SIVB-6.30.2014-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         .
Commission File Number: 000-15637 
SVB FINANCIAL GROUP
(Exact name of registrant as specified in its charter)
  
Delaware
 
91-1962278
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3003 Tasman Drive, Santa Clara, California
 
95054-1191
(Address of principal executive offices)
 
(Zip Code)
(408) 654-7400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
At July 31, 2014, 50,732,080 shares of the registrant’s common stock ($0.001 par value) were outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interim Consolidated Statements of Stockholders' Equity (unaudited) for the six months ended June 30, 2014 and 2013
 
 
 
 
Interim Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013
 
 
 
 
Notes to Interim Consolidated Financial Statements
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

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Table of Contents

Glossary of Acronyms that may be used in this Report

ASC — Accounting Standards Codification
ASU – Accounting Standards Update
EHOP – Employee Home Ownership Program of the Company
EPS – Earnings Per Share
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
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
TDR – Troubled Debt Restructuring
UK – United Kingdom
VIE – Variable Interest Entity

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PART I - FINANCIAL INFORMATION
ITEM 1.        INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands, except par value and share data)
 
June 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
2,649,831

 
$
1,538,779

Available-for-sale securities, at fair value (cost $11,613,679 and $12,055,524, respectively)
 
11,672,790

 
11,986,821

Held-to-maturity securities, at cost (fair value $5,454,996 and $0, respectively)
 
5,463,920

 

Non-marketable and other securities
 
1,757,235

 
1,595,494

Total investment securities
 
18,893,945

 
13,582,315

Loans, net of unearned income
 
11,348,711

 
10,906,386

Allowance for loan losses
 
(120,728
)
 
(142,886
)
Net loans
 
11,227,983

 
10,763,500

Premises and equipment, net of accumulated depreciation and amortization
 
71,465

 
67,485

Accrued interest receivable and other assets
 
465,792

 
465,110

Total assets
 
$
33,309,016

 
$
26,417,189

Liabilities and total equity
 
 
 
 
Liabilities:
 
 
 
 
Noninterest-bearing demand deposits
 
$
20,235,549

 
$
15,894,360

Interest-bearing deposits
 
8,116,998

 
6,578,619

Total deposits
 
28,352,547

 
22,472,979

Short-term borrowings
 
4,910

 
5,080

Other liabilities
 
559,073

 
404,586

Long-term debt
 
454,462

 
455,216

Total liabilities
 
29,370,992

 
23,337,861

Commitments and contingencies (Note 11 and Note 14)
 

 


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; 50,695,206 shares and 45,800,418 shares outstanding, respectively
 
51

 
46

Additional paid-in capital
 
1,092,582

 
624,256

Retained earnings
 
1,532,830

 
1,390,732

Accumulated other comprehensive income (loss)
 
50,276

 
(48,764
)
Total SVBFG stockholders’ equity
 
2,675,739

 
1,966,270

Noncontrolling interests
 
1,262,285

 
1,113,058

Total equity
 
3,938,024

 
3,079,328

Total liabilities and total equity
 
$
33,309,016

 
$
26,417,189

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

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SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
147,680

 
$
131,785

 
$
295,852

 
$
255,529

Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
63,424

 
44,657

 
117,844

 
90,409

Non-taxable
 
794

 
807

 
1,590

 
1,606

Federal funds sold, securities purchased under agreements to resell and other short-term investment securities
 
1,943

 
734

 
3,579

 
1,453

Total interest income
 
213,841

 
177,983

 
418,865

 
348,997

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
3,068

 
2,085

 
5,972

 
4,136

Borrowings
 
5,808

 
5,817

 
11,600

 
11,611

Total interest expense
 
8,876

 
7,902

 
17,572

 
15,747

Net interest income
 
204,965

 
170,081

 
401,293

 
333,250

Provision for loan losses
 
1,947

 
18,572

 
2,441

 
24,385

Net interest income after provision for loan losses
 
203,018

 
151,509

 
398,852

 
308,865

Noninterest income:
 
 
 
 
 
 
 
 
(Losses) gains on investment securities, net
 
(57,320
)
 
40,561

 
166,592

 
67,999

Foreign exchange fees
 
17,928

 
13,667

 
35,124

 
27,863

Gains on derivative instruments, net
 
12,775

 
8,087

 
36,942

 
18,379

Credit card fees
 
10,249

 
7,609

 
20,531

 
15,057

Deposit service charges
 
9,611

 
8,907

 
19,218

 
17,700

Lending related fees
 
5,876

 
4,596

 
12,179

 
8,570

Client investment fees
 
3,519

 
3,524

 
6,937

 
6,999

Letters of credit and standby letters of credit fees
 
2,810

 
3,654

 
6,950

 
7,089

Other
 
8,762

 
7,634

 
19,962

 
7,187

Total noninterest income
 
14,210

 
98,239

 
324,435

 
176,843

Noninterest expense:
 
 
 
 
 
 
 
 
Compensation and benefits
 
99,820

 
84,742

 
202,327

 
173,446

Professional services
 
21,113

 
16,633

 
42,302

 
33,793

Premises and equipment
 
12,053

 
11,402

 
23,635

 
22,127

Business development and travel
 
9,249

 
7,783

 
19,443

 
16,055

Net occupancy
 
7,680

 
5,795

 
15,000

 
11,562

FDIC assessments
 
4,945

 
2,853

 
9,073

 
6,235

Correspondent bank fees
 
3,274

 
3,049

 
6,477

 
6,104

Provision for unfunded credit commitments
 
2,185

 
1,347

 
3,308

 
3,361

Other
 
13,127

 
9,688

 
24,317

 
19,623

Total noninterest expense
 
173,446

 
143,292

 
345,882

 
292,306

Income before income tax expense
 
43,782

 
106,456

 
377,405

 
193,402

Income tax expense
 
33,582

 
29,968

 
92,499

 
56,369

Net income before noncontrolling interests
 
10,200

 
76,488

 
284,906

 
137,033

Net loss (income) attributable to noncontrolling interests
 
40,597

 
(27,904
)
 
(142,808
)
 
(47,558
)
Net income available to common stockholders
 
$
50,797

 
$
48,584

 
$
142,098

 
$
89,475

Earnings per common share—basic
 
$
1.05

 
$
1.08

 
$
3.02

 
$
1.99

Earnings per common share—diluted
 
1.04

 
1.06

 
2.96

 
1.96

 

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

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SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Net income before noncontrolling interests
 
$
10,200

 
$
76,488

 
$
284,906

 
$
137,033

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in cumulative translation Income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation income (loss)
 
157

 
(3,975
)
 
1,621

 
(4,801
)
Related tax (expense) benefit
 
(76
)
 
1,611

 
(654
)
 
1,908

Change in unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses)
 
82,064

 
(172,209
)
 
111,393

 
(194,311
)
Related tax (expense) benefit
 
(33,203
)
 
69,666

 
(45,008
)
 
79,332

Reclassification adjustment for losses (gains) included in net income
 
16,480

 
(775
)
 
16,421

 
(730
)
Related tax (benefit) expense
 
(6,653
)
 
296

 
(6,630
)
 
278

Cumulative-effect adjustment for unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of amortization
 
36,653

 

 
36,653

 

Related tax expense, net of amortization
 
(14,756
)
 

 
(14,756
)
 

Other comprehensive income (loss), net of tax
 
80,666

 
(105,386
)
 
99,040

 
(118,324
)
Comprehensive income (loss)
 
90,866

 
(28,898
)
 
383,946

 
18,709

Comprehensive loss (income) attributable to noncontrolling interests
 
40,597

 
(27,904
)
 
(142,808
)
 
(47,558
)
Comprehensive income (loss) attributable to SVBFG
 
$
131,463

 
$
(56,802
)
 
$
241,138

 
$
(28,849
)
 
See accompanying notes to interim consolidated financial statements (unaudited).

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Table of Contents

SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total SVBFG
Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
(Dollars in thousands)
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2012
 
44,627,182

 
$
45

 
$
547,079

 
$
1,174,878

 
$
108,553

 
$
1,830,555

 
$
774,678

 
$
2,605,233

Common stock issued under employee benefit plans, net of restricted stock cancellations
 
758,415

 

 
27,120

 

 

 
27,120

 

 
27,120

Common stock issued under ESOP
 
74,946

 

 
5,166

 

 

 
5,166

 

 
5,166

Income tax benefit from stock options exercised, vesting of restricted stock and other
 

 

 
1,515

 

 

 
1,515

 

 
1,515

Net income
 

 

 

 
89,475

 

 
89,475

 
47,558

 
137,033

Capital calls, net
 

 

 

 

 

 

 
1,903

 
1,903

Net change in unrealized gains and losses on available-for-sale securities, net of tax
 

 

 

 

 
(115,431
)
 
(115,431
)
 

 
(115,431
)
Foreign currency translation adjustments, net of tax
 

 

 

 

 
(2,893
)
 
(2,893
)
 

 
(2,893
)
Share-based compensation expense
 

 

 
12,445

 

 

 
12,445

 

 
12,445

Other, net
 

 

 
3

 
1

 

 
4

 

 
4

Balance at June 30, 2013
 
45,460,543

 
$
45

 
$
593,328

 
$
1,264,354

 
$
(9,771
)
 
$
1,847,956

 
$
824,139

 
$
2,672,095

Balance at December 31, 2013
 
45,800,418

 
$
46

 
$
624,256

 
$
1,390,732

 
$
(48,764
)
 
$
1,966,270

 
$
1,113,058

 
$
3,079,328

Common stock issued under employee benefit plans, net of restricted stock cancellations
 
379,026

 

 
8,127

 

 

 
8,127

 

 
8,127

Common stock issued under ESOP
 
30,762

 

 
3,890

 

 

 
3,890

 

 
3,890

Income tax benefit from stock options exercised, vesting of restricted stock and other
 

 

 
6,164

 

 

 
6,164

 

 
6,164

Net income
 

 

 

 
142,098

 

 
142,098

 
142,808

 
284,906

Capital calls, net
 

 

 

 

 

 

 
6,419

 
6,419

Net change in unrealized gains and losses on available-for-sale securities, net of tax
 

 

 

 

 
76,176

 
76,176

 

 
76,176

Cumulative-effect for unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax
 

 

 

 

 
22,522

 
22,522

 

 
22,522

Amortization of unrealized gains on securities transferred from available-for-sale to held-to-maturity, net of tax
 

 

 

 

 
(625
)
 
(625
)
 

 
(625
)
Foreign currency translation adjustments, net of tax
 


 

 

 


 
967

 
967

 

 
967

Common stock issued in public offering
 
4,485,000

 
5

 
434,861

 

 

 
434,866

 

 
434,866

Share-based compensation expense
 

 

 
15,284

 

 

 
15,284

 

 
15,284

Balance at June 30, 2014
 
50,695,206

 
$
51

 
$
1,092,582

 
$
1,532,830

 
$
50,276

 
$
2,675,739

 
$
1,262,285

 
$
3,938,024

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

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SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income before noncontrolling interests
 
$
284,906

 
$
137,033

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
2,441

 
24,385

Provision for unfunded credit commitments
 
3,308

 
3,361

Changes in fair values of derivatives, net
 
14,566

 
(4,296
)
Gains on investment securities, net
 
(166,592
)
 
(67,999
)
Depreciation and amortization
 
19,036

 
17,281

Amortization of premiums and discounts on investment securities, net
 
14,419

 
14,884

Tax expense from stock exercises
 

 
(1,346
)
Amortization of share-based compensation
 
14,765

 
12,222

Amortization of deferred loan fees
 
(39,071
)
 
(32,066
)
Deferred income tax expense
 
5,123

 
321

Changes in other assets and liabilities:
 
 
 
 
Accrued interest receivable and payable, net
 
(11,326
)
 
(4,312
)
Accounts receivable and payable, net
 
(3,303
)
 
4,140

Income tax payable and receivable, net
 
5,176

 
(11,591
)
Accrued compensation
 
(48,848
)
 
(39,658
)
Foreign exchange spot contracts, net
 
119,577

 
20,933

Other, net
 
(12,910
)
 
(40,920
)
Net cash provided by operating activities
 
201,267

 
32,372

Cash flows from investing activities:
 
 
 
 
Purchases of available-for-sale securities
 
(6,045,269
)
 
(220,031
)
Proceeds from sales of available-for-sale securities
 
23,708

 
8,293

Proceeds from maturities and pay downs of available-for-sale securities
 
1,050,927

 
1,337,107

Purchases of held-to-maturity securities
 
(120,426
)
 

Proceeds from maturities and pay downs of held-to-maturity securities
 
74,236

 

Purchases of non-marketable and other securities (cost and equity method accounting)
 
(13,532
)
 
(10,858
)
Proceeds from sales and distributions of non-marketable and other securities (cost and equity method accounting)
 
38,265

 
20,378

Purchases of non-marketable and other securities (fair value accounting)
 
(126,907
)
 
(65,943
)
Proceeds from sales and distributions of non-marketable and other securities (fair value accounting)
 
146,509

 
52,103

Net increase in loans
 
(440,780
)
 
(671,105
)
Proceeds from recoveries of charged-off loans
 
2,933

 
5,536

Purchases of premises and equipment
 
(18,744
)
 
(13,546
)
Net cash (used for) provided by investing activities
 
(5,429,080
)
 
441,934

Cash flows from financing activities:
 
 
 
 
Net increase (decrease) in deposits
 
5,879,568

 
(486,378
)
Decrease in short-term borrowings
 
(170
)
 
(160,710
)
Capital contributions from noncontrolling interests, net of distributions
 
6,419

 
1,903

Tax benefit from stock exercises
 
6,164

 
2,861

Proceeds from issuance of common stock, ESPP, and ESOP
 
12,018

 
32,286

Net proceeds from public equity offering
 
434,866

 

Net cash provided by (used for) financing activities
 
6,338,865

 
(610,038
)
Net increase (decrease) in cash and cash equivalents
 
1,111,052

 
(135,732
)
Cash and cash equivalents at beginning of period
 
1,538,779

 
1,008,983

Cash and cash equivalents at end of period
 
$
2,649,831

 
$
873,251

Supplemental disclosures:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
17,535

 
$
15,655

Income taxes
 
75,057

 
64,423

Noncash items during the period:
 
 
 
 
Changes in unrealized gains and losses on available-for-sale securities, net of tax
 
$
76,176

 
$
(115,431
)
Transfers from available-for-sale securities to held-to-maturity

 
5,418,572

 


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

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SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation
SVB Financial Group is a diversified financial services company, as well as a bank holding company and financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a variety of banking and financial products and services to support our clients of all sizes and stages throughout their life cycles. In these notes to our consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG”, the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group, unless the context requires otherwise.
The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 30, 2014 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, 2013 (“2013 Form 10-K”).
During the second quarter of 2014, we re-designated certain securities from the classification of "available-for-sale" ("AFS") to "held-to-maturity" ("HTM"). Transfers of investment securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized gains(losses), net of tax, are retained in other comprehensive income, and the carrying value of the held-to-maturity securities are amortized over the life of the securities in a manner consistent with the amortization of a premium or discount. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Other than the re-designation of securities from AFS to HTM, 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 2013 Form 10-K.
The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include measurements of fair value, the valuation of non-marketable securities, the valuation of equity warrant assets, the adequacy of the allowance for loan losses and reserve for unfunded credit commitments, and the recognition and measurement of income tax assets and liabilities.
Principles of Consolidation and Presentation
Our consolidated financial statements include the accounts of SVB Financial Group and entities in which we have a controlling financial interest. We determine whether we have a controlling financial interest in an entity by evaluating whether the entity is a voting interest entity or a VIE and whether the applicable accounting guidance requires consolidation. All significant intercompany accounts and transactions have been eliminated.
Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant decisions relating to the entity’s operations. For these types of entities, the Company’s determination of whether it has a controlling interest is based on ownership of the majority of the entities’ voting equity interest or through control of management of the entities.
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We determine whether we have a controlling financial interest in a VIE by considering whether our involvement with the VIE is significant and whether we are the primary beneficiary based on the following:
1.
We have the power to direct the activities of the VIE that most significantly impact the entity’s economic performance;

