13,404,754 |
| | $ | 149,992 |
| | $ | 14,672,330 |
| | $ | 161,172 |
|
As a percentage of total assets | | 25.6 | % | | 0.3 | % | | 29.0 | % | | 0.3 | % | | 17.9 | % | | 0.2 | % | | 20.7 | % | | 0.2 | % |
As a percentage of assets carried at fair value | | | | | 1.1 |
| | | | 1.1 |
|
Liabilities carried at fair value | | $ | 100,916 |
| | $ | — |
| | $ | 64,438 |
| | $ | — |
| | $ | 227,424 |
| | $ | — |
| | $ | 137,984 |
| | $ | — |
|
As a percentage of total liabilities | | 0.2 | % | | — | % | | 0.2 | % | | — | % | | 0.3 | % | | — | % | | 0.2 | % | | — | % |
As a percentage of assets carried at fair value | | | | 1.1 | % | | | | 1.0 | % | |
Financial assets valued using Level 3 measurements consist of our non-marketable investment securities in shares of private company stock and equity warrant assets (rights to shares of private and public company capital stock). The valuation methodologies of our non-marketable securities carried under fair value accounting and equity warrant assets involve a significant degree of management judgment. Refer to Note 14—“Fair17 — “Fair Value of Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for a summary of the valuation techniques and significant inputs used for each class of Level 3 assets.
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. The timing and amount of changes in fair value, if any, of these financial instruments depend upon factors beyond our control, including the performance of the underlying companies, fluctuations in the market prices of the preferred or common stock of the underlying companies, general volatility and interest rate market factors, and legal and contractual restrictions. The timing and amount of actual net proceeds, if any, from the disposition of these financial instruments depend upon factors beyond our control, including investor demand for IPOs, levels of M&A activity, legal and contractual restrictions on our ability to sell, and the perceived and actual performance of portfolio companies. All of these factors are difficult to predict and there can be no assurances that we will realize the full value of these securities, which could result in significant losses. See generally “Risk Factors” set forth under Part I, Item 1A in our 20162019 Form 10-K.10-K and under Part II, Item 1A of this report.
During the three and nine months ended September 30, 2017,March 31, 2020, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $24.4 million and $41.4$14.6 million, primarily due to realized and unrealizedreflective of net gains realized on equityexercised warrant assets due primarily to M&A and IPO activity.assets. During the three and nine months ended September 30, 2016,March 31, 2019, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $21.1 million and $33.1$19.1 million primarily due toreflective of valuation increases from our public and private company warrant portfoliosportfolio driven by healthy funding rounds and net gains realized on exercised warrant assets due to IPO and M&A activity.
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 allapplicable regulatory capital guidelines.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. 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 $4.1$7.0 billion at September 30, 2017,March 31, 2020, an increase of $417.3 million,$0.5 billion, or 11.58.7 percent, compared to $3.6$6.5 billion at December 31, 2016. 2019.This increase was due primarily to net income available to common stockholders of $373.3$132.3 million for the nine months endedSeptember 30, 2017 and an increase in additional paid-in capitalother comprehensive income was driven primarily by a $543.9 million ($393.1 million net of $51.8tax) increase in the fair value of our AFS securities portfolio reflective of decreases in period-end market interest rates and a $226.9 million ($163.9 million net of tax) gain from the termination of our interest rate swap cash flow hedge contracts, partially offset by a reclassification to net income for realized gains of $61.2 million ($44.2 million net of tax) attributable primarily to amortizationsales of share-based compensation expense and common stock issued under employee benefit plans.AFS securities.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Capital Ratios
Both SVB Financial and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies.
Regulatory capital ratios for SVB Financial and the Bank exceeded minimum federal regulatory guidelines under the Capital Rules as well as for a well-capitalized"well capitalized" bank holding company and insured depository institution, respectively, as of September 30, 2017March 31, 2020 and December 31, 2016.2019. Capital ratios for SVB Financial and the Bank, compared to the minimum regulatorycapital ratios, applicable to bank holding companies and banks to be considered “well capitalized” and “adequately capitalized”, are set forth below:
|
| | | | | | | | | | | | |
| | | | | | Minimum Ratios under Applicable Regulatory Capital Adequacy Requirements |
| | September 30, 2017 | | December 31, 2016 | | “Well Capitalized” | | “Adequately Capitalized” |
SVB Financial: | | | | | | | | |
CET 1 risk-based capital ratio | | 12.96 | % | | 12.80 | % | | 6.5 | % | | 4.5 | % |
Tier 1 risk-based capital ratio | | 13.32 |
| | 13.26 |
| | 8.0 |
| | 6.0 |
|
Total risk-based capital ratio | | 14.29 |
| | 14.21 |
| | 10.0 |
| | 8.0 |
|
Tier 1 leverage ratio | | 8.34 |
| | 8.34 |
| | N/A |
| | 4.0 |
|
Tangible common equity to tangible assets ratio (1) | | 8.00 |
| | 8.15 |
| | N/A |
| | N/A |
|
Tangible common equity to risk-weighted assets ratio (1) | | 13.01 |
| | 12.89 |
| | N/A |
| | N/A |
|
Bank: | | | | | | | | |
CET 1 risk-based capital ratio | | 12.41 | % | | 12.65 | % | | 6.5 | % | | 4.5 | % |
Tier 1 risk-based capital ratio | | 12.41 |
| | 12.65 |
| | 8.0 |
| | 6.0 |
|
Total risk-based capital ratio | | 13.40 |