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2.
The aggregate indirect and direct variable interests held by the Company have the obligation to absorb losses or the right to receive benefits from the entity that could be significant to the VIE; and,
3.
Qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE.
Voting interest entities in which we have a controlling financial interest or by which we control through management rights are consolidated into our financial statements.
We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide. We are variable interest holders in certain partnerships for which we are not the primary beneficiary. We perform on-going reassessments on the status of the entities and whether facts or circumstances have changed in relation to previously evaluated voting interest entities and our involvement in VIEs which could cause our consolidation conclusion to change.
Impact of Adopting ASU No. 2013-08, Amendments to the Scope, Measurement and Disclosure Requirement for Investment Companies
In June 2013, the FASB issued an accounting standards update, which modified the guidance in ASC 946 for determining whether an entity is an investment company, as well as the measurement and disclosure requirements for investment companies. The ASU does not change current accounting where a noninvestment company parent retains the specialized accounting applied by an investment company subsidiary in consolidation. ASU 2013-08 was effective on a prospective basis for the interim and annual reporting periods beginning after December 15, 2013, and was therefore adopted in the first quarter of 2014. This standard did not have any impact on our financial position, results of operations or stockholders' equity.
Impact of Adopting ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists    
In July 2013, the FASB issued a new accounting standard which requires an unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward that the entity intends to use and is available for settlement at the reporting date. ASU 2013-11 was effective for, and adopted by the Company, in the first quarter of 2014. The adoption of ASU 2013-11 did not have a material impact on the Company’s consolidated financial position, results of operations or stockholders' equity.
Recently Issued Accounting Pronouncements
In January 2014, the FASB issued a new accounting standard (ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects), which permits entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes to make an accounting policy election to use proportional amortization method or apply an equity or cost method. If the proportional amortization method is elected, retrospective presentation is required for prior periods. The guidance is effective on a retrospective basis for the interim and annual reporting periods beginning after December 15, 2014, with early adoption available. We are currently assessing the impact of this guidance, however, we do not expect it to have a material impact on our financial position, results of operations or stockholders' equity.
In May 2014, the FASB issued a new accounting standard (ASU 2014-09, Revenue from Contracts with Customers (Topic 606)), which does not apply to financial instruments, and is effective on a retrospective basis beginning on January 1, 2017. We do not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial position, results of operations or stockholders' equity.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
2.
Stockholders’ Equity and EPS
Common Stock
In the second quarter of 2014, to support the continued growth of our balance sheet, we completed a registered public offering of 4,485,000 shares of our common stock at an offering price of $101.00 per share. We received net proceeds of $434.9 million after deducting underwriting discounts and commissions.
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

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the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issued for stock options and restricted stock units outstanding under our equity incentive plans and our ESPP. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive. The following is a reconciliation of basic EPS to diluted EPS for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars and shares in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
 
Net income available to common stockholders
 
$
50,797

 
$
48,584

 
$
142,098

 
$
89,475

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding-basic
 
48,168

 
45,164

 
47,025

 
44,985

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and ESPP
 
569

 
380

 
601

 
384

Restricted stock units
 
308

 
140

 
361

 
168

Denominator for diluted calculation
 
49,045

 
45,684

 
47,987

 
45,537

Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.05

 
$
1.08

 
$
3.02

 
$
1.99

Diluted
 
$
1.04

 
$
1.06

 
$
2.96

 
$
1.96

The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation as they were deemed to be antidilutive for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Shares in thousands)
 
2014
 
2013
 
2014
 
2013
Stock options
 
167

 
635

 
90

 
693

Restricted stock units
 
2

 

 
1

 

Total
 
169

 
635

 
91

 
693

Accumulated Other Comprehensive Income
The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2014 and 2013:
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
Income Statement Location
 
2014
 
2013
 
2014
 
2013
Reclassification adjustment for losses (gains) included in net income
 
(Losses) gains on investment securities, net
 
$
16,480

 
$
(775
)
 
$
16,421

 
$
(730
)
Related tax (benefit) expense
 
Income tax expense
 
(6,653
)
 
296

 
(6,630
)
 
278

Total reclassification adjustment for losses (gains) included in net income, net of tax
 
 
 
$
9,827

 
$
(479
)
 
$
9,791

 
$
(452
)
3.
Share-Based Compensation
For the three and six months ended June 30, 2014 and 2013, we recorded share-based compensation and related tax benefits as follows: 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Share-based compensation expense
 
$
7,687

 
$
6,396

 
$
14,765

 
$
12,222

Income tax benefit related to share-based compensation expense
 
(2,515
)
 
(1,955
)
 
(4,675
)
 
(3,558
)

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Unrecognized Compensation Expense
As of June 30, 2014, unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
 
  Unrecognized  
Expense
 
Average
Expected
Recognition
  Period - in Years  
Stock options
 
$
18,118

 
2.80
Restricted stock units
 
38,897

 
2.69
Total unrecognized share-based compensation expense
 
$
57,015

 
 
Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the six months ended June 30, 2014:
 
 
Options
 
Weighted
Average
 Exercise Price 
 
Weighted Average Remaining Contractual Life in Years  
 
Aggregate
  Intrinsic Value  
of In-The-
Money
Options
Outstanding at December 31, 2013
 
1,514,159

 
$
55.27

 
 
 
 
Granted
 
229,476

 
108.30

 
 
 
 
Exercised
 
(160,652
)
 
46.96

 
 
 
 
Forfeited
 
(13,654
)
 
70.36

 
 
 
 
Outstanding at June 30, 2014
 
1,569,329

 
63.74

 
4.38
 
$
83,017,236

Vested and expected to vest at June 30, 2014
 
1,510,886

 
62.94

 
4.32
 
81,128,378

Exercisable at June 30, 2014
 
820,343

 
50.28

 
3.28
 
54,421,775

The aggregate intrinsic value of outstanding options shown in the table above represents the pretax intrinsic value based on our closing stock price of $116.62 as of June 30, 2014. The total intrinsic value of options exercised during the three and six months ended June 30, 2014 was $3.5 million and $10.7 million, respectively, compared to $7.2 million and $11.9 million for the comparable 2013 period.
The table below provides information for restricted stock units under the 2006 Equity Incentive Plan for the six months ended June 30, 2014:
 
 
Shares    
 
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2013
 
682,347

 
$
65.93

Granted
 
180,679

 
108.06

Vested
 
(196,253
)
 
64.08

Forfeited
 
(11,549
)
 
71.33

Nonvested at June 30, 2014
 
655,224

 
78.00

4.
Cash and Cash Equivalents
The following table details our cash and cash equivalents at June 30, 2014 and December 31, 2013:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Cash and due from banks (1)
 
$
2,589,946

 
$
1,349,688

Securities purchased under agreements to resell (2)
 
53,764

 
172,989

Other short-term investment securities
 
6,121

 
16,102

Total cash and cash equivalents
 
$
2,649,831

 
$
1,538,779

 
 

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(1)
At June 30, 2014 and December 31, 2013, $1.7 billion and $715 million, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $443 million and $300 million, respectively.
(2)
At June 30, 2014 and December 31, 2013, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $55 million and $176 million, respectively. None of these securities received as collateral were sold or repledged as of June 30, 2014 or December 31, 2013.
5.
Investment Securities
Our investment securities portfolio consists of an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest-earning investment securities, and a non-marketable and other securities portfolio, which primarily represents investments managed as part of our funds management business.
Available-for-Sale Securities
The major components of our available-for-sale investment securities portfolio at June 30, 2014 and December 31, 2013 are as follows:
 
 
June 30, 2014
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
4,871,469

 
$
11,526

 
$
(823
)
 
$
4,882,172

U.S. agency debentures
 
3,714,346

 
41,999

 
(10,472
)
 
3,745,873

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
2,128,052

 
28,146

 
(13,369
)
 
2,142,829

Agency-issued collateralized mortgage obligations—variable rate
 
887,862

 
3,073

 
(23
)
 
890,912

Equity securities
 
11,950

 
629

 
(1,575
)
 
11,004

Total available-for-sale securities
 
$
11,613,679

 
$
85,373

 
$
(26,262
)
 
$
11,672,790


 
 
December 31, 2013
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. agency debentures
 
$
4,344,652

 
$
41,365

 
$
(40,785
)
 
$
4,345,232

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
2,472,528

 
17,189

 
(16,141
)
 
2,473,576

Agency-issued collateralized mortgage obligations—fixed rate
 
3,386,670

 
24,510

 
(85,422
)
 
3,325,758

Agency-issued collateralized mortgage obligations—variable rate
 
1,183,333

 
3,363

 
(123
)
 
1,186,573

Agency-issued commercial mortgage-backed securities
 
581,475

 
552

 
(17,423
)
 
564,604

Municipal bonds and notes
 
82,024

 
4,024

 
(21
)
 
86,027

Equity securities
 
4,842

 
692

 
(483
)
 
5,051

Total available-for-sale securities
 
$
12,055,524

 
$
91,695

 
$
(160,398
)
 
$
11,986,821






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The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months and 12 months or longer as of June 30, 2014:
 
 
June 30, 2014
 
 
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
 
$
698,273

 
$
(823
)
 
$

 
$

 
$
698,273

 
$
(823
)
U.S. agency debentures
 
200,773

 
(290
)
 
555,839

 
(10,182
)
 
756,612

 
(10,472
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations—fixed rate
 
135,122

 
(189
)
 
479,641

 
(13,180
)
 
614,763

 
(13,369
)
Agency-issued collateralized mortgage obligations—variable rate
 
75,974

 
(23
)
 

 

 
75,974

 
(23
)
Equity securities
 
7,335

 
(1,575
)
 

 

 
7,335

 
(1,575
)
Total temporarily impaired securities: (1)
 
$
1,117,477

 
$
(2,900
)
 
$
1,035,480

 
$
(23,362
)
 
$
2,152,957

 
$
(26,262
)
 
 
(1)
As of June 30, 2014, we identified a total of 81 investments that were in unrealized loss positions, of which 33 investments totaling $1.0 billion with unrealized losses of $23.4 million have been in an impaired position for a period of time greater than 12 months. As of June 30, 2014, we do not intend to sell any impaired fixed income investment securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis. Based on our analysis as of June 30, 2014, we deem all impairments to be temporary, and therefore changes in value for our temporarily impaired securities as of the same date are included in other comprehensive income. Market valuations and impairment analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis.
The following table summarizes our unrealized losses on our available-for-sale securities portfolio into categories of less than 12 months and 12 months or longer as of December 31, 2013:
 
 
December 31, 2013
 
 
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
U.S. agency debentures
 
$
1,821,045

 
$
(40,785
)
 
$

 
$

 
$
1,821,045

 
$
(40,785
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
1,480,870

 
(14,029
)
 
19,830

 
(2,112
)
 
1,500,700

 
(16,141
)
Agency-issued collateralized mortgage obligations—fixed rate
 
2,098,137

 
(79,519
)
 
134,420

 
(5,903
)
 
2,232,557

 
(85,422
)
Agency-issued collateralized mortgage obligations—variable rate
 
109,699

 
(123
)
 

 

 
109,699

 
(123
)
Agency-issued commercial mortgage-backed securities
 
464,171

 
(17,423
)
 

 

 
464,171

 
(17,423
)
Municipal bonds and notes
 
3,404

 
(21
)
 

 

 
3,404

 
(21
)
Equity securities
 
910

 
(483
)
 

 

 
910

 
(483
)
Total temporarily impaired securities 
 
$
5,978,236

 
$
(152,383
)
 
$
154,250

 
$
(8,015
)
 
$
6,132,486

 
$
(160,398
)



14

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The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income investment securities classified as available-for-sale as of June 30, 2014. 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, 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 rate environments.
 
 
June 30, 2014
 
 
Total
 
One Year
or Less
 
After One Year to
Five Years
 
After Five Years to
Ten Years
 
After
Ten Years
(Dollars in thousands)
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
 
Carrying
Value
 
Weighted-
Average
Yield
U.S. treasury securities
 
$
4,882,172

 
1.11
%
 
$
50,062

 
0.12
%
 
$
4,337,387

 
1.01
%
 
$
494,723

 
2.03
%
 
$

 
%
U.S. agency debentures
 
3,745,873

 
1.62

 
590,227

 
1.47

 
2,231,645

 
1.55

 
924,001

 
1.89

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations - fixed rate
 
2,142,829

 
2.01

 

 

 

 

 
380,924

 
2.69

 
1,761,905

 
1.87

Agency-issued collateralized mortgage obligations - variable rate
 
890,912

 
0.71

 

 

 

 

 

 

 
890,912

 
0.71

Total
 
$
11,661,786

 
1.41

 
$
640,289

 
1.36

 
$
6,569,032

 
1.19

 
$
1,799,648

 
2.10

 
$
2,652,817

 
1.48




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Held-to-Maturity Securities

During the second quarter of 2014, we re-designated certain securities from the classification of “available-for-sale” to “held-to-maturity”. The securities re-designated primarily consisted of agency-issued mortgage securities and collateralized mortgage obligations ("CMOs") with a total carrying value of $5.4 billion at June 1, 2014. At the time of re-designation the securities had net unrealized gains totaling $22.5 million, net of tax, recorded in other comprehensive income and are being amortized over the life of the securities in a manner consistent with the amortization of a premium or discount. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding. Held-to-maturity securities are carried on the balance sheet at amortized cost and the changes in the value of these securities, other than impairment charges, are not reported on the financial statements.

The major components of our held-to-maturity investment securities portfolio at June 30, 2014 are as follows:
 
 
June 30, 2014
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Held-to-maturity securities, at cost:
 
 
 
 
 
 
 
 
U.S. agency debentures (1)
 
$
318,260

 
$
1,244

 
$
(165
)
 
$
319,339

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
3,051,644

 
847

 
(3,991
)
 
3,048,500

Agency-issued collateralized mortgage obligations—fixed rate
 
1,309,382

 
619

 
(8,939
)
 
1,301,062

Agency-issued collateralized mortgage obligations—variable rate
 
148,422

 
19

 
(1
)
 
148,440

Agency-issued commercial mortgage-backed securities
 
550,269

 
2,149

 
(515
)
 
551,903

Municipal bonds and notes
 
85,943

 
16

 
(207
)
 
85,752

Total held-to-maturity securities
 
$
5,463,920

 
$
4,894

 
$
(13,818
)
 
$
5,454,996

 
 
(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.
 
The following table summarizes our unrealized losses on our held-to-maturity securities portfolio into categories of less than 12 months and 12 months or longer as of June 30, 2014:
 
 
June 30, 2014
 
 
Less than 12 months
 
12 months or longer (1)
 
Total
(Dollars in thousands)
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. agency debentures
 
$
171,001

 
$
(105
)
 
$
48,590

 
$
(60
)
 
$
219,591

 
$
(165
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
2,473,332

 
(3,945
)
 
20,180

 
(46
)
 
2,493,512

 
(3,991
)
Agency-issued collateralized mortgage obligations—fixed rate
 
383,763

 
(2,035
)
 
850,606

 
(6,904
)
 
1,234,369

 
(8,939
)
Agency-issued collateralized mortgage obligations—variable rate
 
10,799

 
(1
)
 

 

 
10,799

 
(1
)
Agency-issued commercial mortgage-backed securities
 
268,818

 
(515
)
 

 

 
268,818

 
(515
)
Municipal bonds and notes
 
69,524

 
(207
)
 

 

 
69,524

 
(207
)
Total temporarily impaired securities (2):
 
$
3,377,237

 
$
(6,808
)
 
$
919,376

 
$
(7,010
)
 
$
4,296,613

 
$
(13,818
)
 
 
(1)
Represents securities in an unrealized loss position for twelve months or longer in which the amortized cost basis was re-set for those securities re-designated from AFS to HTM effective June 1, 2014.

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Table of Contents

(2)
As of June 30, 2014, we identified a total of 276 investments that were in unrealized loss positions, of which 31 investments totaling $919.4 million with unrealized losses of $7.0 million have been in an impaired position for a period of time greater than 12 months. As of June 30, 2014, we do not intend to sell any impaired fixed income investment securities prior to recovery of our adjusted cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our adjusted cost basis, which is consistent with our classification of these securities. Based on our analysis as of June 30, 2014, 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.

17

Table of Contents

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 June 30, 2014. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 35.0 percent. The weighted average yield is computed using the amortized cost of fixed income investment securities, which are reported at fair value. 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 rate environments.
 