| | 13.66 |
| | 10.0 |
| | 8.0 |
|
Tier 1 leverage ratio | | 7.59 |
| | 7.67 |
| | 5.0 |
| | 4.0 |
|
Tangible common equity to tangible assets ratio (1) | | 7.47 |
| | 7.77 |
| | N/A |
| | N/A |
|
Tangible common equity to risk-weighted assets ratio (1) | | 12.44 |
| | 12.75 |
| | N/A |
| | N/A |
|
|
| | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 | | Required Minimum (1) | | Well Capitalized Minimum |
SVB Financial: | | | | | | | | |
CET 1 risk-based capital ratio (2)(3) | | 12.35 | % | | 12.58 | % | | 7.0 | % | | N/A |
|
Tier 1 risk-based capital ratio (3) | | 13.35 |
| | 13.43 |
| | 8.5 |
| | 6.0 |
|
Total risk-based capital ratio (3) | | 14.45 |
| | 14.23 |
| | 10.5 |
| | 10.0 |
|
Tier 1 leverage ratio (2)(3) | | 9.00 |
| | 9.06 |
| | 4.0 |
| | N/A |
|
Tangible common equity to tangible assets ratio (4)(5) | | 8.70 |
| | 8.39 |
| | N/A |
| | N/A |
|
Tangible common equity to risk-weighted assets ratio (4)(5) | | 13.40 |
| | 12.76 |
| | N/A |
| | N/A |
|
Bank: | | | | | | | | |
CET 1 risk-based capital ratio (3) | | 10.90 | % | | 11.12 | % | | 7.0 | % | | 6.5 | % |
Tier 1 risk-based capital ratio (3) | | 10.90 |
| | 11.12 |
| | 8.5 |
| | 8.0 |
|
Total risk-based capital ratio (3) | | 12.04 |
| | 11.96 |
| | 10.5 |
| | 10.0 |
|
Tier 1 leverage ratio (3) | | 7.21 |
| | 7.30 |
| | 4.0 |
| | 5.0 |
|
Tangible common equity to tangible assets ratio (4)(5) | | 7.63 |
| | 7.24 |
| | N/A |
| | N/A |
|
Tangible common equity to risk-weighted assets ratio (4)(5) | | 11.99 |
| | 11.31 |
| | N/A |
| | N/A |
|
| |
(1) | Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital conservation buffer under the Capital Rules. |
| |
(2) | "Well-Capitalized Minimum" CET 1 risk-based capital and Tier 1 leverage ratios are not formally defined under applicable banking regulations for bank holding companies. |
| |
(3) | Capital ratios include regulatory capital phase-in of the allowance for credit losses under the 2020 CECL Interim Final Rule for periods beginning March 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 Federal Reserve 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. |
Regulatory Capital Phase-In under the 2020 CECL Interim Final Rule ("IFR")
Federal banking regulatory agencies have provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by COVID-19 as well as the significant resources required to implement CECL. The interim final rule provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total). The interim final rule provides electing banking organizations with a methodology for delaying the effect on regulatory capital of an estimated amount of the increase in the allowance for credit loss ("ACL") that can be attributed to the adoption of CECL, relative to the increase in the allowance for loan and lease losses ("ALLL") that would have occurred for banking organizations operating under the incurred loss methodology. Accordingly, we have elected to use the regulatory capital phase-in under the IFR.
Based on the methodology under the IFR, we received a 19 bps and 18 bps benefit to our Common Equity Tier 1 and Tier 1 Capital ratios (CETRatios, respectively, along with an 11 bps benefit to our Leverage Ratios for SVB Financial Group and the Bank.
Regulatory Capital: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996
On July 22, 2019, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve Board issued a final rule titled Regulatory Capital: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Simplifications Rule"), which simplified the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and the calculation of minority interest. These provisions in the Simplifications Rule were effective as April 1, tier2020. Under the effective date revision in this final rule, non-advanced approaches banking organizations, such as SVB Financial Group, may implement the simplification rule beginning on January 1, 2020. As such, we have elected to adopt these provisions effective January 1, 2020.
Our total risk-based capital ratios for both SVBFG and tier 1 leverage) for SVB Financial increasedthe Bank as of September 30, 2017,March 31, 2020, increased compared to the same ratios as of December 31, 2016. The changes were driven2019 as a result of an increase in capital, offset by an increase in capital during the nine months ended September 30, 2017, primarily from net income. Anour risk-weighted assets. The increase in additional paid-in capital from share-based compensation expense duringwas due to net income, an increase in our allowance for credits losses for loans and HTM securities and an increase in minority interest for SVBFG reflective of the nine months ended September 30, 2017 also resulted in a benefit toimplementation of the capital ratios. The
Simplifications Rule. These increases in capital were partially offset by a decrease in
retained earnings due to the stock repurchase program for SVBFG. The increase in risk-weighted assets was primarily driven by our robust period-end loan growth.
Our tier 1 capital and leverage ratios for both SVBFG and the Bank as of March 31, 2020, decreased compared to December 31, 2019 driven primarily by an increase in risk-weighted and average assets, due to period-endoffset by an increase in tier 1 capital. The increase in risk-weighted and average assets was driven primarily by loan growth, and higher investmentincreased cash and cash balances driven by increasesequivalents and increased fixed income investment securities. The increase in deposits.
Capital ratios (CET 1, tier 1 total risk-based capital and tier 1 leverage) for the Bank was driven primarily by net income. The increase in tier 1 capital for SVBFG was driven primarily by net income and an increase in minority interest due to the Simplifications Rule, offset by a decrease in retained earnings due to common stock repurchases under our stock repurchase program.
Our CET 1 capital ratio decreased for both SVBFG and the Bank as of September 30, 2017,March 31, 2020, compared to the same ratios as of December 31, 2016.2019 as a result of an increase in capital, partially offset by the increase our risk-weighted assets. The decreaseincrease in capital was due to net income and an increase in the Bank'sallowance for credit losses for loans and HTM securities. These increases in capital ratios reflected $60.0 million of cash dividends paidwere partially offset by the Bank toincrease in risk weighted assets, driven by our bank holding company, SVB Financial, during the nine months ended September 30, 2017. robust period-end loan growth.
All of our reported capital ratios remain above the levels considered to be “well capitalized” under applicable banking regulations.
The tangible common equity 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. These ratios are calculated by dividing total SVBFG stockholders' 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 for SVB Financial and the Bank for the periods ended September 30, 2017March 31, 2020 and December 31, 2016:2019:
| | | | SVB Financial | | Bank | | SVB Financial | | Bank |
Non-GAAP tangible common equity and tangible assets (Dollars in thousands, except ratios) | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 |
GAAP SVBFG stockholders’ equity | | $ | 4,059,813 |
| | $ | 3,642,554 |
| | $ | 3,728,890 |
| | $ | 3,423,427 |
| | $ | 7,034,749 |
| | $ | 6,470,307 |
| | $ | 5,617,402 |
| | $ | 5,034,095 |
|
Less: preferred stock | | | 340,138 |
| | 340,138 |
| | — |
| | — |
|
Less: intangible assets | | | 185,895 |
| | 187,240 |
| | — |
| | — |
|
Tangible common equity | | $ | 4,059,813 |
| | $ | 3,642,554 |
| | $ | 3,728,890 |
| | $ | 3,423,427 |
| | $ | 6,508,716 |
| | $ | 5,942,929 |
| | $ | 5,617,402 |
| | $ | 5,034,095 |
|
GAAP total assets | | $ | 50,754,287 |
| | $ | 44,683,660 |
| | $ | 49,937,343 |
| | $ | 44,059,340 |
| | $ | 75,009,640 |
| | $ | 71,004,903 |
| | $ | 73,630,526 |
| | $ | 69,563,817 |
|
Less: intangible assets | | | 185,895 |
| | 187,240 |
| | — |
| | — |
|
Tangible assets | | $ | 50,754,287 |
| | $ | 44,683,660 |
| | $ | 49,937,343 |
| | $ | 44,059,340 |
| | $ | 74,823,745 |
| | $ | 70,817,663 |
| | $ | 73,630,526 |
| | $ | 69,563,817 |
|
Risk-weighted assets | | $ | 31,208,081 |
| | $ | 28,248,750 |
| | $ | 29,970,913 |
| | $ | 26,856,850 |
| | $ | 48,578,473 |
| | $ | 46,577,485 |
| | $ | 46,839,951 |
| | $ | 44,502,150 |
|
Tangible common equity to tangible assets | | 8.00 | % | | 8.15 | % | | 7.47 | % | | 7.77 | % | |
Tangible common equity to risk-weighted assets | | 13.01 |
| | 12.89 |
| | 12.44 |
| | 12.75 |
| |
Non-GAAP tangible common equity to tangible assets | | | 8.70 | % | | 8.39 | % | | 7.63 | % | | 7.24 | % |
Non-GAAP tangible common equity to risk-weighted assets | | | 13.40 |
| | 12.76 |
| | 11.99 |
| | 11.31 |
|
The tangible common equity to tangible assets ratio decreasedand the tangible common equity to risk weighted assets ratio increased for SVB FinancialSVBFG and the Bank due to the proportionally higher increase in our assets compared to the increases in common equity during the ninethree months ended September 30, 2017. Increased capital was reflective primarily of net income for the nine months ended September 30, 2017. Total assets increased primarily as a result of loan growth and higher investment and cash balances driven by increases in deposits.March 31, 2020. The tangible common equity to risk-weighted assets ratio increased for SVB Financial and decreased for the Bank. The increase for SVB Financial wasas a result of the proportionally higher increase in net income comparedequity due to unrealized gains on AFS securities and unrealized gains due to the changes in risk-weighted assets during the nine months ended September 30, 2017.termination of our interest rate swap cash flow hedge contracts as mentioned above. The growth in period-end risk-weighted assets was primarily due to increases in cash and cash equivalents and period-end loan growth and higher investment and cash balances driven by increases in deposits. The decrease for the Bank was a result of $60.0 million in cash dividends paid by the Bank to our bank holding company, SVB Financial, during the nine months ended September 30, 2017. See “SVBFG Stockholders’ Equity” above for further details on changes to the individual components of our equity balance.growth.
Off-Balance Sheet Arrangements
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract. For details of our commitments to extend credit, and commercial
and standby letters of credit, please refer to Note 12—“Off-Balance15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Commitments to Invest in Venture Capital and Private Equity Funds
Subject to applicable regulatory requirements, including the Volcker Rule, we make investments. 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.
For further details on our commitments to invest in venture capital and private equity funds, refer to Note 12—“Off-Balance15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Liquidity
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations, including, as necessary, paying creditors, meeting depositors’ needs, accommodating loan demand and growth, funding investments, repurchasing securities and other operating or capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Our Asset/Liability Committee (“ALCO”), which is a management committee, provides oversight to the liquidity management process and recommends policy guidelines for the approval of the Finance Committee of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Additionally, we routinely conduct liquidity stress testing as part of our liquidity management practices.
Our deposit base is, and historically has been, our primary source of liquidity. Our deposit levels and cost of deposits may fluctuate from time to time due to a variety of factors, including market conditions, prevailing interest rates, changes in client deposit behaviors, availability of insurance protection, and our offering of deposit products. We may also offer more investment alternatives for our off-balance sheet products which may impact deposit levels. At September 30, 2017,March 31, 2020, our period-end total deposit balances were $44.8$61.9 billion, compared to $39.0$61.8 billion at December 31, 2016.2019.
Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, short-term investment securities maturing within one year, available-for-sale 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 high-quality fixed income 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 Federal Reserve Bank. The fair valueFRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of March 31, 2020, collateral pledged to the FHLB of San Francisco (comprisedwas comprised primarily of U.S. Treasury securities)fixed income investment securities and loans and had a carrying value of $4.8 billion, of which $1.4 billion was available to support additional borrowings. As of March 31, 2020, collateral pledged to the discount window at September 30, 2017 totaled $1.9the FRB was comprised of fixed income investment securities and had a carrying value of $1.0 billion, all of which was unused and available to support additional borrowings. The fair value of collateral pledged at the discount window of the Federal Reserve Bank at September 30, 2017 totaled $0.7 billion, all of which wasOur total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.6 billion at March 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $3.3 billion at March 31, 2020.
In connection with our participation in the PPP under the CARES Act as discussed, we are considering participating in the Federal Reserve’s PPPLF. The PPPLF is intended to support additional borrowings.facilitate lending under the PPP, and extends credit to eligible PPP loan originators on a non-recourse basis, taking PPP loans as collateral at face value. Additionally, interim final capital rules issued by federal bank regulatory agencies have neutralized the regulatory capital effects of participating in the PPP, and have also clarified that a zero percent risk weight applies to loans covered by the PPP for capital purposes.
On a stand-alone basis, SVB Financial’s primary liquidity channels include cash flow from investments and interest in financial assets (including equity warrants) held by SVB Financial or its operating subsidiaries other than the Bank; to the extent declared, dividends from the Bank;Bank, its portfolio of liquid assets, and its ability to the extent needed, capital market transactions offeringraise debt and equity instruments in the public and private markets.capital. Consistent with recent prior quarters, the Bank has paid a quarterly dividend to SVB Financial. For the three and nine months ended September 30, 2017,March 31, 2020, the dividend amount paid was $20 million and $60 million, respectively.
$50.0 million. The ability of the Bank
to pay dividends is subject to certain regulations described in “Business—Supervision and Regulation—Restriction on Dividends” under Part I, Item 1 of our 20162019 Form 10-K.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016.2019. For further details, see our “Interim Consolidated Statements of Cash Flows (Unaudited)” under Part I, Item 1 of this report.
| | | | Nine months ended September 30, | | Three months ended March 31, |
(Dollars in thousands) | | 2017 | | 2016 | | 2020 | | 2019 |
Average cash and cash equivalents | | $ | 3,596,669 |
| | $ | 2,437,763 |
| | $ | 8,106,167 |
| | $ | 4,987,487 |
|
Percentage of total average assets | | 7.6 | % | | 5.6 | % | | 11.2 | % | | 8.7 | % |
Net cash provided by operating activities | | $ | 468,032 |
| | $ | 273,004 |
| | $ | 168,125 |
| | $ | 340,750 |
|
Net cash (used for) provided by investing activities | | (4,734,383 | ) | | 2,472,444 |
| | (599,041 | ) | | 904,427 |
|
Net cash provided by (used for) financing activities | | 5,276,172 |
| | (1,727,386 | ) | |
Net cash provided by financing activities | | | 3,210,581 |
| | 2,250,167 |
|
Net increase in cash and cash equivalents | | $ | 1,009,821 |
| | $ | 1,018,062 |
| | $ | 2,779,665 |
| | $ | 3,495,344 |
|
Average cash and cash equivalents increased by $1.2$3.1 billion, or 47.562.5 percent, to $3.6$8.1 billion for the ninethree months ended September 30, 2017,March 31, 2020, compared to $2.4$5.0 billion for the comparable 20162019 period.
Cash provided by operating activities was $468.0$168.1 million for the ninethree months ended September 30, 2017,March 31, 2020, reflective primarily of net income before noncontrolling interests and dividends of $394.5 million.$133.6 million and a net increase of $34 million in adjustments to reconcile net income to net cash primarily due to the increase in the provision for credit losses and proceeds for the settled transactions for the termination of interest rate swap cash flow hedge contracts, partially offset by the decrease in accrued compensation.
Cash used for investing activities of $4.7$0.6 billion for the ninethree months ended September 30, 2017March 31, 2020 was driven by $6.2$1.9 billion in purchases of fixed income investment securities and a $2.8 billion increase in loan balances, partially offset by $3.7$2.7 billion in proceeds from the sale of AFS securities and $1.4 billion of proceeds from maturities and principal paydownsprinciple pay downs from our fixed income investment securities portfolio. Additionally, $2.3 billion in cash outflows were used to fund loan growth during the nine months ended September 30, 2017.
Cash provided by financing activities was $5.3$3.2 billion for the ninethree months endedSeptember 30, 2017, March 31, 2020, reflective primarily of a net$3.1 billion increase of $5.8 billion in deposits, partially offset by $507.8 million of payments on our overnight short-term borrowings and $46.2 million for the repayment of our 6.05% Subordinated Notes upon maturity.short term borrowings.
Cash and cash equivalents were $3.6$9.6 billion and $2.5$7.1 billion, respectively, at September 30, 2017March 31, 2020 and September 30, 2016.2019.
ITEM 3. 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. 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 ofpricing). All these risks are important considerations allbut are also inherently difficult to predict and it is equally difficult to assess the impact of each on the overall 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 the modeled 12-month forward lookingprojection of net interest income from changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and current market conditions. Adherence with relevantRelevant metrics included in our Interest Rate Risk Policy,and guidelines, which isare approved by the Finance Committee of our Board of Directors isand are included in our Interest Rate Risk Policy, are monitored on an ongoing basis.