 
June 30, 2014
 
 
Total
 
One Year
or Less
 
After One Year to
Five Years
 
After Five Years to
Ten Years
 
After
Ten Years
(Dollars in thousands)
 
Amortized Cost
 
Weighted-
Average
Yield
 
Amortized Cost
 
Weighted-
Average
Yield
 
Amortized Cost
 
Weighted-
Average
Yield
 
Amortized Cost
 
Weighted-
Average
Yield
 
Amortized Cost
 
Weighted-
Average
Yield
U.S. agency debentures
 
$
318,260

 
2.93
%
 
$

 
%
 
$

 
%
 
$
318,260

 
2.93
%
 
$

 
%
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
3,051,644

 
2.42

 

 

 
47,059

 
2.43

 
949,796

 
2.19

 
2,054,789

 
2.52

Agency-issued collateralized mortgage obligations - fixed rate
 
1,309,382

 
1.64

 

 

 

 

 

 

 
1,309,382

 
1.64

Agency-issued collateralized mortgage obligations - variable rate
 
148,422

 
0.65

 

 

 

 

 

 

 
148,422

 
0.65

Agency-issued commercial mortgage-backed securities
 
550,269

 
2.20

 

 

 

 

 

 

 
550,269

 
2.20

Municipal bonds and notes
 
85,943

 
5.99

 
3,351

 
5.42

 
26,510

 
5.80

 
43,369

 
6.06

 
12,713

 
6.29

Total
 
$
5,463,920

 
2.25

 
$
3,351

 
5.42

 
$
73,569

 
3.65

 
$
1,311,425

 
2.49

 
$
4,075,575

 
2.14



18

Table of Contents

Non-marketable and Other Securities
The major components of our non-marketable and other investment securities portfolio at June 30, 2014 are as follows:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Non-marketable and other securities:
 
 
 
 
Non-marketable securities (fair value accounting):
 
 
 
 
Venture capital and private equity fund investments (1)
 
$
1,040,522

 
$
862,972

Other venture capital investments (2)
 
43,747

 
32,839

Other securities (fair value accounting) (3)
 
281,639

 
321,374

Non-marketable securities (equity method accounting):
 
 
 
 
Other investments (4)
 
137,845

 
142,883

Low income housing tax credit funds
 
95,395

 
72,241

Non-marketable securities (cost method accounting):
 
 
 
 
Venture capital and private equity fund investments (5)
 
142,136

 
148,994

Other investments
 
15,951

 
14,191

Total non-marketable and other securities
 
$
1,757,235

 
$
1,595,494

 
(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 June 30, 2014 and December 31, 2013 (fair value accounting):
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Amount
 
Ownership %
 
Amount
 
Ownership %
SVB Strategic Investors Fund, LP
 
$
27,075

 
12.6
%
 
$
29,104

 
12.6
%
SVB Strategic Investors Fund II, LP
 
92,617

 
8.6

 
96,185

 
8.6

SVB Strategic Investors Fund III, LP
 
257,489

 
5.9

 
260,272

 
5.9

SVB Strategic Investors Fund IV, LP
 
307,600

 
5.0

 
226,729

 
5.0

Strategic Investors Fund V Funds
 
191,024

 
Various

 
118,181

 
Various

Strategic Investors Fund VI Funds
 
38,879

 
0.2

 
7,944

 
0.2

SVB Capital Preferred Return Fund, LP
 
61,573

 
20.0

 
59,028

 
20.0

SVB Capital—NT Growth Partners, LP
 
63,026

 
33.0

 
61,126

 
33.0

SVB Capital Partners II, LP (i)
 
595

 
5.1

 
708

 
5.1

Other private equity fund (ii)
 
644

 
58.2

 
3,695

 
58.2

Total venture capital and private equity fund investments
 
$
1,040,522

 
 
 
$
862,972

 
 
 
 
(i)
At June 30, 2014, we had a direct ownership interest of 1.3 percent and an indirect ownership interest of 3.8 percent in the fund through our ownership interest of SVB Strategic Investors Fund II, LP.
(ii)
At June 30, 2014, we had a direct ownership interest of 41.5 percent and indirect ownership interests of 12.6 percent and 4.1 percent in the fund through our ownership interest of SVB Capital—NT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively.
(2)
The following table shows the amounts of other venture capital investments held by the following consolidated funds and our ownership percentage of each fund at June 30, 2014 and December 31, 2013 (fair value accounting):

19

Table of Contents

 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Amount
 
Ownership %
 
Amount
 
Ownership %
Silicon Valley BancVentures, LP
 
$
6,177

 
10.7
%
 
$
6,564

 
10.7
%
SVB Capital Partners II, LP (i)
 
18,471

 
5.1

 
22,684

 
5.1

Capital Partners III, LP
 
15,000

 
0.4

 

 

SVB Capital Shanghai Yangpu Venture Capital Fund
 
4,099

 
6.8

 
3,591

 
6.8

Total other venture capital investments
 
$
43,747

 
 
 
$
32,839

 
 
 
 
(i)
At June 30, 2014, we had a direct ownership interest of 1.3 percent and an indirect ownership interest of 3.8 percent in the fund through our ownership of SVB Strategic Investors Fund II, LP.

(3)
Investments classified as other securities (fair value accounting) represent direct equity investments in public companies held by our consolidated funds. At June 30, 2014, the amount primarily includes total unrealized gains of $193.9 million in one public company, FireEye, Inc. ("FireEye"). The extent to which any unrealized gains (or losses) will become realized is subject to a variety of factors, including among other things, changes in prevailing market prices and the timing of any sales or distribution of securities, which are subject to our securities sales and governance processes and may also be constrained by lock-up agreements. None of the FireEye related investments currently are subject to a lock-up agreement.
(4)
The following table shows the carrying value and our ownership percentage of each investment at June 30, 2014 and December 31, 2013 (equity method accounting):
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Amount
 
Ownership %
 
Amount
 
Ownership %
Gold Hill Capital 2008, LP (i)
 
$
20,474

 
15.5
%
 
$
21,867

 
15.5
%
China Joint Venture investment
 
79,182

 
50.0

 
79,940

 
50.0

Other investments
 
38,189

 
Various

 
41,076

 
Various

Total other investments (equity method accounting)
 
$
137,845

 
 
 
$
142,883

 
 
 
 
(i)
At June 30, 2014, we had a 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 282 and 288 funds (primarily venture capital funds) at June 30, 2014 and December 31, 2013, 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 these venture capital and private equity fund investments (cost method accounting) was $142 million, and $230 million, respectively, as of June 30, 2014. The carrying value, and estimated fair value, of these venture capital and private equity fund investments (cost method accounting) was $149 million and $215 million, respectively, as of December 31, 2013.

20

Table of Contents

The following table presents the components of gains and losses (realized and unrealized) on investment securities for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Gross gains on investment securities:
 
 
 
 
 
 
 
 
Available-for-sale securities, at fair value (1)
 
$
224

 
$
2,850

 
$
597

 
$
2,850

Non-marketable securities (fair value accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
88,003

 
44,339

 
199,439

 
71,720

Other venture capital investments
 
1,973

 
200

 
4,555

 
2,840

Other securities (fair value accounting) (2)
 
13,816

 
2,427

 
130,566

 
4,345

Non-marketable securities (equity method accounting):
 
 
 
 
 
 
 
 
Other investments
 
2,886

 
4,754

 
6,528

 
7,469

Non-marketable securities (cost method accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
1,762

 
767

 
5,065

 
1,790

Other investments
 
5,021

 
191

 
5,155

 
336

Total gross gains on investment securities
 
113,685

 
55,528

 
351,905

 
91,350

Gross losses on investment securities:
 
 
 
 
 
 
 
 
Available-for-sale securities, at fair value (1)
 
(16,704
)
 
(2,075
)
 
(17,017
)
 
(2,120
)
Non-marketable securities (fair value accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
(50,558
)
 
(10,703
)
 
(50,659
)
 
(15,445
)
Other venture capital investments
 
(1,297
)
 
(1,190
)
 
(2,041
)
 
(1,654
)
Other securities (fair value accounting) (2)
 
(101,014
)
 
(461
)
 
(113,787
)
 
(2,534
)
Non-marketable securities (equity method accounting):
 
 
 
 
 
 
 
 
Other investments
 
(828
)
 
(232
)
 
(1,040
)
 
(477
)
Non-marketable securities (cost method accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments (3)
 
(353
)
 
(304
)
 
(509
)
 
(773
)
Other investments
 
(251
)
 
(2
)
 
(260
)
 
(348
)
Total gross losses on investment securities
 
(171,005
)
 
(14,967
)
 
(185,313
)
 
(23,351
)
(Losses) gains on investment securities, net
 
$
(57,320
)
 
$
40,561

 
$
166,592

 
$
67,999

 
 
(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)
Other securities (fair value accounting) includes net losses of $84.9 million (including $20.4 million of realized gains) for the three months ended June 30, 2014, and net gains of $28.1 million (including $66.5 million of realized gains) for the six months ended June 30, 2014, attributable to one public company, FireEye. The extent to which any unrealized gains (or losses) will become realized is subject to a variety of factors, including among other things, changes in prevailing market prices and the timing of any sales or distribution of securities, which are subject to our securities sales and governance processes and may also be constrained by lock-up agreements. None of the FireEye related investments currently are subject to a lock-up agreement.
(3)
For the three months ended June 30, 2014 and 2013, includes OTTI losses of $0.3 million from the declines in value for 12 of the 282 investments and $0.3 million from the declines in value for 12 of the 303 investments, respectively. For the six months ended June 30, 2014 and 2013, includes OTTI losses of $0.4 million from the declines in value for 18 of the 282 investments and $0.8 million from the declines in value for 27 of the 303 investments, respectively. We concluded that any declines in value for the remaining investments were temporary, and as such, no OTTI was required to be recognized.

21

Table of Contents

6. Loans and Allowance for Loan Losses
We serve a variety of commercial clients in the technology, life science, venture capital/private equity and premium wine industries. Our technology clients generally tend to be in the industries of hardware (semiconductors, communications and electronics), software and related services, 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, life science and other commercial loan categories, as applicable. Our life science clients are concentrated in the medical devices and biotechnology sectors. Loans made to venture capital/private equity 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 venture capital/private equity 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 loans” below and are primarily secured by real estate.
The composition of loans, net of unearned income of $89 million at both June 30, 2014 and December 31, 2013, respectively, is presented in the following table:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Commercial loans:
 
 
 
 
Software
 
$
4,212,190

 
$
4,102,636

Hardware
 
1,144,144

 
1,213,032

Venture capital/private equity
 
2,646,397

 
2,386,054

Life science
 
1,166,231

 
1,170,220

Premium wine
 
174,837

 
149,841

Other
 
244,914

 
288,904

Total commercial loans
 
9,588,713

 
9,310,687

Real estate secured loans:
 
 
 
 
Premium wine (1)
 
546,876

 
514,993

Consumer loans (2)
 
984,583

 
873,255

Other
 
30,355

 
30,743

Total real estate secured loans
 
1,561,814

 
1,418,991

Construction loans
 
76,221

 
76,997

Consumer loans
 
121,963

 
99,711

Total loans, net of unearned income (3)
 
$
11,348,711

 
$
10,906,386

 
 
(1)
Included in our premium wine portfolio are gross construction loans of $107 million and $112 million at June 30, 2014 and December 31, 2013, respectively.
(2)
Consumer loans secured by real estate at June 30, 2014 and December 31, 2013 were comprised of the following:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Loans for personal residence
 
$
785,914

 
$
685,327

Loans to eligible employees
 
129,116

 
121,548

Home equity lines of credit
 
69,553

 
66,380

Consumer loans secured by real estate
 
$
984,583

 
$
873,255

(3)
Included within our total loan portfolio are credit card loans of $109 million and $85 million at June 30, 2014 and December 31, 2013, respectively.

22

Table of Contents

Credit Quality
The composition of loans, net of unearned income of $89 million at both June 30, 2014 and December 31, 2013, respectively, broken out by portfolio segment and class of financing receivable, is as follows:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Commercial loans:
 
 
 
 
Software
 
$
4,212,190

 
$
4,102,636

Hardware
 
1,144,144

 
1,213,032

Venture capital/private equity
 
2,646,397

 
2,386,054

Life science
 
1,166,231

 
1,170,220

Premium wine
 
721,713

 
664,834

Other
 
351,490

 
396,644

Total commercial loans
 
10,242,165

 
9,933,420

Consumer loans:
 
 
 
 
Real estate secured loans
 
984,583

 
873,255

Other consumer loans
 
121,963

 
99,711

Total consumer loans
 
1,106,546

 
972,966

Total loans, net of unearned income
 
$
11,348,711

 
$
10,906,386


23

Table of Contents

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of June 30, 2014 and December 31, 2013:
(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
June 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
Software
 
$
9,102

 
$
610

 
$
56

 
$
9,768

 
$
4,226,640

 
$
56

Hardware
 
9,047

 
4

 
37

 
9,088

 
1,140,049

 
37

Venture capital/private equity
 
19,588

 
1

 

 
19,589

 
2,651,011

 

Life science
 
1,892

 
786

 

 
2,678

 
1,174,250

 

Premium wine
 

 

 

 

 
722,742

 

Other
 
211

 
27

 

 
238

 
353,444

 

Total commercial loans
 
39,840

 
1,428

 
93

 
41,361

 
10,268,136

 
93

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate secured loans
 
167

 

 

 
167

 
983,810

 

Other consumer loans
 
21

 
1

 

 
22

 
121,458

 

Total consumer loans
 
188

 
1

 

 
189

 
1,105,268

 

Total gross loans excluding impaired loans
 
40,028

 
1,429

 
93

 
41,550

 
11,373,404

 
93

Impaired loans
 
36

 
3,722

 
1,394

 
5,152

 
17,194

 

Total gross loans
 
$
40,064

 
$
5,151

 
$
1,487

 
$
46,702

 
$
11,390,598

 
$
93

December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
Software
 
$
9,804

 
$
1,291

 
$
99

 
$
11,194

 
$
4,102,546

 
$
99

Hardware
 
2,679

 
3,965

 

 
6,644

 
1,198,169

 

Venture capital/private equity
 
4

 

 

 
4

 
2,408,382

 

Life science
 
395

 
131

 

 
526

 
1,179,462

 

Premium wine
 

 

 

 

 
665,755

 

Other
 
1,580

 
142

 

 
1,722

 
397,416

 

Total commercial loans
 
14,462

 
5,529

 
99

 
20,090

 
9,951,730

 
99

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate secured loans
 
240

 

 

 
240

 
872,586

 

Other consumer loans
 
8

 

 

 
8

 
98,965

 

Total consumer loans
 
248

 

 

 
248

 
971,551

 

Total gross loans excluding impaired loans
 
14,710

 
5,529

 
99

 
20,338

 
10,923,281

 
99

Impaired loans
 
4,657

 
7,043

 
4,339

 
16,039

 
35,610

 

Total gross loans
 
$
19,367

 
$
12,572

 
$
4,438

 
$
36,377

 
$
10,958,891

 
$
99


24

Table of Contents

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 June 30, 2014 and December 31, 2013:
(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
June 30, 2014:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
13,619

 
$
797

 
$
14,416

 
$
15,747

Hardware
 
5,502

 

 
5,502

 
5,793

Venture capital/private equity
 

 

 

 

Life science
 

 

 

 

Premium wine
 

 
1,373

 
1,373

 
1,761

Other
 
499

 

 
499

 
551

Total commercial loans
 
19,620

 
2,170

 
21,790

 
23,852

Consumer loans:
 
 
 
 
 
 
 
 
Real estate secured loans
 

 
220

 
220

 
1,424

Other consumer loans
 
336

 

 
336

 
628

Total consumer loans
 
336

 
220

 
556

 
2,052

Total
 
$
19,956

 
$
2,390

 
$
22,346

 
$
25,904

December 31, 2013:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
27,308

 
$
310

 
$
27,618

 
$
28,316

Hardware
 
19,329

 
338

 
19,667

 
35,317

Venture capital/private equity
 
40

 

 
40

 
40

Life science
 

 
1,278

 
1,278

 
4,727

Premium wine
 

 
1,442

 
1,442

 
1,778

Other
 
690

 

 
690

 
718

Total commercial loans
 
47,367

 
3,368

 
50,735

 
70,896

Consumer loans:
 
 
 
 
 
 
 
 
Real estate secured loans
 

 
244

 
244

 
1,434

Other consumer loans
 
670

 

 
670

 
941

Total consumer loans
 
670

 
244

 
914

 
2,375

Total
 
$
48,037

 
$
3,612

 
$
51,649

 
$
73,271





25

Table of Contents

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Average impaired loans:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
15,742

 
$
5,473

 
$
15,210

 
$
4,794

Hardware
 
6,860

 
24,519

 
11,440

 
24,076

Venture capital/private equity
 

 
30

 

 
15

Life science
 
552

 
596

 
787

 
455

Premium wine
 
1,398

 
1,536

 
1,415

 
2,936

Other
 
1,699

 
4,165

 
1,738

 
4,692

Total commercial loans
 
26,251

 
36,319

 
30,590

 
36,968

Consumer loans:
 
 
 
 
 
 
 
 
Real estate secured loans
 
224

 
4,071

 
231

 
3,374

Other consumer loans
 
374

 
1,069

 
431

 
1,099

Total consumer loans
 
598

 
5,140

 
662

 
4,473

Total average impaired loans
 
$
26,849

 
$
41,459

 
$
31,252

 
$
41,441

The following tables summarize the activity relating to our allowance for loan losses for the three and six months ended June 30, 2014 and 2013, broken out by portfolio segment:
Three months ended June 30, 2014 (dollars in thousands)
 
Beginning Balance March 31, 2014
 
Charge-offs
 
Recoveries
 
Provision for
(Reduction of) Loan Losses
 
Ending Balance June 30, 2014
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Software
 