Management of interest
Interest rate risk is carried outmanaged primarily through strategies involving our fixed income securities portfolio, available funding channels and capital market activities. In addition, our policies permit the use of off-balance sheet derivatives, such as interest rate swaps, to assist inwith managing interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the economic value of our equity and our net interest income under a variety of interest rate scenarios, balance sheet forecasts and business strategies. The simulation model provides a dynamic assessment of interest rate sensitivity embedded within our balance sheet which measures the potential variability in economic value and net interest income relating solely to changes in market interest rates over time. We review our interest rate risk position and sensitivity to market interest rates on a quarterly basis at a minimum.
regularly.
Model Simulation and Sensitivity Analysis
A specific application of our simulation model involves measurement of the impact of changes in market interest rates on ourthe economic value of equity (“EVE”). EVE is defined as the market value of assets, less the market value of liabilities, adjusted for any off-balance sheet items, if any.liabilities. Another application of the simulation model measures the impact of changes in market interest rates on our net interest income (“NII”) assuming a static balance sheet size and composition as of the period-end reporting date. Meaning,In the NII simulation, the level of market interest rates as well as 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 decay rate assumptions on demand deposits and interest bearinginterest-bearing deposits, which are replenished to hold the level and mix of funding liabilities constant. Changes in market interest rates that affect usnet interest income are principally short-term interest rates and include the following benchmark indexes: (i) the National and SVB Prime rates,Rate, (ii) 1-month and 3-month LIBOR, and (iii) the Federal Funds target rate. Changes in these short-term rates impact interest earned on our variable rate loans variable rate investment securities and balances held as cash and cash equivalents. Additionally, simulated changes in deposit pricing relative to changes in market rates, commonly referred to as deposit beta, generally follow overall changes in short-term interest rates, although actual changes may lag in terms of timing and magnitude. Overall,
The NII simulation results presented here include an "asymmetric" beta assumption that is applied in the assumed weighted deposit beta on interest bearing deposits is approximately 35.0 percent, which meansNII and EVE simulation models for interest-bearing deposits. This reflects management expectations that deposit repricing is assumed tobehavior in a falling rate environment would be different than repricing behavior in a rising rate environment. This model assumes the overall beta for interest-bearing deposits in a falling rate environment would be approximately 35.060 percent. That is, overall changes in interest-bearing deposit rates would be approximately 60 percent of a giventhe change in short-term interestmarket rates. ThisThese repricing isassumptions are reflected as a changechanges in interest expense on interest bearinginterest-bearing deposit balances.
For the three months ended September 30, 2017, our results include two key modeling assumption changes relating to our non-maturity deposits and prepayments on outstanding commercial loans. The impact was seen primarily in our EVE sensitivity profile and, to a lesser degree, on our NII sensitivity.
For non-maturity deposits, the assumed deposit decay rate is greater in current modeled results compared to assumptions used in prior periods. The impact of the change in assumptions in all rate simulations resulted in greater market value sensitivity of deposits and greater EVE sensitivity overall. Prepayment rate assumptions on commercial loans are also greater in current modeled results compared to assumptions used in prior periods. The impact of the change in assumptions resulted in lower market value sensitivity on commercial loans but the impact on overall EVE sensitivity was minimal in comparison to the overall changes in EVE sensitivity.
The following table presents our EVE and NII sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points ("bps") at September 30, 2017March 31, 2020 and at December 31, 2016 (as revised based on the assumptions noted above):2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
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 |
September 30, 2017: | | | | | | | | | | | | |
200 | | $ | 8,223,716 |
| | $ | 999,900 |
| | 13.8 | % | | $ | 1,889,933 |
| | $ | 426,799 |
| | 29.2 | % |
100 | | 7,767,694 |
| | 543,878 |
| | 7.5 |
| | 1,677,489 |
| | 214,355 |
| | 14.7 |
|
— | | 7,223,816 |
| | — |
| | — |
| | 1,463,134 |
| | — |
| | — |
|
-100 | | 6,448,044 |
| | (775,772 | ) | | (10.7 | ) | | 1,248,346 |
| | (214,788 | ) | | (14.7 | ) |
-200 | | 5,444,025 |
| | (1,779,791 | ) | | (24.6 | ) | | 1,190,846 |
| | (272,288 | ) | | (18.6 | ) |
| | | | | | | | | | | | |
December 31, 2016 (As revised): | | | | | | | | | | | | |
200 | | $ | 7,601,404 |
| | $ | 1,129,823 |
| | 17.5 | % | | $ | 1,543,247 |
| | $ | 365,734 |
| | 31.1 | % |
100 | | 7,073,407 |
| | 601,826 |
| | 9.3 |
| | 1,360,356 |
| | 182,843 |
| | 15.5 |
|
— | | 6,471,581 |
| | — |
| | — |
| | 1,177,513 |
| | — |
| | — |
|
-100 | | 5,765,799 |
| | (705,782 | ) | | (10.9 | ) | | 1,075,353 |
| | (102,160 | ) | | (8.7 | ) |
-200 | | 4,860,540 |
| | (1,611,041 | ) | | (24.9 | ) | | 1,039,903 |
| | (137,610 | ) | | (11.7 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
Change in interest rates (bps) (Dollars in thousands) | | Estimated | | Estimated Increase/(Decrease) in EVE | | Estimated | | Estimated Increase/(Decrease) in NII |
| EVE | | Amount | | Percent | | NII | | Amount | | Percent |
March 31, 2020: | | | | | | | | | | | | |
+200 | | $ | 10,519,005 |
| | $ | 138,025 |
| | 1.3 | % | | $ | 2,443,279 |
| | $ | 559,545 |
| | 29.7 | % |
+100 | | 10,600,353 |
| | 219,373 |
| | 2.1 |
| | 2,160,226 |
| | 276,492 |
| | 14.7 |
|
— | | 10,380,980 |
| | — |
| | — |
| | 1,883,734 |
| | — |
| | — |
|
-100 | | 10,333,795 |
| | (47,185 | ) | | (0.5 | ) | | 1,790,704 |
| | (93,030 | ) | | (4.9 | ) |
-200 | | 10,417,466 |
| | 36,486 |
| | 0.4 |
| | 1,774,703 |
| | (109,031 | ) | | (5.8 | ) |
| | | | | | | | | | | | |
December 31, 2019: | | | | | | | | | | | | |
+200 | | $ | 9,930,270 |
| | $ | (253,659 | ) | | (2.5 | )% | | $ | 2,528,158 |
| | $ | 421,358 |
| | 20.0 | % |
+100 | | 10,056,711 |
| | (127,218 | ) | | (1.2 | ) | | 2,314,686 |
| | 207,886 |
| | 9.9 |
|
— | | 10,183,929 |
| | — |
| | — |
| | 2,106,800 |
| | — |
| | — |
|
-100 | | 10,138,558 |
| | (45,371 | ) | | (0.4 | ) | | 1,927,801 |
| | (178,999 | ) | | (8.5 | ) |
-200 | | 10,000,585 |
| | (183,344 | ) | | (1.8 | ) | | 1,760,283 |
| | (346,517 | ) | | (16.4 | ) |
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 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 value of equityEVE or forecast of NII.