$
55,241

 
$
(4,015
)
 
$
119

 
$
1,894

 
$
53,239

Hardware
 
25,236

 
(412
)
 
1,182

 
(1,226
)
 
24,780

Venture capital/private equity
 
17,676

 

 

 
1,328

 
19,004

Life science
 
11,474

 
(249
)
 
190

 
(818
)
 
10,597

Premium wine
 
3,737

 

 
19

 
(210
)
 
3,546

Other
 
4,041

 
(1,706
)
 
10

 
873

 
3,218

Total commercial loans
 
117,405

 
(6,382
)
 
1,520

 
1,841

 
114,384

Consumer loans
 
6,137

 

 
101

 
106

 
6,344

Total allowance for loan losses
 
$
123,542

 
$
(6,382
)
 
$
1,621

 
$
1,947

 
$
120,728



26

Table of Contents

Six months ended June 30, 2014 (dollars in thousands)
 
Beginning Balance December 31, 2013
 
Charge-offs
 
Recoveries
 
Provision for
(Reduction of) Loan Losses
 
Ending Balance June 30, 2014
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Software
 
$
64,084

 
$
(12,025
)
 
$
233

 
$
947

 
$
53,239

Hardware
 
36,553

 
(12,587
)
 
1,957

 
(1,143
)
 
24,780

Venture capital/private equity
 
16,385

 

 

 
2,619

 
19,004

Life science
 
11,926

 
(930
)
 
288

 
(687
)
 
10,597

Premium wine
 
3,914

 

 
238

 
(606
)
 
3,546

Other
 
3,680

 
(1,990
)
 
10

 
1,518

 
3,218

Total commercial loans
 
136,542

 
(27,532
)
 
2,726

 
2,648

 
114,384

Consumer loans
 
6,344

 

 
207

 
(207
)
 
6,344

Total allowance for loan losses
 
$
142,886

 
$
(27,532
)
 
$
2,933

 
$
2,441

 
$
120,728


Three months ended June 30, 2013 (dollars in thousands)
 
Beginning Balance March 31, 2013
 
Charge-offs
 
Recoveries
 
Provision for
(Reduction of) Loan Losses
 
Ending Balance June 30, 2013
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Software
 
$
45,010

 
$
(3,574
)
 
$
397

 
$
4,965

 
$
46,798

Hardware
 
27,869

 
(4,434
)
 
403

 
9,350

 
33,188

Venture capital/private equity
 
10,482

 

 

 
3,111

 
13,593

Life science
 
13,946

 
(491
)
 
886

 
(2,600
)
 
11,741

Premium wine
 
3,699

 

 
41

 
53

 
3,793

Other
 
3,975

 
(6,007
)
 
2,375

 
3,311

 
3,654

Total commercial loans
 
104,981

 
(14,506
)
 
4,102

 
18,190

 
112,767

Consumer loans
 
7,224

 
(869
)
 
67

 
382

 
6,804

Total allowance for loan losses
 
$
112,205

 
$
(15,375
)
 
$
4,169

 
$
18,572

 
$
119,571


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Six months ended June 30, 2013 (dollars in thousands)
 
Beginning Balance December 31, 2012
 
Charge-offs
 
Recoveries
 
Provision for
(Reduction of) Loan Losses
 
Ending Balance June 30, 2013
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Software
 
$
42,648

 
$
(5,092
)
 
$
639

 
$
8,603

 
$
46,798

Hardware
 
29,761

 
(6,431
)
 
849

 
9,009

 
33,188

Venture capital/private equity
 
9,963

 

 

 
3,630

 
13,593

Life science
 
13,606

 
(2,561
)
 
1,089

 
(393
)
 
11,741

Premium wine
 
3,523

 

 
131

 
139

 
3,793

Other
 
3,912

 
(6,048
)
 
2,381

 
3,409

 
3,654

Total commercial loans
 
103,413

 
(20,132
)
 
5,089

 
24,397

 
112,767

Consumer loans
 
7,238

 
(869
)
 
447

 
(12
)
 
6,804

Total allowance for loan losses
 
$
110,651

 
$
(21,001
)
 
$
5,536

 
$
24,385

 
$
119,571

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2014 and December 31, 2013, broken out by portfolio segment:
 
 
June 30, 2014
 
December 31, 2013
 
 
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
 
$
2,979

$
14,416

 
$
50,260

$
4,197,774

 
$
11,261

$
27,617

 
$
52,823

$
4,075,019

Hardware
 
1,443

5,502

 
23,337

1,138,642

 
9,673

19,667

 
26,880

1,193,365

Venture capital/private equity
 


 
19,004

2,646,397

 
19

39

 
16,366

2,386,015

Life science
 


 
10,597

1,166,231

 

1,278

 
11,926

1,168,942

Premium wine
 

1,373

 
3,546

720,340

 

1,442

 
3,914

663,392

Other
 
118

499

 
3,100

350,991

 
156

690

 
3,524

395,954

Total commercial loans
 
4,540

21,790

 
109,844

10,220,375

 
21,109

50,733

 
115,433

9,882,687

Consumer loans
 
141

556

 
6,203

1,105,990

 
168

915

 
6,176

972,051

Total
 
$
4,681

$
22,346

 
$
116,047

$
11,326,365

 
$
21,277

$
51,648

 
$
121,609

$
10,854,738

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”, with loans risk-rated 1 being cash secured. Loans risk-rated 5 through 7 are performing 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)”. A majority of our Performing (Criticized) loans are from our SVB Accelerator practice, serving our emerging or early stage clients. Loans risk-rated 8 and 9 are loans that are considered to be impaired and are on nonaccrual status. Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), or when we have determined, based upon most recent available information, that the timely collection of principal or interest is not probable; these loans are deemed “impaired” (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2013 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.



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The following table summarizes the credit quality indicators, broken out by portfolio segment and class of financing receivables as of June 30, 2014 and December 31, 2013:
(Dollars in thousands)
 
Pass
 
  Performing  
  (Criticized)  
 
Impaired  
 
Total
June 30, 2014:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
3,956,825

 
$
279,583

 
$
14,416

 
$
4,250,824

Hardware
 
972,454

 
176,683

 
5,502

 
1,154,639

Venture capital/private equity
 
2,668,213

 
2,387

 

 
2,670,600

Life science
 
1,066,046

 
110,882

 

 
1,176,928

Premium wine
 
713,329

 
9,413

 
1,373

 
724,115

Other
 
334,167

 
19,515

 
499

 
354,181

Total commercial loans
 
9,711,034

 
598,463

 
21,790

 
10,331,287

Consumer loans:
 
 
 
 
 
 
 
 
Real estate secured loans
 
980,226

 
3,751

 
220

 
984,197

Other consumer loans
 
118,659

 
2,821

 
336

 
121,816

Total consumer loans
 
1,098,885

 
6,572

 
556

 
1,106,013

Total gross loans
 
$
10,809,919

 
$
605,035

 
$
22,346

 
$
11,437,300

December 31, 2013:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
3,875,043

 
$
238,697

 
$
27,618

 
$
4,141,358

Hardware
 
995,055

 
209,758

 
19,667

 
1,224,480

Venture capital/private equity
 
2,408,386

 

 
40

 
2,408,426

Life science
 
1,091,993

 
87,995

 
1,278

 
1,181,266

Premium wine
 
652,747

 
13,008

 
1,442

 
667,197

Other
 
383,602

 
15,536

 
690

 
399,828

Total commercial loans
 
9,406,826

 
564,994

 
50,735

 
10,022,555

Consumer loans:
 
 
 
 
 
 
 
 
Real estate secured loans
 
868,789

 
4,037

 
244

 
873,070

Other consumer loans
 
95,586

 
3,387

 
670

 
99,643

Total consumer loans
 
964,375

 
7,424

 
914

 
972,713

Total gross loans
 
$
10,371,201

 
$
572,418

 
$
51,649

 
$
10,995,268


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TDRs
As of June 30, 2014 we had 15 TDRs with a total carrying value of $20 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were unfunded commitments available for funding of $0.2 million to the clients associated with these TDRs as of June 30, 2014. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at June 30, 2014 and December 31, 2013:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Loans modified in TDRs:
 
 
 
 
Commercial loans:
 
 
 
 
Software
 
$
13,053

 
$
5,860

Hardware
 
4,108

 
13,329

Venture capital/ private equity
 

 
77

Premium wine
 
2,014

 
1,442

Other
 
804

 
1,055

Total commercial loans
 
19,979

 
21,763

Consumer loans:
 
 
 
 
Other consumer loans
 
336

 
670

Total consumer loans
 
336

 
670

Total
 
$
20,315

 
$
22,433

The following table summarizes the recorded investment in loans modified in TDRs, broken out by portfolio segment and class of financing receivable, for modifications made during the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Loans modified in TDRs during the period:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
455

 
$
778

 
$
12,816

 
$
778

Hardware
 

 
5,629

 

 
5,629

Venture capital/ private equity
 

 
89

 

 
676

Premium wine
 

 

 
641

 

Total commercial loans
 
455

 
6,496

 
13,457

 
7,083

Consumer loans:
 
 
 
 
 
 
 
 
Other consumer loans
 

 

 

 
70

Total consumer loans
 

 

 

 
70

Total loans modified in TDR’s during the period (1)
 
$
455

 
$
6,496

 
$
13,457

 
$
7,153

 
 
(1)
There were no partial charge-offs on loans classified as TDRs for the three and six months ended June 30, 2014. There were partial charge-offs of $1.2 million for both the three and six months ended June 30, 2013.
During the three months ended June 30, 2014, new TDRs of $0.5 million were modified through payment deferrals granted to our clients. During the six months ended June 30, 2014, new TDRs of $10.8 million were modified through payment deferrals granted to our clients and $2.7 million were modified through partial forgiveness of principal.
During the three and six months ended June 30, 2013, new TDRs of $6.5 million and $7.2 million, respectively, were modified through payment deferrals granted to our clients and no principal or interest was forgiven.
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.

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The following table summarizes the recorded investment in loans modified in TDRs within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2014 and 2013, broken out by portfolio segment and class of financing receivable.
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
TDRs modified within the previous 12 months that defaulted during the period:
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
236

 
$

 
$
236

 
$

Hardware
 

 
4,154

 

 
4,154

Other
 

 

 

 
2,750

Total commercial loans
 
236

 
4,154

 
236

 
6,904

Consumer loans
 

 
70

 

 
70

Total TDRs modified within the previous 12 months that defaulted in the period
 
$
236

 
$
4,224

 
$
236

 
$
6,974

Charge-offs and defaults on previously restructured loans are evaluated to determine the impact to the allowance for loan losses, if any. The evaluation of these defaults may impact the assumptions used in calculating the reserve on other TDRs and impaired 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 was necessary to determine the allowance for loan losses as of June 30, 2014.
7.
Short-Term Borrowings and Long-Term Debt
The following table represents outstanding short-term borrowings and long-term debt at June 30, 2014 and December 31, 2013:
 
 
 
 
 
 
Carrying Value
(Dollars in thousands)
 
Maturity
 
Principal value at June 30, 2014
 
June 30,
2014
 
December 31,
2013
Short-term borrowings:
 
 
 
 
 
 
 
 
Other short-term borrowings
 
(1)
 
$
4,910

 
$
4,910

 
$
5,080

Total short-term borrowings
 
 
 
 
 
$
4,910

 
$
5,080

Long-term debt:
 
 
 
 
 
 
 
 
5.375% Senior Notes
 
September 15, 2020
 
$
350,000

 
$
348,321

 
$
348,209

6.05% Subordinated Notes (2)
 
June 1, 2017
 
45,964

 
51,208

 
51,987

7.0% Junior Subordinated Debentures
 
October 15, 2033
 
50,000

 
54,933

 
55,020

Total long-term debt
 
 
 
 
 
$
454,462

 
$
455,216

 
 
(1)
Represents cash collateral received from counterparties in relation to market value exposures of derivative contracts in our favor, primarily for our interest rate swap agreement related to our 6.05% Subordinated Notes.
(2)
At June 30, 2014 and December 31, 2013, included in the carrying value of our 6.05% Subordinated Notes was an interest rate swap valued at $5.7 million and $6.5 million, respectively, related to hedge accounting associated with the notes.
Interest expense related to long-term debt was $5.8 million and $11.6 million for the three and six months ended June 30, 2014 and 2013, respectively. Interest expense is net of the hedge accounting impact from our interest rate swap agreement related to our 6.05% Subordinated Notes. The weighted average interest rate associated with our short-term borrowings as of June 30, 2014 was 0.09 percent.
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. These include repurchase agreements and uncommitted federal funds lines with various financial institutions. As of June 30, 2014, we did not borrow against our uncommitted federal funds lines. We

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also pledge securities to the FHLB of San Francisco and the discount window at the Federal Reserve Bank. The market value of collateral pledged to the FHLB of San Francisco (comprised primarily of U.S. agency debentures and mortgage securities) at June 30, 2014 totaled $1.3 billion, all of which was unused and available to support additional borrowings. The market value of collateral pledged at the discount window of the Federal Reserve Bank at June 30, 2014 totaled $548 million, all of which was unused and available to support additional borrowings.
8.
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. 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 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 for our 6.05% Subordinated Notes, we entered into a fixed-for-floating interest rate swap agreement at the time of debt issuance based upon LIBOR with matched-terms. Net cash benefits associated with our interest rate swap is recorded as a reduction in “Interest expense—Borrowings,” a component of net interest income. The fair value of our interest rate swap is calculated using a discounted cash flow method and adjusted for credit valuation associated with counterparty risk. Changes in the fair value of the interest rate swap are reflected in either other assets (if in an asset position) or other liabilities (if in a liability position).
We assess hedge effectiveness under ASC 815, Derivatives and Hedging, using the long-haul method. Any differences associated with our interest rate swap that arise as a result of hedge ineffectiveness is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
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, primarily in Pound Sterling and Euro. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Changes in currency rates on foreign currency denominated instruments are included in other noninterest income, a component of noninterest 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 through net gains on derivative instruments, in noninterest income, a component of consolidated net income. Additionally, through our global banking operations we maintain customer deposits denominated in the Euro and Pound Sterling which are used to fund certain loans in these currencies to limit our exposure to currency fluctuations.
Other Derivative Instruments
Equity Warrant Assets
Our equity warrant assets are concentrated in private, venture-backed companies in the technology and life science industries. Most of these warrant agreements contain net share settlement provisions, which permit us to pay the warrant exercise price using shares issuable under the warrant (“cashless exercise”). We value our equity warrant assets using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. We make valuation adjustments for estimated remaining life and marketability for warrants issued by private companies. Equity warrant assets are recorded at fair value in other assets, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
Loan Conversion Options
In connection with negotiating certain credit facilities, we occasionally extend loan facilities which have convertible option features. The convertible loans may be converted into a certain number of shares determined by dividing the principal amount of the loan by the applicable conversion price. Because our loan conversion options have underlying and notional values and had no initial net investment, these assets qualify as derivative instruments. We value our loan conversion options using a modified Black-Scholes option pricing model, which incorporates assumptions about the underlying asset value, volatility, and the risk-free rate. Loan conversion options are recorded at fair value in other assets, while changes in their fair value are recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.


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Other Derivatives
We sell forward and option contracts to clients who wish to mitigate their foreign currency exposure. We economically reduce the currency risk from this business by entering into opposite way contracts with correspondent banks. These relationships do not qualify for hedge accounting. The contracts generally have terms of one year or less, although we may have contracts extending for up to five years. Generally, we have not experienced nonperformance on these contracts, have not incurred credit losses, and anticipate performance by all counterparties to such agreements. Contracts in an asset position are included in other assets and contracts in a liability position are included in other liabilities. The net change in the fair value of these contracts is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.
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. We do not designate any of these contracts (which are derivative instruments) as qualifying for hedge accounting. Contracts in an asset position are included in other assets and contracts in a liability position are included in other liabilities. The net change in the fair value of these derivatives is recorded through net gains on derivative instruments, in noninterest income, a component of consolidated net income.

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, fair value, collateral and net exposure of our derivative financial instruments at June 30, 2014 and December 31, 2013 were as follows:
 
 
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Balance Sheet
Location
 
Notional or
Contractual
Amount
 
Fair Value
 
Collateral
(1)
 
Net
Exposure
(2)
 
Notional or
Contractual
Amount
 
Fair Value
 
Collateral
(1)
 
Net
Exposure
(2)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Interest rate risks:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Other assets
 
$
45,964

 
$
5,692

 
$
3,910

 
$
1,782

 
$
45,964

 
$
6,492

 
$
5,080

 
$
1,412

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Currency exchange risks:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forwards
 
Other assets
 
3,240

 
198

 

 
198

 
140,760

 
1,423

 

 
1,423

Foreign exchange forwards
 
Other liabilities
 
178,419

 
(1,545
)
 

 
(1,545
)
 
62,649

 
(634
)
 

 
(634
)
Net exposure
 
 
 
 
 
(1,347
)
 

 
(1,347
)
 
 
 
789

 

 
789

 Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets
 
Other assets
 
182,145

 
88,905

 

 
88,905

 
179,934

 
103,513

 

 
103,513

Other derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Client foreign exchange forwards
 
Other assets
 
417,361

 
10,759

 
1,000

 
9,759

 
424,983

 
13,673

 

 
13,673

Client foreign exchange forwards
 
Other liabilities
 
347,983

 
(9,066
)
 

 
(9,066
)
 
367,079

 
(11,549
)
 

 
(11,549
)
Client foreign currency options
 
Other assets
 
4,500

 
133

 

 
133

 
91,854

 
434

 

 
434

Client foreign currency options
 
Other liabilities
 
4,500

 
(133
)
 

 
(133
)
 
91,854

 
(434
)
 

 
(434
)
Loan conversion options
 
Other assets
 
1,940

 
53

 

 
53

 
3,455

 
314

 

 
314

Client interest rate derivatives
 
Other assets
 
310,910

 
2,239

 

 
2,239

 
216,773

 
1,265

 

 
1,265

Client interest rate derivatives
 
Other liabilities
 
310,910

 
(2,420
)
 

 
(2,420
)
 
216,773

 
(1,396
)
 

 
(1,396
)
Net exposure
 
 
 
 
 
1,565

 
1,000

 
565

 
 
 
2,307

 

 
2,307

Net
 
 
 
 
 
$
94,815

 
$
4,910

 
$
89,905

 
 
 
$
113,101

 
$
5,080

 
$
108,021

 
 
(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.

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(2)
Net exposure for contracts in a gain position reflects the replacement cost in the event of nonperformance by all such counterparties. The credit ratings of our institutional counterparties as of June 30, 2014 remain at investment grade or higher and there were no material changes in their credit ratings during the three and six months ended June 30, 2014.
A summary of our derivative activity and the related impact on our consolidated statements of income for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
Statement of income location   
 
2014
 
2013
 
2014
 
2013
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 Interest rate risks:
 
 
 
 
 
 
 
 
 
 
Net cash benefit associated with interest rate swaps
 
Interest expense—borrowings
 
$
638

 
$
633

 
$
1,277

 
$
1,267

Changes in fair value of interest rate swaps
 
Net gains on derivative instruments
 
(13
)
 
(33
)
 
(25
)
 
27

Net gains associated with interest rate risk derivatives
 
 
 
$
625

 
$
600

 
$
1,252

 
$
1,294

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 Currency exchange risks:
 
 
 
 
 
 
 
 
 
 
(Losses) gains on revaluations of foreign currency instruments
 
Other noninterest income
 
$
(685
)
 
$
(586
)
 
$
293

 
$
(7,650
)
Gains (losses) on internal foreign exchange forward contracts, net
 
Net gains on derivative instruments
 
538

 
712

 
(491
)
 
6,912

Net (losses) gains associated with currency risk
 
 
 
$
(147
)
 
$
126

 
$
(198
)
 
$
(738
)
 Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
Net gains on equity warrant assets
 
Net gains on derivative instruments
 
$
12,329

 
$
7,190

 
$
37,702

 
$
10,695

Gains on client foreign exchange forward contracts, net
 
Net gains on derivative instruments
 
$
170

 
$
124

 
$
472

 
$
173

Net (losses) gains on other derivatives (1)
 
Net gains on derivative instruments
 
$
(249
)
 
$
94

 
$
(716
)
 
$
572

 
 
(1)
Primarily represents the change in fair value of loan conversion options.
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 June 30, 2014 and December 31, 2013:

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Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements
 
 
(Dollars in thousands)
 
Gross Amounts of Recognized Assets
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swaps
 
$
5,692

 
$

 
$
5,692

 
$
(1,782
)
 
$
(3,910
)
 
$

Foreign exchange forwards
 
10,957

 

 
10,957

 
(3,633
)
 
(1,000
)
 
6,324

   Foreign currency options
 
133

 

 
133

 
(133
)
 

 

   Client interest rate derivatives
 
2,239

 

 
2,239

 
(559
)
 

 
1,680

Total derivative assets:
 
19,021

 

 
19,021

 
(6,107
)
 
(4,910
)
 
8,004

Reverse repurchase, securities borrowing, and similar arrangements
 
53,764

 

 
53,764

 
(53,764
)
 

 

Total
 
$
72,785

 
$

 
$
72,785

 
$
(59,871
)
 
$
(4,910
)
 
$
8,004

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swaps
 
$
6,492

 
$

 
$
6,492

 
$
(1,412
)
 
$
(5,080
)
 
$

Foreign exchange forwards
 
15,096

 

 
15,096

 
(6,735
)
 

 
8,361

   Foreign currency options
 
504

 
(70
)
 
434

 
(155
)
 

 
279

   Client interest rate derivatives
 
1,265

 

 
1,265

 
(256
)
 

 
1,009

Total derivative assets:
 
23,357

 
(70
)
 
23,287

 
(8,558
)
 
(5,080
)
 
9,649

Reverse repurchase, securities borrowing, and similar arrangements
 
172,989

 

 
172,989

 
(172,989
)
 

 

Total
 
$
196,346

 
$
(70
)
 
$
196,276

 
$
(181,547
)
 
$
(5,080
)
 
$
9,649

The following table summarizes our liabilities subject to enforceable master netting arrangements as of June 30, 2014 and December 31, 2013:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements
 
 
(Dollars in thousands)
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
   Foreign exchange forwards
 
$
10,611

 
$

 
$
10,611

 
$
(6,973
)
 
$

 
$
3,638

   Foreign currency options
 
133

 

 
133

 

 

 
133

   Client interest rate derivatives
 
2,420

 

 
2,420

 
(1,861
)
 

 
559

Total derivative liabilities:
 
13,164

 

 
13,164

 
(8,834
)
 

 
4,330

Repurchase, securities lending, and similar arrangements
 

 

 

 

 

 

Total
 
$
13,164

 
$

 
$
13,164

 
$
(8,834
)
 
$

 
$
4,330

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
   Foreign exchange forwards
 
$
12,183

 
$

 
$
12,183

 
$
(8,282
)
 
$

 
$
3,901

   Foreign currency options
 
504

 
(70
)
 
434

 
(279
)
 

 
155

   Client interest rate derivatives
 
1,396

 

 
1,396

 
(1,087
)
 

 
309

Total derivative liabilities:
 
14,083

 
(70
)
 
14,013

 
(9,648
)
 

 
4,365

Repurchase, securities lending, and similar arrangements
 

 

 

 

 

 

Total
 
$
14,083

 
$
(70
)
 
$
14,013

 
$
(9,648
)
 
$

 
$
4,365


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9.     Other Noninterest Income and Other Noninterest Expense
A summary of other noninterest income for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Fund management fees
 
$
3,559

 
$
2,940

 
$
6,314

 
$
5,709

Service-based fee income
 
2,252

 
2,001

 
4,279

 
3,805

(Losses) gains on revaluation of foreign currency instruments (1)
 
(685
)
 
(586
)
 
293

 
(7,650
)
Other (2)
 
3,636

 
3,279

 
9,076

 
5,323

Total other noninterest income
 
$
8,762

 
$
7,634

 
$
19,962

 
$
7,187

 
 
(1)
Represents the revaluation of foreign currency denominated financial instruments issued and held by us, primarily loans, deposits and cash.
(2)
Includes dividends on FHLB/FRB stock, correspondent bank rebate income and other fee income.

A summary of other noninterest expense for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Client services
 
$
2,586

 
$
1,856

 
$
4,945

 
$
3,791

Tax credit fund amortization
 
2,502

 
1,338

 
4,530

 
2,655

Data processing services
 
2,041

 
1,882

 
4,268

 
3,794

Telephone
 
1,538

 
1,512

 
3,286

 
3,069

Postage and supplies
 
716

 
680

 
1,485

 
1,218

Dues and publications
 
636

 
445

 
1,133

 
903

Other
 
3,108

 
1,975

 
4,670

 
4,193

Total other noninterest expense
 
$
13,127

 
$
9,688

 
$
24,317

 
$
19,623

10.
Segment Reporting
We have three reportable segments for management reporting purposes: Global Commercial Bank, SVB Private Bank and SVB Capital. The results of our operating segments are based on our internal management reporting process.
Our operating 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, our segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised, and an earnings charge is made for funded loans. FTP is calculated at an instrument level based on account characteristics.
We also evaluate performance based on provision for loan 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 taxes 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.

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For reporting purposes, SVB Financial Group has three operating segments for which we report our financial information:
Global Commercial Bank is comprised of results from the following:
Our Commercial Bank products and services are provided by the Bank to commercial clients in the technology, life science and clean technology (energy and resource innovation) 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 serves clients within the United States, as well as non-U.S. clients in key international entrepreneurial markets.   In addition, the Bank and its subsidiaries offer a variety of investment services and solutions, including investment advisory and broker-dealer services. 
Our Private Equity Division provides banking products and services primarily to our venture capital and private equity clients.
Our Wine practice provides banking products and services to our premium wine industry clients, and our Community Development Finance practice makes loans as part of our responsibilities under the Community Reinvestment Act.  These practices are formerly known as SVB Specialty Lending.
SVB Analytics provides equity valuation services to companies and venture capital/private equity firms.
Debt Fund Investments is comprised of our investments in certain debt funds.

SVB Private Bank is the private banking division of the Bank, which provides banking products and a range of personal financial solutions for consumers.  Our clients are primarily venture capital/private equity 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, as well as cash and wealth management services. 
SVB Capital is the venture capital investment arm of SVBFG, which focuses primarily on funds management.  SVB Capital manages funds (primarily venture capital funds) on behalf of third party limited partners and SVB Financial Group. The SVB Capital family of funds is comprised of funds of funds and direct venture funds.  SVB Capital generates income for the Company primarily through management fees, carried interest arrangements and returns through the Company’s investments in the funds.
The summary financial results of our operating segments are presented along with a reconciliation to our consolidated interim results.

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Our segment information for the three and six months ended June 30, 2014 and 2013 is as follows:
(Dollars in thousands)
 
Global
Commercial
Bank (1)
 
SVB Private  
Bank
 
SVB Capital (1)  
 
Other Items (2)      
 
Total      
Three months ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
178,488

 
$
9,293

 
$
29

 
$
17,155

 
$
204,965

(Provision for) loan losses
 
(1,841
)
 
(106
)
 

 

 
(1,947
)
Noninterest income
 
53,021

 
356

 
(3,119
)
 
(36,048
)
 
14,210

Noninterest expense (3)
 
(123,679
)
 
(2,640
)
 
(3,144
)
 
(43,983
)
 
(173,446
)
Income (loss) before income tax expense (4)
 
$
105,989

 
$
6,903

 
$
(6,234
)
 
$
(62,876
)
 
$
43,782

Total average loans, net of unearned income
 
$
9,971,725

 
$
1,119,503

 
$

 
$
(10,626
)
 
$
11,080,602

Total average assets (5)
 
29,218,349

 
985,225

 
342,924

 
1,199,132

 
31,745,630

Total average deposits
 
26,324,070

 
791,261

 

 
61,794

 
27,177,125

Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
154,586

 
$
5,927

 
$
3

 
$
9,565

 
$
170,081

(Provision for) loan losses
 
(18,190
)
 
(382
)
 

 

 
(18,572
)
Noninterest income
 
48,361

 
253

 
7,281

 
42,344

 
98,239

Noninterest expense (3)
 
(101,246
)
 
(1,848
)
 
(2,757
)
 
(37,441
)
 
(143,292
)
Income before income tax expense (4)
 
$
83,511

 
$
3,950

 
$
4,527

 
$
14,468

 
$
106,456

Total average loans, net of unearned income
 
$
8,203,231

 
$
871,746

 
$

 
$
(52,804
)
 
$
9,022,173

Total average assets (5)
 
20,442,613

 
881,298

 
269,771

 
499,616

 
22,093,298

Total average deposits
 
18,137,218

 
472,613

 

 
4,339

 
18,614,170

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
354,191

 
$
16,185

 
$
43

 
$
30,874

 
$
401,293

(Provision for) reduction of loan losses
 
(2,648
)
 
207

 

 

 
(2,441
)
Noninterest income
 
111,658

 
630

 
34,553

 
177,594

 
324,435

Noninterest expense (2)
 
(245,604
)
 
(5,135
)
 
(5,779
)
 
(89,364
)
 
(345,882
)
Income before income tax expense (3)
 
$
217,597

 
$
11,887

 
$
28,817

 
$
119,104

 
$
377,405

Total average loans, net of unearned income
 
$
9,867,841

 
$
1,084,894

 
$

 
$
(27,728
)
 
$
10,925,007

Total average assets (4)
 
27,405,141

 
974,853

 
342,451

 
1,045,176

 
29,767,621

Total average deposits
 
24,610,629

 
768,300

 

 
57,528

 
25,436,457

Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
303,522

 
$
12,031

 
$
4

 
$
17,693

 
$
333,250

(Provision for) reduction of loan losses
 
(24,397
)
 
12

 

 

 
(24,385
)
Noninterest income
 
94,902

 
487

 
12,722

 
68,732

 
176,843

Noninterest expense (2)
 
(205,585
)
 
(3,779
)
 
(5,143
)
 
(77,799
)
 
(292,306
)
Income before income tax expense (3)
 
$
168,442

 
$
8,751

 
$
7,583

 
$
8,626

 
$
193,402

Total average loans, net of unearned income
 
$
8,036,833

 
$
858,351

 
$

 
$
(42,696
)
 
$
8,852,488

Total average assets (4)
 
20,491,451

 
865,777

 
254,343

 
591,746

 
22,203,317

Total average deposits
 
18,219,590

 
471,648

 

 
8,130

 
18,699,368

 
 
(1)
Global Commercial Bank’s and SVB Capital’s components of net interest income, noninterest income, noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented. Noncontrolling interest is included within "Other Items" as discussed below.
(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. Noninterest income is primarily attributable to noncontrolling interests and gains on equity warrant assets. Noninterest expense primarily consists of expenses associated with corporate support functions such as finance, human resources, marketing, legal and other expenses. Additionally, average assets primarily consist of cash and cash equivalents.
(3)
The Global Commercial Bank segment includes direct depreciation and amortization of $5.1 million and $4.6 million for the three months ended June 30, 2014 and 2013, respectively and $10.0 million and $9.1 million for the six months ended June 30, 2014 and 2013, 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.
(5)
Total average assets equal the greater of total average assets or the sum of total liabilities and total stockholders’ equity for each segment.
11.
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 credit risk to varying degrees. 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 June 30, 2014 and December 31, 2013:
(Dollars in thousands)
 
June 30,
2014
 
December 31,
2013
Loan commitments available for funding: (1)
 
 
 
 
Fixed interest rate commitments
 
$
1,394,063

 
$
1,392,781

Variable interest rate commitments
 
11,070,302

 
9,101,973

Total loan commitments available for funding
 
12,464,365

 
10,494,754

Commercial and standby letters of credit (2)
 
1,105,617

 
975,968

Total unfunded credit commitments
 
$
13,569,982

 
$
11,470,722

Commitments unavailable for funding (3)
 
$
1,267,797

 
$
1,006,168

Maximum lending limits for accounts receivable factoring arrangements (4)
 
978,752

 
894,276

Reserve for unfunded credit commitments (5)
 
33,319

 
29,983

 
 
(1)
Represents commitments which are available for funding, due to clients meeting all collateral, compliance and financial covenants required under loan commitment agreements.
(2)
See below for additional information on our commercial and standby letters of credit.
(3)
Represents commitments which are currently unavailable for funding, due to clients failing to meet all collateral, compliance and financial covenants under loan commitment agreements.
(4)
We extend credit under accounts receivable factoring arrangements when our clients’ sales invoices are deemed creditworthy under existing underwriting practices.
(5)
Our reserve 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 June 30, 2014. 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
 
$
972,386

 
$
55,165

 
$
1,027,551

 
$
1,027,551

Performance standby letters of credit
 
58,678

 
8,343

 
67,021

 
67,021

Commercial letters of credit
 
11,045

 

 
11,045

 
11,045

Total
 
$
1,042,109

 
$
63,508

 
$
1,105,617

 
$
1,105,617


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Deferred fees related to financial and performance standby letters of credit were $7.6 million at June 30, 2014 and $8.2 million at December 31, 2013. At June 30, 2014, collateral in the form of cash of $471.2 million and available-for-sale securities of $1.3 million were 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
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. The following table details our total capital commitments, unfunded capital commitments, and our ownership percentage in each fund at June 30, 2014:
 Our Ownership in Venture Capital/Private Equity Funds
 (Dollars in thousands)
 