Our base case EVE as of September 30, 2017March 31, 2020 increased $197 million from December 31, 20162019, driven by $0.8 billion primarily due tooverall balance sheet growth. For the period ended March 31, 2020, compared to December 31, 2019, cash and loan balances increased by $2.8 billion each, offset by a decrease of $1.6 billion in fixed income investments in our AFS and HTM portfolios. Deposits remained relatively flat with a shift in the mix of deposits resulting in a $2.1 billion increase in noninterest-bearing balances and a $1.9 billion decrease in interest bearing balances. Short-term borrowings increased by $3.1 billion.
Decreases in interest rates at the beginning of March partially offset the increase in base EVE from balance sheet growth. The market value of noninterest-bearing deposits is more sensitive to changes as well asin rates. Growth in noninterest-bearing balances coupled with lower overall rates result in a higher EVE sensitivity in the assumption model changes discussed above.+100 and +200 rate shock scenarios. As of September 30, 2017, period-end loans, netMarch 31, 2020, noninterest-bearing deposits represented 70 percent of unearned income increased $2.3 billiontotal deposit balances, up four percent as compared to December 31, 2016. Comparing the same periods, period-end total2019. Purchases in fixed income investment securities increased $2.6 billioninvestments during Q1 2020 were not material and period-end cashdid not have an impact on EVE sensitivity in the +100 and cash equivalents increased by $1.0 billion driven primarily by an increase+200 rate shock scenarios. Due to the sudden decrease in deposits balancesmarket rates that occurred in March 2020, EVE sensitivity measures in the -100 and -200 bps rate shock scenarios do not represent the full magnitude of $5.8 billion.
Higher short-term LIBORthose rate shocks because we assume that U.S. Federal Fund rates as of September 30, 2017, with marginally lower long-term rates, contributed to a flatteningare floored at zero. Rates at the short end of the yieldrate curve compared to December 31, 2016. Changeswere over 100 bps, accordingly in nominal rates and athe -100 bps rate shock, market values behave as we would expect them to; EVE decreases reflective of the change in market value of deposits as they are greater than the shape of the yield curve resultedchange in the market value of deposits decreasing proportionally higher thanour assets. However, in the -200 bps scenario, all rates floor out to zero and there is not much room for interest-bearing deposit rates to move, so their sensitivity actually decreases while the change in the market value of assets remains the same as noted above, non-maturity deposit modeling assumption changes werein the primary driver of-100 bps scenario as the rates for those are already floored. As a higher base case EVEresult, we do not get a full -200 bps rate shock as of September 30, 2017. Compared to December 31, 2016, proportional growth in loans, investments, andthe sensitivity metrics on deposits did not significantly impact EVEare asymmetrical. Therefore, the sensitivity measures in the +100 bps and +200these scenarios essentially reflect results similar to what would be seen in a -25 to -50 bps rate shock scenarios as of September 30, 2017. range.
The overall change in mix in the composition of our balance sheet as discussed, results in an EVE sensitivity can be attributed primarily to the non-maturity assumptionsprofile that experiences positive changes as described above.rates rise, and represents a typical profile for a balance sheet that includes a rate-sensitive loan portfolio funded by a much larger noninterest-bearing deposit base.
12-Month Net Interest Income Simulation
Our simulated 12-month base case NII at September 30, 2017 increased from December 31, 2016 by $286 million, primarily due to the impact of the loan prepayment assumptions changes described above, higher rates on LIBOR and Prime rate based loans, higher period-end loan growth as noted above, and a higher level of earning assets at September 30, 2017.