SVBFG Capital Commitments    
 
SVBFG Unfunded    
Commitments
 
SVBFG Ownership  
of each Fund (4)
Silicon Valley BancVentures, LP
 
$
6,000

 
$
270

 
10.7
%
SVB Capital Partners II, LP (1)
 
1,200

 
162

 
5.1

Capital Partners III, LP
 
750

 
664

 
0.4

SVB Capital Shanghai Yangpu Venture Capital Fund
 
935

 
161

 
6.8

SVB Strategic Investors Fund, LP
 
15,300

 
688

 
12.6

SVB Strategic Investors Fund II, LP
 
15,000

 
1,050

 
8.6

SVB Strategic Investors Fund III, LP
 
15,000

 
1,538

 
5.9

SVB Strategic Investors Fund IV, LP
 
12,239

 
2,693

 
5.0

Strategic Investors Fund V Funds
 
515

 
265

 
Various

Strategic Investors Fund VI Funds
 
500

 
442

 
0.2

SVB Capital Preferred Return Fund, LP
 
12,688

 

 
20.0

SVB Capital—NT Growth Partners, LP
 
24,670

 
1,340

 
33.0

Other private equity fund (2)
 
9,338

 

 
58.2

Partners for Growth, LP
 
25,000

 
9,750

 
50.0

Debt funds (equity method accounting)
 
65,379

 
4,950

 
Various

Other fund investments (3)
 
301,596

 
29,587

 
Various  

Total
 
$
506,110

 
$
53,560

 
 
 
 
(1)
Our ownership includes direct ownership of 1.3 percent and indirect ownership interest of 3.8 percent through our investment in SVB Strategic Investors Fund II, LP.
(2)
Our ownership includes direct ownership of 41.5 percent and indirect ownership interests of 12.6 percent and 4.1 percent in the fund through our ownership interest of SVB Capital - NT Growth Partners, LP and SVB Capital Preferred Return Fund, LP, respectively.
(3)
Represents commitments to 287 funds (primarily venture capital funds) where our ownership interest is generally less than 5 percent of the voting interests of each such fund.
(4)
We are subject to the Volcker Rule, which restricts or limits our sponsorship of and ownership of interests in “covered” funds including venture capital and private equity funds. For funds that we sponsor, the Volcker Rule limits the amount of our investment to 3% of the fund, and our aggregate investments in all such funds must not exceed 3% of our Tier 1 capital. The current deadline to conform to these limits is July 21, 2015. The time period to divest an investment that is not permitted by the final rule may be extended by the Federal Reserve Board for up to two one-year general extensions, and one additional extension up to five additional years for investments in funds that are considered illiquid. We intend to seek the maximum extensions available to us.  However, there is no guarantee that the Federal Reserve Board will grant any of these extensions. See “Business - Supervision and Regulation” under Item 1 of Part I of our 2013 Form 10-K.

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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 June 30, 2014:
 Limited Partnership
 (Dollars in thousands)
 
Unfunded
    Commitments    
SVB Strategic Investors Fund, LP
 
$
2,250

SVB Strategic Investors Fund II, LP
 
5,770

SVB Strategic Investors Fund III, LP
 
17,249

SVB Strategic Investors Fund IV, LP
 
45,277

Strategic Investors Fund V Funds
 
181,221

Strategic Investors Fund VI Funds
 
237,682

SVB Capital Preferred Return Fund, LP
 
7,884

SVB Capital—NT Growth Partners, LP
 
8,587

Other private equity fund
 
243

Total
 
$
506,163

12.
Income Taxes
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 tax returns in California and Massachusetts as major tax filings. U.S. federal tax examinations through 2009 have been concluded. Our U.S. federal tax returns for 2008, 2010 and subsequent years remain open to examination. Our California tax returns for 2008 and subsequent tax years remain open to examination. Massachusetts tax returns for 2008, 2010 and subsequent years remain open to examination.
At June 30, 2014, our unrecognized tax benefit was $0.4 million, the recognition of which would reduce our income tax expense by $0.3 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 six month periods ending June 30, 2014.
13.
Fair Value of Financial Instruments
Fair Value Measurements
Our available-for-sale securities, derivative instruments and certain non-marketable and other 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 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, 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 third party external pricing service providers. We review the methodologies used to determine the fair value, including understanding the nature and observability of the inputs used to determine the price. 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. The valuation

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methodology that is generally used for the Level 2 assets is the income approach. 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, 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 and notes: Bonds issued by municipal governments generally have stated coupon rates, final maturity dates and are subject to being called ahead of the final maturity date at the option of the issuer. Fair value measurements of these securities are priced based on spreads to other municipal benchmark bonds with similar characteristics; or, relative to market rates on U.S. Treasury bonds of similar maturity.
Interest rate swap assets: Fair value measurements of interest rate swaps are priced considering the coupon rate of the fixed leg of the contract and the variable coupon 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: Fair value measurements of these assets and liabilities are priced based on spot and forward foreign currency rates and option volatility assumptions and the credit worthiness of the contract counterparty.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions.
Level 3
The fair value measurement is derived from valuation techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions we believe market participants would use in pricing the asset. Below is a summary of the valuation techniques used for each class of Level 3 assets:
Venture capital and private equity fund investments: Fair value measurements are based on the net asset value per share as obtained from the investee funds' management, as the funds do not have a readily determinable fair value and the funds prepare their financial statements using guidance consistent with fair value accounting. We account for differences between our measurement date and the date of the fund investment’s net asset value by using the most recent available financial information from the investee general partner, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
Other venture capital investments: Fair value measurements are based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. The significant unobservable inputs used in the fair value measurement include the information about each portfolio company, including actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Significant changes to any one of these inputs in isolation could result in a significant change in the fair value measurement, however, we generally consider all factors available through ongoing communication with the portfolio companies and venture capital fund managers to determine whether there are changes to the portfolio company or the environment that indicate a change in the fair value measurement.

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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% to 20% depending on the duration of the sale restrictions which typically range from 3 to 6 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% for certain warrants that have lockup 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 0 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 modified 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 modified 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.

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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 June 30, 2014:
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at June 30, 2014
Assets
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
4,882,172

 
$

 
$

 
$
4,882,172

U.S. agency debentures
 

 
3,745,873

 

 
3,745,873

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued collateralized mortgage obligations - fixed rate
 

 
2,142,829

 

 
2,142,829

Agency-issued collateralized mortgage obligations - variable rate
 

 
890,912

 

 
890,912

Equity securities
 
2,489

 
8,515

 

 
11,004

Total available-for-sale securities
 
4,884,661

 
6,788,129

 

 
11,672,790

Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
Non-marketable securities:
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 

 

 
1,040,522

 
1,040,522

Other venture capital investments
 

 

 
43,747

 
43,747

Other securities
 
275,831

 

 
5,808

 
281,639

Total non-marketable and other securities (fair value accounting)
 
275,831

 

 
1,090,077

 
1,365,908

Other assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 

 
5,692

 

 
5,692

Foreign exchange forward and option contracts
 

 
11,090

 

 
11,090

Equity warrant assets
 

 
1,754

 
87,151

 
88,905

Loan conversion options
 

 
53

 

 
53

Client interest rate derivatives
 

 
2,239

 

 
2,239

Total assets (1)
 
$
5,160,492

 
$
6,808,957

 
$
1,177,228

 
$
13,146,677

Liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward and option contracts
 
$

 
$
10,744

 
$

 
$
10,744

Client interest rate derivatives
 

 
2,420

 

 
2,420

Total liabilities
 
$

 
$
13,164

 
$

 
$
13,164

 
 
(1)
Included in Level 1 and Level 3 assets are $255.9 million and $1.0 billion, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

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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, 2013:
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at December 31, 2013
Assets
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. agency debentures
 
$

 
$
4,345,232

 
$

 
$
4,345,232

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 

 
2,473,576

 

 
2,473,576

Agency-issued collateralized mortgage obligations - fixed rate
 

 
3,325,758

 

 
3,325,758

Agency-issued collateralized mortgage obligations - variable rate
 

 
1,186,573

 

 
1,186,573

Agency-issued commercial mortgage-backed securities
 

 
564,604

 

 
564,604

Municipal bonds and notes
 

 
86,027

 

 
86,027

Equity securities
 
3,732

 
1,319

 

 
5,051

Total available-for-sale securities
 
3,732

 
11,983,089

 

 
11,986,821

Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
Non-marketable securities:
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 

 

 
862,972

 
862,972

Other venture capital investments
 

 

 
32,839

 
32,839

Other Securities
 
2,125

 

 
319,249

 
321,374

Total non-marketable and other securities (fair value accounting)
 
2,125

 

 
1,215,060

 
1,217,185

Other assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 

 
6,492

 

 
6,492

Foreign exchange forward and option contracts
 

 
15,530

 

 
15,530

Equity warrant assets
 

 
3,622

 
99,891

 
103,513

Loan conversion options
 

 
314

 

 
314

Client interest rate derivatives
 

 
1,265

 

 
1,265

Total assets (1)
 
$
5,857

 
$
12,010,312

 
$
1,314,951

 
$
13,331,120

Liabilities
 
 
 
 
 
 
 
 
Foreign exchange forward and option contracts
 
$

 
$
12,617

 
$

 
$
12,617

Client interest rate derivatives
 

 
1,396

 

 
1,396

Total liabilities
 
$

 
$
14,013

 
$

 
$
14,013

 
 
(1)
Included in Level 1 and Level 3 assets are $2.0 million and $1.1 billion, respectively, attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.


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The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2014 and 2013, respectively:
(Dollars in thousands)
 
Beginning
Balance
 
Total Realized and Unrealized Gains (Losses) Included in Income
 
Purchases  
 
Sales
 
Issuances  
 
Distributions and Other Settlements
 
Transfers Into Level 3 
 
Transfers Out of Level 3
 
Ending
Balance
Three months ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
$
976,922

 
$
37,445

 
$
65,956

 
$

 
$

 
$
(39,801
)
 
$

 
$

 
$
1,040,522

Other venture capital investments
 
28,306

 
676

 
15,826

 
(925
)
 

 
(10
)
 

 
(126
)
 
43,747

Other securities (fair value accounting)
 
362,487

 
1,616

 

 

 

 

 

 
(358,295
)
 
5,808

Total non-marketable and other securities (fair value accounting)(1)
 
1,367,715

 
39,737

 
81,782

 
(925
)
 

 
(39,811
)
 

 
(358,421
)
 
1,090,077

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
87,642

 
13,141

 

 
(16,644
)
 
2,749

 
583

 

 
(320
)
 
87,151

Total assets
 
$
1,455,357

 
$
52,878

 
$
81,782

 
$
(17,569
)
 
$
2,749

 
$
(39,228
)
 
$

 
$
(358,741
)
 
$
1,177,228

Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
$
701,076

 
$
33,728

 
$
35,574

 
$

 
$

 
$
(28,856
)
 
$

 
$

 
$
741,522

Other venture capital investments
 
124,786

 
(939
)
 
28

 
(364
)
 

 
(18
)
 

 

 
123,493

Total non-marketable and other securities (fair value accounting) (1)
 
825,862

 
32,789

 
35,602

 
(364
)
 

 
(28,874
)
 

 

 
865,015

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
66,046

 
6,468

 

 
(2,189
)
 
2,388

 
1,014

 

 
(498
)
 
73,229

Total assets
 
$
891,908

 
$
39,257

 
$
35,602

 
$
(2,553
)
 
$
2,388

 
$
(27,860
)
 
$

 
$
(498
)
 
$
938,244

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
$
862,972

 
$
148,780

 
$
110,411

 
$

 
$

 
$
(81,641
)
 
$

 
$

 
$
1,040,522

Other venture capital investments
 
32,839

 
2,514

 
16,496

 
(4,439
)
 

 
(3,537
)
 

 
(126
)
 
43,747

Other securities (fair value accounting)
 
319,249

 
104,310

 

 
(46,840
)
 

 
3,417

 

 
(374,328
)
 
5,808

Total non-marketable and other securities (fair value accounting) (1)
 
1,215,060

 
255,604

 
126,907

 
(51,279
)
 

 
(81,761
)
 

 
(374,454
)
 
1,090,077

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
99,891

 
37,519

 

 
(56,637
)
 
6,166

 
1,209

 

 
(997
)
 
87,151

Total assets
 
$
1,314,951

 
$
293,123

 
$
126,907

 
$
(107,916
)
 
$
6,166

 
$
(80,552
)
 
$

 
$
(375,451
)
 
$
1,177,228

Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
$
665,921

 
$
56,238

 
$
65,318

 
$

 
$

 
$
(45,955
)
 
$

 
$

 
$
741,522

Other venture capital investments
 
127,091

 
1,249

 
194

 
(385
)
 

 
(1,095
)
 

 
(3,561
)
 
123,493

Total non-marketable and other securities (fair value accounting) (1)
 
793,012

 
57,487

 
65,512

 
(385
)
 

 
(47,050
)
 

 
(3,561
)
 
865,015

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
66,129

 
7,927

 

 
(4,439
)
 
4,314

 
1,378

 

 
(2,080
)
 
73,229

Total assets
 
$
859,141

 
$
65,414

 
$
65,512

 
$
(4,824
)
 
$
4,314

 
$
(45,672
)
 
$

 
$
(5,641
)
 
$
938,244

 
 
(1)
Realized and unrealized gains (losses) are recorded in the line items “gains on investment securities, net”, and “other noninterest income”, components of noninterest income.
(2)
Realized and unrealized gains (losses) are recorded in the line item “gains on derivative instruments, net”, a component of noninterest income.

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The following table presents the amount of unrealized gains (losses) included in earnings (which is inclusive of noncontrolling interest) attributable to Level 3 assets still held at June 30, 2014:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
$
38,061

 
$
34,390

 
$
149,917

 
$
57,011

Other venture capital investments
 
1,324

 
(209
)
 
1,310

 
1,117

Other securities (fair value accounting)
 
1,615

 

 
80,583

 

Total non-marketable and other securities (fair value accounting) (1)
 
41,000

 
34,181

 
231,810

 
58,128

Other assets:
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
9,578

 
5,240

 
11,971

 
6,279

Total unrealized gains, net
 
$
50,578

 
$
39,421

 
$
243,781

 
$
64,407

Unrealized gains attributable to noncontrolling interests
 
$
38,791

 
$
28,482

 
$
148,151

 
$
50,245

 
 
(1)
Unrealized gains (losses) are recorded in the line items “gains on investment securities, net”, and “other noninterest income”, components of noninterest income.
(2)
Unrealized gains (losses) are recorded in the line item “gains on derivative instruments, net”, a component of noninterest income.
The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at June 30, 2014. 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
June 30, 2014:
 
 
 
 
 
 
 
 
Other venture capital investments (fair value accounting)
 
$
43,747

 
Private company equity pricing
 
(1)
 
(1
)
Other securities
 
5,808

 
Modified stock price
 
Sales restrictions discount (2)
 
10.0
%
Equity warrant assets (public portfolio)
 
671

 
Modified Black-Scholes option pricing model
 
Volatility
 
43.3
%
 
 
 
 
Risk-Free interest rate
 
1.8
%
 
 
 
 
Sales restrictions discount (2)
 
14.8
%
Equity warrant assets (private portfolio)
 
86,480

 
Modified Black-Scholes option pricing model
 
Volatility
 
38.9
%
 
 
 
 
 
Risk-Free interest rate
 
0.8
%
 
 
 
 
 
Marketability discount (3)
 
20.0
%
 
 
 
 
 
Remaining life assumption (4)
 
45.0
%
December 31, 2013:
 
 
 
 
 
 
 
 
Other venture capital investments (fair value accounting)
 
$
32,839

 
Private company equity pricing
 
(1)
 
(1
)
Other securities
 
319,249

 
Modified stock price
 
Sales restrictions discount (2)
 
12.0
%
Equity warrant assets (public portfolio)
 
24,217

 
Modified Black-Scholes option pricing model
 
Volatility
 
41.3
%
 
 
 
 
Risk-Free interest rate
 
1.7
%
 
 
 
 
Sales restrictions discount (2)
 
13.7
%
Equity warrant assets (private portfolio)
 
75,674

 
Modified Black-Scholes option pricing model
 
Volatility
 
40.1
%
 
 
 
 
Risk-Free interest rate
 
0.8
%
 
 
 
 
Marketability discount (3)
 
22.5
%
 
 
 
 
Remaining life assumption (4)
 
45.0
%
 
 
 
(1)
In determining the fair value of our other venture capital investment portfolio, we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Additionally, we have ongoing communication with the

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portfolio companies and venture capital fund managers, to determine whether there is a material change in fair value. 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 3 to 6 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 on long-run averages and is influenced over time by various factors, including market conditions. On a quarterly basis, a sensitivity analysis is performed on our marketability discount.
(4)
We adjust the contractual remaining term of private company warrants based on our estimate of the actual remaining life, which we determine by utilizing historical data on cancellations and exercises. At June 30, 2014, the weighted average contractual remaining term was 6.2 years, compared to our estimated remaining life of 2.8 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption.
For the three and six months ended June 30, 2014 and 2013, we did not have any material transfers between Level 2 and Level 1. Transfers from Level 3 to Level 1 for the six months ended June 30, 2014 included $374.5 million as a result of the expiration of lockup and other restrictions on certain of our other securities. Transfers from Level 3 to Level 2 for the six months ended June 30, 2013 include $3.6 million due to the IPO of one of our portfolio companies.
All other transfers from Level 3 to Level 2 for the three and six months ended June 30, 2014 and 2013 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. Because 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, excluding financial instruments already recorded at fair value as described above.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash balances due from banks, interest-earning deposits, securities purchased under agreements to resell and other short-term investment securities. The carrying amount is a reasonable estimate of fair value because of the insignificant risk of changes in fair value due to changes in market interest rates, and the instruments are purchased in conjunction with our cash management activities.
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), low income housing tax credit funds (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) include our investment in SPD Silicon Valley Bank ("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 investee or obtained from the fund investments’

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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 March 31st for our June 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. The carrying value of our low income housing tax credit funds (equity method accounting) is a reasonable estimate of fair value.
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.
FHLB and Federal Reserve Bank Stock
Investments in FHLB and Federal Reserve Bank stock are recorded at cost. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest receivable and payable are reasonable estimates of fair value due to the short-term nature of these balances.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits is equal to the amount payable on demand at the measurement date. The fair value of 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.
Short-Term Borrowings
Short-term borrowings at both June 30, 2014 and December 31, 2013 included cash collateral received from our counterparties in relation to derivative contracts where the net market value is in our favor, primarily for our interest rate swap agreement related to our 6.05% Subordinated Notes. The carrying amount of the cash collateral is a reasonable estimate of fair value.
Long-Term Debt
Long-term debt at June 30, 2014 and December 31, 2013 included our 5.375% Senior Notes, 7.0% Junior Subordinated Debentures and 6.05% Subordinated Notes. 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 note.
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 June 30, 2014 and December 31, 2013. Commitments to extend credit and letters of credit typically result in loans with a market interest rate if funded.

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The following fair value hierarchy table presents the estimated fair values of our financial instruments that are not carried at fair value at June 30, 2014 and December 31, 2013:
 
 
 
 
Estimated Fair Value
(Dollars in thousands)
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
June 30, 2014:
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
2,649,831

 
$
2,649,831

 
$

 
$

Held-to-maturity securities
 
5,463,920

 

 
5,454,996

 

Non-marketable and other securities (cost and equity method accounting)
 
391,327

 

 

 
480,736

Net commercial loans
 
10,127,781

 

 

 
10,319,273

Net consumer loans
 
1,100,202

 

 

 
1,039,405

FHLB and Federal Reserve Bank stock
 
41,026

 

 

 
41,026

Accrued interest receivable
 
79,135

 

 
79,135

 

Financial liabilities:
 
 
 
 
 
 
 
 
Other short-term borrowings
 
4,910

 
4,910

 

 

Non-maturity deposits (1)
 
28,196,740

 
28,196,740

 

 

Time deposits
 
155,807

 

 
155,812

 

5.375% Senior Notes
 
348,321

 

 
396,452

 

6.05% Subordinated Notes (2)
 
51,208

 

 
55,806

 

7.0% Junior Subordinated Debentures
 
54,933

 

 
54,289

 

Accrued interest payable
 
6,895

 

 
6,895

 

Off-balance sheet financial assets:
 
 
 
 
 
 
 
 
Commitments to extend credit
 

 

 

 
27,698

December 31, 2013:
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,538,779

 
$
1,538,779

 
$

 
$

Non-marketable and other securities (cost and equity method accounting)
 
378,309

 

 

 
447,783

Net commercial loans
 
9,796,878

 

 

 
9,935,917

Net consumer loans
 
966,622

 

 

 
1,005,080

FHLB and Federal Reserve Bank stock
 
40,632

 

 

 
40,632

Accrued interest receivable
 
67,772

 

 
67,772

 

Financial liabilities:
 
 
 
 
 
 
 
 
Other short-term borrowings
 
5,080

 
5,080

 

 

Non-maturity deposits (1)
 
22,259,119

 
22,259,119

 

 

Time deposits
 
213,860

 

 
213,874

 

5.375% Senior Notes
 
348,209

 

 
383,782

 

6.05% Subordinated Notes (2)
 
51,987

 

 
56,297

 

7.0% Junior Subordinated Debentures
 
55,020

 

 
51,915

 

Accrued interest payable
 
6,858

 

 
6,858

 

Off-balance sheet financial assets:
 
 
 
 
 
 
 
 
Commitments to extend credit
 

 

 

 
24,285

 
 
(1)
Includes noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits.
(2)
At June 30, 2014 and December 31, 2013, included in the carrying value and estimated fair value of our 6.05% Subordinated Notes was an interest rate swap valued at $5.7 million and $6.5 million, respectively, related to hedge accounting associated with the notes.

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Investments in Entities that Calculate Net Asset Value Per Share
FASB guidance over certain fund investments requires that we disclose the fair value of funds, significant investment strategies of the investees, redemption features of the investees, restrictions on the ability to sell investments, estimate of the period of time over which the underlying assets are expected to be liquidated by the investee, and unfunded commitments related to the investments.
Our investments in debt funds and venture capital and private equity fund investments generally cannot be redeemed. Alternatively, we expect distributions, if any, to be received primarily through IPOs and M&A activity of the underlying assets of the fund. We currently 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 March 31st, for our June 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.
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 June 30, 2014:
(Dollars in thousands)
 
Carrying Amount      
 
Fair Value        
 
Unfunded
Commitments      
Non-marketable and other securities (fair value accounting):
 
 
 
 
 
 
Venture capital and private equity fund investments (1)
 
$
1,040,522

 
$
1,040,522

 
$
506,163

Non-marketable and other securities (equity method accounting):
 
 
 
 
 
 
Other investments (2)
 
47,706

 
49,220

 
5,836

Non-marketable securities (cost method accounting):
 
 
 
 
 
 
Venture capital and private equity fund investments (3)
 
142,136

 
230,236

 
28,100

Total
 
$
1,230,364

 
$
1,319,978

 
$
540,099

 
 
(1)
Venture capital and private equity fund investments within non-marketable securities (fair value accounting) include investments made by our managed funds of funds and one of our direct venture funds. These investments represent investments in venture capital and private equity funds that invest primarily in U.S. and global technology and life sciences companies. Included in the fair value and unfunded commitments of fund investments under fair value accounting are $962 million and $501 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)
Other investments within non-marketable securities (equity method accounting) include investments in debt funds and venture capital and private equity fund investments that invest in or lend money to primarily U.S. and global technology and life sciences companies. It is estimated that we will receive distributions from the fund investments over the next 5 to 7 years, depending on the age of the funds.
(3)
Venture capital and private equity fund investments within non-marketable securities (cost method accounting) include investments in venture capital and private equity fund investments that invest primarily in U.S. and global technology and life sciences companies. It is estimated that we will receive distributions from the fund investments over the next 5 to 7 years, depending on the age of the funds and any potential extensions of the terms of the funds.
14.
Legal Matters
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. In accordance with applicable accounting guidance, we establish accruals for all lawsuits, claims and 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 lawsuits and claims 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 disclose information relating to any such potential loss, whether in excess of any established accruals or where there is no established accrual. We also disclose information relating to any material potential loss that is probable but not reasonably estimable. Where reasonably practicable, we will 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 these matters, nor do we currently expect it is reasonably possible 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.
15.
Related Parties
SVB Financial has commitments under two partially-syndicated revolving line of credit facilities totaling $65 million to Gold Hill Capital 2008 LP, a venture debt fund, and an affiliated fund, for which SVB Financial has ownership interests. Of the $65 million, $13 million is syndicated to another lender. SVB Financial has an 11.5 percent direct ownership interest and a 4.0 percent indirect ownership interest in Gold Hill Capital 2008 LP through our 83.8 percent interest in its general partner, Gold Hill Capital 08, LLC. The lines of credit are secured and bear an interest rate of national Prime plus one percent. The highest outstanding balance under SVB Financial's portion of the facility for the three months ended June 30, 2014 was $23 million. SVB Financial's portion of the outstanding balance was $19 million at June 30, 2014 and $23 million at December 31, 2013.
During the six months ended June 30, 2014, the Bank made loans to related parties, including certain companies in which certain of our directors or their affiliated venture funds are beneficial owners of ten percent or more of the equity securities of

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such companies. Such loans: (a) were made in the ordinary course of business; (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other non-related persons; and (c) did not involve more than the normal risk of collectability or present other unfavorable features. Additionally, we also provide real estate secured loans to eligible employees through our EHOP.
16.
Subsequent Events
Update on Investments in FireEye
As of June 30, 2014, our managed funds (including SVB Financial's interest) held approximately 4.9 million shares of FireEye common stock ("FireEye Shares").
From June 30, 2014 to August 6, 2014, the market price of FireEye's common stock decreased by 24 percent from $40.55 to $30.78. Based on this decrease, we would expect a total decrease in the pre-tax valuation of the FireEye Shares, during this time period, of approximately $48 million ($9 million, net of noncontrolling interests). (This is a non-GAAP financial measure. See reconciliation below).
Investment gains or losses relating to the remaining 4.9 million FireEye Shares are subject to FireEye’s stock price, which is subject to market conditions and various other factors. Additionally, the decrease in the pre-tax valuation of the FireEye Shares, specifically noted in the paragraph above, are currently unrealized losses. Any losses (or gains) relating to the FireEye Shares that will actually become realized is subject to a variety of factors, including among other things, changes in prevailing market prices and timing of any sales of securities, which are subject to our securities sales and governance processes. None of the FireEye related investments currently are subject to a lock-up agreement.
The table below sets forth a reconciliation of the non-GAAP financial measure discussed above:

Non-GAAP losses on investments securities, net of noncontrolling interests (Dollars in millions)
 
Through August 6, 2014
GAAP losses on certain non-marketable and other securities
 
$
48

Less: losses attributable to noncontrolling interests, including carried interest
 
39

Non-GAAP losses on certain non-marketable and other securities, net of noncontrolling interests
 
$
9

 

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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 Private Securities Litigation Reform Act of 1995. 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:
Projections of 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 venture capital/private equity funding and investment levels
Forecasts of future interest rates, economic performance, and income from investments
Forecasts of expected levels of provisions for loan losses, loan growth and client funds
Descriptions of assumptions underlying or relating to any of the foregoing
In this Quarterly Report on Form 10-Q, we make forward-looking statements, including, but not limited to, those discussing our management’s expectations about:
Market and economic conditions (including interest rate environment, and levels of public offerings, mergers/acquisitions and venture capital financing activities) and the associated impact on us
The sufficiency of our capital, including sources of capital (such as funds generated through retained earnings), the extent to which capital may be used or required, and our capital category classification
The adequacy of our liquidity position, including sources of liquidity (such as funds generated through retained earnings)
Our overall investment plans, strategies and activities, including venture capital/private equity funding and investments, and our investment of excess cash/liquidity
The realization, timing, valuation and performance of equity or other investments, including the impact of changes in our valuation of our investments, such as FireEye.
The likelihood that the market value of our temporarily impaired investments will recover
Our intent to sell our available-for-sale securities prior to recovery of our cost basis, or the likelihood of such
Our ability and intent to hold our held-to-maturity securities until maturity
The impact on our interest income from mortgage prepayment levels as it relates to our premium amortization expense, and from changes in loan yields due to shifts in loan mix
Expected cash requirements for unfunded commitments to certain investments, including capital calls
Our overall management of interest rate risk, including managing the sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to earnings from a change in interest rates
The credit quality of our loan portfolio, including levels and trends of nonperforming loans, impaired loans, criticized loans and troubled debt restructurings
The adequacy of reserves (including allowance for loan and lease losses) and the appropriateness of our methodology for calculating such reserves
The level of loan and deposit and client investment fund balances
The level of client investment fees and associated margins
The profitability of our products and services, including loan yields, loan pricing, and interest margins
Our strategic initiatives, including the expansion of operations and business activities in China, Hong Kong, India, Israel, the UK and elsewhere domestically or internationally

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The expansion and growth of our noninterest income sources
Distributions of venture capital, private equity or debt fund investment proceeds; intentions to sell such fund investments
The changes in, or adequacy of, our unrecognized tax benefits and any associated impact
The realization of certain deferred tax assets, and of any benefit stemming from certain net operating loss carryforwards.
The extent to which counterparties, including those to our forward and option contracts, will perform their contractual obligations
The condition and suitability of our properties
The manner in which we compete
The effect of application of accounting pronouncements and regulatory requirements
The effect of lawsuits and claims
Regulatory developments, including the nature and timing of the adoption and effectiveness of requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), new capital requirements and other applicable Federal, State and International laws and regulations, and any related impact on us
The expected impact of the "Volcker Rule" under the Dodd-Frank Act, including our intention to seek the maximum extensions to the conformance period applicable to us
You can identify these and other forward-looking statements by the use of words such as “becoming,” “may,” “will,” “should,” "could," "would," “predicts,” “potential,” “continue,” “anticipates,” “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends,” the negative of such words, or comparable terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our beliefs as well as our assumptions, and such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management’s forward-looking statements.
Factors that could cause actual results to differ from the expectations stated in the forward-looking statements include, but are not limited to, factors discussed elsewhere in this Quarterly Report on Form 10-Q, under “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”), as filed with the SEC on February 27, 2014, and other documents we file with the SEC. We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this report. 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 applicable by law.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and accompanying notes as presented in Part I, Item 1 of this report and in conjunction with our 2013 Form 10-K.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentations.
Management’s Overview of Second Quarter 2014 Performance
Overall, we had a strong second quarter in 2014, which was reflective of the positive business environment for our clients and our unique business model and expertise in supporting innovation companies and their investors, which have enabled us to deliver solid organic growth. We had net income available to common stockholders of $50.8 million and diluted EPS was $1.04. This compares to net income of $48.6 million and diluted EPS of $1.06 in the second quarter of 2013. In the second quarter of 2014, compared to the second quarter of 2013, we experienced strong growth in net interest income as a result of the increase in average investments of $4.8 billion, and loan growth of $2.1 billion, driven by our outstanding deposit growth, with record high average deposits of $27.2 billion. In addition, overall credit quality improved resulting in lower loan reserves, we saw continued growth in income from core fees as well as gains on equity warrant assets, and our liquidity and capital ratios continued to remain strong overall. Net gains on investment securities of $41.6 million, excluding FireEye losses of $98.9, was also strong

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in the second quarter 2014. Our total client funds, which consist of on-balance sheet deposits and off-balance sheet client investment funds, increased, reflecting growth from our existing and new clients. Our noninterest expense increased $30.2 million primarily from increases in compensation expense mainly driven by increased incentive compensation, due to our strong performance, as well as an increase in average FTEs.
Second quarter 2014 results (compared to the second quarter 2013, where applicable) included:
Continued strong growth in our lending business with record high average loan balances of $11.1 billion, an increase of $2.1 billion, or 22.8 percent.
Average investment securities, excluding non-marketable and other securities, of $15.2 billion, an increase of $4.8 billion, or 45.7 percent. Period-end investment securities, excluding non-marketable and other securities, of $17.1 billion, an increase of $7.1 billion, or 70.6 percent.
Average deposit balances of $27.2 billion, an increase of $8.6 billion, or 46.0 percent. Period-end deposit balances were $28.4 billion, an increase of $9.7 billion, or 51.7 percent.
Average total client funds (including on-balance sheet deposits and off-balance sheet client investment funds) were $57.3 billion, an increase of $15.5 billion, or 37.1 percent. Period-end total client funds were $58.7 billion, an increase of $16.0 billion, or 37.6 percent.
Net interest income (fully taxable equivalent basis) of $205.4 million, an increase of $34.9 million, or 20.5 percent, primarily due to an increase in interest income from loans and fixed income investment securities, attributable to growth in average loan and investment balances of $2.1 billion and $4.8 billion, respectively, driven by the strong average deposit growth mentioned above. This increase was partially offset by a decrease in the overall yield of our loan portfolio primarily resulting from the growth in our venture capital and private equity loan portfolio which, on average, have lower yields. The overall low market rate environment and increased price competition also impacted interest income.
Net interest margin of 2.79 percent, compared to 3.40 percent, primarily reflective of a 51 basis point decrease in the overall yield of our loan portfolio. This decrease was primarily attributable to the change in mix of our interest earning assets. Loans represented 38 percent of earning assets in the second quarter of 2014 compared to 45 percent in the second quarter of 2013.
Provision for loan losses of $1.9 million, compared to $18.6 million. The provision of $1.9 million was primarily driven by $5.3 million from period-end loan growth and $4.8 million in net charge-offs, offset by a reserve release of $6.0 million due to the improvement of the credit quality of our overall loan portfolio and a $2.1 million decrease in the reserve for impaired loans resulting from a decrease in impaired loan balances from repayments and charge-offs.
Foreign exchange, credit card and lending related fees of $34.1 million, an increase of $8.2 million, or 31.6 percent reflective of increased client activity and transaction volumes.
Net losses on investment securities of $57.3 million, compared to net gains of $40.6 million. Non-GAAP net losses on investment securities, net of noncontrolling interests of $22.1 million, compared to net gains of $9.5 million (See non-GAAP reconciliation under the section "Results of Operations—Noninterest Income—Gains on Investment Securities, Net") , primarily resulting from our FireEye related investments. Specifically, we had losses on investment securities related to FireEye of $98.9 million ($30.4 million net of noncontrolling interests). See "Results of Operations—Noninterest Income—Gains on Investment Securities, Net" for details about our FireEye related investments during the three and six months ended June 30, 2014.
Net gains on equity warrant assets of $12.3 million, an increase of $5.1 million, or 71.5 percent, compared to $7.2 million. This increase was primarily driven by the increase in the number of equity warrant assets held as well as gains due to increases in valuations across the equity warrant asset portfolio.
Noninterest expense of $173.4 million, an increase of $30.2 million, or 21.0 percent. The increase was primarily due to increases in incentive compensation and ESOP and other employee benefits as a result of our strong financial performance and an increase in average FTEs. Average FTEs increased by 6.7 percent to 1,768 for the three months ended June 30, 2014, compared to 1,657 FTEs for the comparable 2013 period.
The issuance and sale through a registered public offering of 4,485,000 shares of common stock at an offering price of $101.00 per share, which resulted in net proceeds of $434.9 million to support the continued growth of our balance sheet.