NII sensitivity is measured as of September 30, 2017the 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 March 31,2020, NII sensitivity was 14.7 percent in the +100 and -100 bps interest rate shock scenarios is nearly symmetricalscenario, compared to 9.9 percent at +14.7% and -14.7%, respectively. This profile is as expected, given the composition of floating rate loans in our balance sheet.December 31, 2019. Our NII sensitivity in the +200 and -200 bps interest rate shock scenarios still shows asymmetry, with lessscenario was 29.7 percent compared to 20.0 percent at December 31, 2019. NII sensitivity in the -100 bps scenario of negative 4.9 percent was lower at March 31, 2020, compared to a negative 8.5 percent at December 31, 2019. The -200 bps scenario currently indicates a lower percentage change in NII of negative 5.8 percent at March 31, 2020, compared to negative 16.4 percent at December 31, 2019. However, as noted above, the -100 and -200 bps scenarios are not complete rate shocks in this rate environment, since rates are assumed to be floored at zero. Therefore, the sensitivity measures in these scenarios essentially reflect results similar to what would be seen in a -25 to -50 bps rate shock scenariorange. The March 31, 2020 NII sensitivity percentages are inclusive of the realized income or expense associated with interest rate swaps that were partially unwound reflective of the macro hedging process initiated in 2019 to reduce the impact of decreasing rates on NII. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition described previously, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at March 31, 2020 decreased compared to December 31, 2019 by $223 million, primarily driven by the growth in the balance sheet that has taken place year-to-date combined with an overall relatively lower rate environment, reflective of the decrease in the Fed Funds rate during March 2020, compared to last year. Specifically, a large portion of the loan portfolio is indexed to the Prime rate, which decreased 150 bps due to floorsactions undertaken by the Federal Reserve in March to mitigate a possible economic downturn. The adverse impact of changes in interest rates on loans.NII was tempered to a certain degree by continued growth in the loan portfolio, along with decreases in interest bearing deposit balances and growth in noninterest-bearing deposit balances.
A majority of our loans are indexed to Prime and LIBOR. In the positive parallel simulated rate shock scenarios, interest income on assets that are tied to variable rate indexes, primarily our variable rate loans, are expected to benefit our base 12-month NII projections. The opposite is true for negative rate shock scenarios.
The 12-month NII simulations include repricing assumptions on our interest-bearing deposit products which we set at our discretion based on client needs and our overall funding mix. Repricing of interest-bearing deposits impacts estimated interest expense. As noted previously, repricing deposit rates are generally assumed to be approximately 60 percent of the amount of simulated changes in short-term market interest rates.
The simulation model used in the above analysis incorporates embedded floors on loans, where present, in our interest rate scenarios, which prevent model benchmark rates from moving below zero percent in the down rate scenarios. The embedded floors are also a factor in the up rateup-rate scenarios to the extent a simulated increase in rates is needed before floored rates are cleared. In addition, we assume different deposit balance decay rates for each interest rate scenario based on a historical deposit study of our clients. These assumptions may change in future periods based on changes in client behavior and at management's discretion. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our actual sensitivity overall.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, among other things, processes, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of our most recently completed fiscal quarter, pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control
ThereExcept as set forth below, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Beginning January 1, 2020, we adopted and implemented ASC 326, CECL and have implemented changes to our processes, systems and control activities related to the modeling and recognition of our allowance for credit loss estimates. The key changes to our processes and control activities included data management, economic forecasting, modeling, qualitative framework, governance and gathering of information provided for disclosures.
PART II–OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to Note 15—“Legal18 — “Legal Matters” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
ITEM 1A. RISK FACTORS
ThereWith the exception of the additional risk factor due to ongoing outbreak of COVID-19 below, there are no material changes to the risk factors set forth in our 20162019 Annual Report on Form 10-K.
Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has created significant economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. We cannot predict at this time the 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, customers, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.
The COVID-19 pandemic has contributed 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) significant draws on credit lines as clients seek to increase liquidity; (v) significant reductions in the targeted federal funds rate (which was reduced to a target rate of between zero and 0.25% in the first quarter and may be reduced to below zero if the Federal Reserve determines economic conditions warrant); and (vi) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements and the current environment, including increased fraudulent activity. In addition, we also face an increased risk of client disputes, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions. Moreover, we have focused resources and management attention towards managing the impacts from COVID-19 pandemic, which will likely result in a slowdown of our growth initiatives and other investments in the near term.
We are prioritizing the safety of our employees. We have currently moved to a work-from-home plan, prohibited all business travel and postponed or move online all SVB-hosted events, and enabled remote access to our systems. If our work-from-home plan is not effective or if there are negative effects from a prolonged work-from-home arrangement, it may lead to reduced productivity and significant disruptions in our business operations. We are also developing a plan for employees to eventually return to work in our offices, the manner and timing of which are unclear. Our return to work plan will be subject to a variety of complex considerations including, among others, international, federal, state and local government and health organization guidance, health and safety implications (including potential health testing requirements), employee needs, and the practical requirements of potential office reconfigurations or a phased return. It is also possible that our current extended work-from-home model may affect or change our prior—work-in-the-office model, as we may allow an increase in remote working practices.
Many of our counterparties and third-party service providers have also been, and may further be, affected by “stay-at-home” orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.
We are offering special financial assistance to support certain clients who are experiencing financial hardships related to the COVID-19 pandemic, including offering certain venture-backed companies, Private Bank, Wine and other clients the opportunity to temporarily defer their scheduled loan principal payments. We continue to engage with our clients to understand client needs, and we may implement additional assistance or other relief to supporting clients across various sectors and life stages. Additionally, we are participating as a lender under the Paycheck Protection Program under CARES Act and may participate in other government relief programs in the U.S. or internationally. These government programs are complex and our participation in any of these programs may lead to governmental, regulatory and other scrutiny, litigation and negative publicity and reputation damage for us and our customers who participate. Overall, these relief measures, whether our own programs or our participation
in government programs, are new programs for us (with new or revised regulatory guidance for the government programs that may be issued at different times throughout the process) and we may not be successful in implementing or administering the programs as intended. Further, the extent to which these programs are successful in assisting our clients is uncertain. If these relief measures are not effective, there may be an adverse effect on our revenue and results of operations, including increased provisions in our allowance for credit losses, higher rates of default and increased credit losses in future periods.
Certain industries where the Company has credit exposure, including the technology, life science/healthcare and premium wine industries, have experienced, and are expected to continue to experience, significant operational and financial challenges as a result of COVID-19. As examples, many of our early-stage clients have limited cash on hand with limited or no financing sources available and may experience difficulties sustaining their businesses; and, our premium wine industry clients may be impacted by the loss of restaurant and winery sales. These negative effects have resulted in a number of clients making higher than usual draws on outstanding lines of credit, which may negatively affect our liquidity if current economic conditions persist. 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. For certain early-stage and mid-stage clients, repayment of loans is dependent upon receipt of additional financing from venture capitalists or others, or in some cases, upon a successful sale to a third party, public offering or other form of liquidity or “exit” event. Further, many of our private equity/venture capital loans are dependent on the payment of capital calls or management fees by underlying limited partner investors in funds managed by private equity and venture capital firm clients. The effects of the COVID-19 pandemic has caused client valuations to drop, reduced the rate of financing or other “exit” events and impaired the ability of investors to meet their financial obligations to our clients, all of which has had and may continue to have an adverse effect on our clients’ ability to repay their loans to us.
In connection with negotiated credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology, life science and healthcare industries subject to applicable regulatory limits. We have also made investments through SVB Financial, SVB Leerink and our SVB Capital family of funds in venture capital funds and direct investments in companies, many of which are required to be carried at fair value or are impacted by changes in fair value. Due to the negative effects of the COVID-19 pandemic as well as recent declines, and significant increases in volatility, in financial markets, the value of these assets have decreased, and may continue to decrease (potentially in a significant manner). Additionally, 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.
The effects of the COVID-19 pandemic has led to a significant slowdown in IPO and M&A activity, resulting in fewer transactions overall and therefore decreased revenues of SVB Leerink, our investment banking business, as such revenues stem primarily from underwriting and advisory fees associated with capital markets and M&A transactions. The IPO and M&A slowdown also impacts our ability to monetize and realize gains from our equity warrant assets and other nonmarketable securities. Additionally, a slowdown in overall private equity and 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.
Our earnings and cash flows are dependent to a large degree on net interest income (the difference between interest income from loans and investments and interest expense on deposits and borrowings). Net interest income is significantly affected by market rates of interest. The significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities, in some cases declining below zero. If interest rates are reduced further in response to COVID-19, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to the COVID-19 pandemic, and resulting economic conditions. Our net interest income is also impacted by our loan volume. If our loan levels were to decline, our net interest income would also be negatively impacted.
Our core fee income may be negatively affected by decreasing business activity due to the COVID-19 pandemic. For example, credit card activity and fees have declined, and may continue to decline in the future. Foreign exchange fees and letters of credit and standby letters of credit fees may also decline if the negative effect on business activity persists for a prolonged period of time. Additionally, our deposit levels may fluctuate during the current environment. It is difficult to predict client liquidity in a challenging economic environment, as clients may increase their draws on their lines of credit to bolster their cash positions, or clients may not be able to obtain additional financing which may lead to the depletion of their cash positions. Declines in client deposit levels may negatively affect our liquidity, as well as our net interest income.
The effects of the COVID-19 pandemic on economic and market conditions have increased demands on our liquidity as we meet our clients’ needs. In addition, these adverse developments may negatively affect our capital and leverage ratios. We have
temporarily suspended our stock repurchases and will reevaluate the program once the economic environment is more stable. We will continue to exercise prudent capital management and monitor the business environment.
Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.
Other negative effects of COVID-19 that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that our business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides and the U.S. economy begins to recover. Further, the COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q. Until the pandemic subsides, we expect continued draws on lines of credit, reduced revenues from our lending businesses, increased credit losses in our lending portfolios and reduced activity in our noninterest income-producing lines of business. Even after the pandemic subsides, it is possible that the U.S. and other major economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.Stock repurchase activity during the three months ended March 31, 2020 was as follows:
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| | | | | | | | | | | | | | |
Period ended | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Maximum dollar value that may yet be purchased under the programs (1) |
January 31, 2020 | | 62,655 |
| | $ | 245.94 |
| | 62,655 |
| | $ | 334,590,536 |
|
February 29, 2020 | | 181,568 |
| | 245.70 |
| | 181,568 |
| | 289,979,534 |
|
March 31, 2020 | | — |
| | — |
| | — |
| | — |
|
Total | | 244,223 |
| | $ | 245.76 |
| | 244,223 |
| | $ | 289,979,534 |
|
| |
(1) | On October 24, 2019, the Company announced that its Board of Directors had authorized a $350 million common stock repurchase program pursuant to which the Company may, from time to time and on or before the program’s expiration date, repurchase shares of its outstanding common stock in the open market, in privately-negotiated transactions, or otherwise, subject to applicable laws and regulations. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the program’s expiration, without any prior notice. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The new stock repurchase program expires on October 29, 2020. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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Exhibit Number | | Exhibit Description | | Incorporated by Reference | | Filed Herewith |
Form | | File No. | | Exhibit | | Filing Date | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | X |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | | | | | | | | | X |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | |
| | SVB Financial Group |
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Date: November 8, 2017May 11, 2020 | | /s/ DANIEL BECK |
| | Daniel Beck |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| |
| | SVB Financial Group |
| |
Date: November 8, 2017May 11, 2020 | | /s/ KAMRAN HUSAINKAREN HON |
| | Kamran HusainKaren Hon |
| | Chief Accounting Officer |
| | (Principal Accounting Officer) |