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A summary of our performance for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands, except per share data and ratios)
 
2014
 
2013
 
% Change  
 
2014
 
2013
 
% Change  
Income Statement:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
1.04

 
$
1.06

 
(1.9
)
 
$
2.96

 
$
1.96

 
51.0

Net income available to common stockholders
 
50,797

 
48,584

 
4.6

  
 
142,098

 
89,475

 
58.8

  
Net interest income
 
204,965

 
170,081

 
20.5

  
 
401,293

 
333,250

 
20.4

  
Net interest margin
 
2.79
%
 
3.40
%
 
(61
)
bps 
 
2.95
%
 
3.32
%
 
(37
)
bps 
Provision for loan losses
 
$
1,947

 
$
18,572

 
(89.5
)
 
$
2,441

 
$
24,385

 
(90.0
)
Noninterest income
 
14,210

 
98,239

 
(85.5
)
  
 
324,435

 
176,843

 
83.5

  
Noninterest expense
 
173,446

 
143,292

 
21.0

  
 
345,882

 
292,306

 
18.3

  
Non-GAAP core fee income (1)
 
49,993

 
41,957

 
19.2

 
 
100,939

 
83,278

 
21.2

 
Non-GAAP noninterest income, net of noncontrolling interests (1)
 
49,535

 
67,488

 
(26.6
)
  
 
173,042

 
123,602

 
40.0

  
Non-GAAP noninterest expense, net of noncontrolling interests (2)
 
168,179

 
140,425

 
19.8

  
 
337,294

 
286,579

 
17.7

  
Balance Sheet:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average loans, net of unearned income
 
$
11,080,602

 
$
9,022,173

 
22.8

 
$
10,925,007

 
$
8,852,488

 
23.4

Average noninterest-bearing demand deposits
 
19,472,542

 
13,257,481

 
46.9

  
 
18,183,692

 
13,321,635

 
36.5

  
Average interest-bearing deposits
 
7,704,583

 
5,356,689

 
43.8

  
 
7,252,765

 
5,377,733

 
34.9

  
Average total deposits
 
27,177,125

 
18,614,170

 
46.0

  
 
25,436,457

 
18,699,368

 
36.0

  
Earnings Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets (annualized) (3)
 
0.64
%
 
0.88
%
 
(27.3
)
 
0.96
%
 
0.81
%
 
18.5

Return on average SVBFG stockholders’ equity (annualized) (4)
 
8.50

 
10.12

 
(16.0
)
  
 
12.74

 
9.52

 
33.8

  
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses as a percentage of total period-end gross loans
 
1.06
%
 
1.23
%
 
(17
)
bps 
 
1.06
%
 
1.23
%
 
(17
)
bps 
Allowance for loan losses for performing loans as a percentage of total gross performing loans
 
1.02

 
1.13

 
(11
)
  
 
1.02

 
1.13

 
(11
)
  
Gross loan charge-offs as a percentage of average total gross loans (annualized)
 
0.23

 
0.68

 
(45
)
  
 
0.50

 
0.47

 
3

  
Net loan charge-offs as a percentage of average total gross loans (annualized)
 
0.17

 
0.49

 
(32
)
  
 
0.45

 
0.35

 
10

  
Capital Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
 
15.36
%
 
14.03
%
 
133

bps 
 
15.36
%
 
14.03
%
 
133

bps 
Tier 1 risk-based capital ratio
 
14.42

 
12.84

 
158

  
 
14.42

 
12.84

 
158

  
Tier 1 leverage ratio
 
8.74

 
8.78

 
(4
)
  
 
8.74

 
8.78

 
(4
)
  
Tangible common equity to tangible assets (5)
 
8.03

 
8.34

 
(31
)
  
 
8.03

 
8.34

 
(31
)
  
Tangible common equity to risk-weighted assets (5)
 
14.52

 
12.73

 
179

  
 
14.52

 
12.73

 
179

  
Bank total risk-based capital ratio
 
13.41

 
12.42

 
99

  
 
13.41

 
12.42

 
99

  
Bank tier 1 risk-based capital ratio
 
12.45

 
11.20

 
125

  
 
12.45

 
11.20

 
125

  
Bank tier 1 leverage ratio
 
7.51

 
7.66

 
(15
)
  
 
7.51

 
7.66

 
(15
)
  
Bank tangible common equity to tangible assets (5)
 
7.22

 
7.60

 
(38
)
  
 
7.22

 
7.60

 
(38
)
  
Bank tangible common equity to risk-weighted assets (5)
 
12.65

 
11.18

 
147

  
 
12.65

 
11.18

 
147

  
Other Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating efficiency ratio (6)
 
78.98
%
 
53.32
%
 
48.1

 
47.60
%
 
57.21
%
 
(16.8
)
Non-GAAP operating efficiency ratio (2)
 
65.97

 
59.01

 
11.8

  
 
58.64

 
62.62

 
(6.4
)
  
Book value per common share (7)
 
$
52.78

 
$
40.65

 
29.8

  
 
$
52.78

 
$
40.65

 
29.8

  
Other Statistics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average full-time equivalent employees
 
1,768

 
1,657

 
6.7

 
1,751

 
1,656

 
5.7

Period-end full-time equivalent employees
 
1,786

 
1,657

 
7.8

  
 
1,786

 
1,657

 
7.8

  
 
 
(1)
See “Results of Operations–Noninterest Income” for a description and reconciliation of non-GAAP core fee income and noninterest income.

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(2)
See “Results of Operations–Noninterest Expense” for a description and reconciliation of non-GAAP noninterest expense and non-GAAP 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)
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)
The operating efficiency ratio is calculated by dividing total noninterest expense by total taxable-equivalent net interest income plus noninterest income.
(7)
Book value per common share is calculated by dividing total SVBFG stockholders’ equity by total outstanding common shares at period-end.
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.
There have been no significant changes during the six months ended June 30, 2014 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 2013 Form 10-K.
Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis)
Net interest income is defined as the difference between interest earned on loans, fixed income investment portfolio (available-for-sale and held-to-maturity securities), short-term investment securities and 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 35.0 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 mix of interest-earning assets and interest-bearing liabilities, referred to as “volume change.” Net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.” The following table sets forth changes in interest income for each major category of interest-earning assets and interest expense for each major category of interest-bearing liabilities. The table also reflects the amount of simultaneous changes attributable to both volume and rate changes for the 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.

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2014 Compared to 2013
 
2014 Compared to 2013
 
 
Three months ended June 30, increase (decrease) due to change in
 
Six months ended June 30, increase (decrease) due to change in
(Dollars in thousands)
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities
 
$
1,644

 
$
(435
)
 
$
1,209

 
$
2,804

 
$
(678
)
 
$
2,126

Fixed income investment portfolio (taxable)
 
21,781

 
(3,014
)
 
18,767

 
28,076

 
(641
)
 
27,435

Fixed income investment portfolio (non-taxable)
 
(14
)
 
(7
)
 
(21
)
 
(48
)
 
23

 
(25
)
Loans, net of unearned income
 
28,165

 
(12,270
)
 
15,895

 
56,897

 
(16,574
)
 
40,323

Increase (decrease) in interest income, net
 
51,576

 
(15,726
)
 
35,850

 
87,729

 
(17,870
)
 
69,859

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
NOW deposits
 
17

 
16

 
33

 
31

 
21

 
52

Money market deposits
 
1,229

 
(220
)
 
1,009

 
2,204

 
(278
)
 
1,926

Money market deposits in foreign offices
 
14

 
(8
)
 
6

 
32

 
(8
)
 
24

Time deposits
 
(29
)
 
(48
)
 
(77
)
 
(30
)
 
(120
)
 
(150
)
Sweep deposits in foreign offices
 
21

 
(9
)
 
12

 
(7
)
 
(9
)
 
(16
)
Total increase (decrease) in deposits expense
 
1,252

 
(269
)
 
983

 
2,230

 
(394
)
 
1,836

Short-term borrowings
 
(43
)
 

 
(43
)
 
(71
)
 

 
(71
)
5.375% Senior Notes
 

 
7

 
7

 
6

 
8

 
14

Junior Subordinated Debentures
 

 
16

 
16

 
(5
)
 
28

 
23

6.05% Subordinated Notes
 
(5
)
 
16

 
11

 
(10
)
 
33

 
23

Total (decrease) increase in borrowings expense
 
(48
)
 
39

 
(9
)
 
(80
)
 
69

 
(11
)
Increase (decrease) in interest expense, net
 
1,204

 
(230
)
 
974

 
2,150

 
(325
)
 
1,825

Increase (decrease) in net interest income
 
$
50,372

 
$
(15,496
)
 
$
34,876

 
$
85,579

 
$
(17,545
)
 
$
68,034

Net Interest Income (Fully Taxable Equivalent Basis)
Three months ended June 30, 2014 and 2013
Net interest income increased by $34.9 million to $205.4 million for the three months ended June 30, 2014, compared to $170.5 million for the comparable 2013 period. Overall, we saw an increase in our net interest income primarily due to higher average loan and investment securities balances. These increases were partially offset by lower overall loan and investment yields.
The main factors affecting interest income and interest expense for the three months ended June 30, 2014, compared to the comparable 2013 period are discussed below:
Interest income for the three months ended June 30, 2014 increased by $35.9 million primarily due to:
An $18.7 million increase in interest income on investment securities to $64.6 million for the three months ended June 30, 2014, compared to $45.9 million for the comparable 2013 period. The increase was reflective of an increase in average investment securities balances of $4.8 billion as a result of deposit growth, offset by a decrease in the overall yield on our investment securities portfolio, which decreased 6 basis points to 1.71 percent. Lower reinvestment yields, resulting from a lower overall market rate environment and an increase in purchases of shorter term U.S. Treasury securities during the three months ended June 30, 2014, contributed to a decline of 13 basis points. The decline was partially offset by a 7 basis point benefit from lower premium amortization expense. As of June 30, 2014, the remaining unamortized premium balance, net of discounts, on our investment securities portfolio was $17.8 million (net of discounts of $85.3 million), compared to $99.6 million (net of discounts of $16.3 million) for the comparable 2013 period.
A $15.9 million increase in interest income on loans to $147.7 million for the three months ended June 30, 2014, compared to $131.8 million for the comparable 2013 period. This increase was reflective of an increase in average loan balances of $2.1 billion, partially offset by a decrease from both gross loan and loan fee yields. Gross loan yields, excluding loan interest recoveries and loan fees, decreased to 4.49 percent from 4.90 percent, reflective of a continued change in the mix of our overall loan portfolio. Loan fee yields decreased to 77 basis

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points, from 90 basis points, as a result of the decrease in regular amortizing fee income, fee income earned from early loan repayments and other nonrecurring loan fees. Loan growth through the second quarter of 2014 has primarily come from our venture capital/private equity loan portfolio which, on average, has lower yielding loans. Additionally, the overall low market rate environment and increased price competition have also impacted interest income.
Interest expense for the three months ended June 30, 2014 increased to $8.9 million, compared to $7.9 million for the comparable 2013 period. The increase in interest expense was primarily from interest-bearing money market deposits of $1.0 million, mainly attributable to growth of our average money market deposits of $2.1 billion.
Six months ended June 30, 2014 and 2013
Net interest income increased by $68.0 million to $402.1 million for the six months ended June 30, 2014, compared to $334.1 million for the comparable 2013 period. Overall, we saw an increase in our net interest income primarily due to higher average loan balances and growth in our investment securities portfolio, which has increased as a result of the continued growth in deposits. These increases were partially offset by lower yields earned on our loans.
The main factors affecting interest income for the six months ended June 30, 2014, compared to the comparable 2013 period are discussed below:
Interest income for the six months ended June 30, 2014 increased by $69.9 million primarily due to:
A $40.3 million increase in interest income on loans, primarily due to an increase in average loan balances of $2.1 billion. In addition, driven by early loan repayments, non-recurring loan fee income increased $6.1 million to $18.1 million for the six months ended June 30, 2014 compared to $12.0 million for the comparable 2013 period. Gross loan yields, excluding loan interest recoveries and loan fees, decreased to 4.53 percent from 4.92 percent, reflective of a continued change in the mix of our overall loan portfolio. As mentioned above, our loan growth through the second quarter of 2014 has primarily come from our venture capital/private equity loan portfolio which, on average, has lower yielding loans. Additionally, the overall low market rate environment and increased price competition have also impacted interest income. The decrease in gross loan yields was partially offset by loan interest recoveries of $3.3 million for the six months ended June 30, 2014, compared to $0.6 million for the comparable 2013 period.
A $27.4 million increase in interest income on investment securities, with the majority of the increase due to a $3.1 billion increase in average balances due to strong deposit growth.
Interest expense for the six months ended June 30, 2014 increased to $17.6 million, compared to $15.7 million for the comparable 2013 period. The increase in interest expense was primarily from interest-bearing money market deposits of $1.9 million, mainly attributable to growth of our average money market deposits of $1.8 billion.
Net Interest Margin (Fully Taxable Equivalent Basis)
Our net interest margin decreased by 61 basis points to 2.79 percent for the three months ended June 30, 2014, compared to 3.40 percent for the comparable 2013 period.
Our net interest margin decreased by 37 basis points to 2.95 percent for the six months ended June 30, 2014, compared to 3.32 percent for the comparable 2013 period.
The decrease in our net interest margin for both the three and six months ended June 30, 2014, was primarily reflective of the shift in the mix of our interest-earning assets as a result of the significant growth in deposits (higher average cash and investment securities balances to deposits and lower average loan balances to deposits) and lower overall loan yield, partially offset by lower premium amortization expense on investment securities. Our loan portfolio (higher-yielding assets) comprised 38 percent, and 40 percent, of our average interest-earning assets during the three and six months ended June 30, 2014, respectively, compared to 45 percent and 44 percent, respectively, for the comparable 2013 periods.
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 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 six months ended June 30, 2014 and 2013:

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Table of Contents

Average Balances, Rates and Yields for the Three Months Ended June 30, 2014 and 2013
 
 
Three months ended June 30,
 
 
2014
 
2013
(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)
 
$
3,210,218

 
$
1,943

 
0.24
%
 
$
693,297

 
$
734

 
0.42
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
13,342,544

 
53,915

 
1.62

 
10,342,873

 
44,657

 
1.73

Non-taxable (3)
 
54,721

 
815

 
5.97

 
82,943

 
1,242

 
6.01

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
1,765,204

 
9,509

 
2.16

 

 

 

Non-taxable (3)
 
28,494

 
406

 
5.72

 

 

 

Total loans, net of unearned income (4) (5)
 
11,080,602

 
147,680

 
5.35

 
9,022,173

 
131,785

 
5.86

Total interest-earning assets
 
29,481,783

 
214,268

 
2.91

 
20,141,286

 
178,418

 
3.55

Cash and due from banks
 
60,373

 
 
 
 
 
299,886

 
 
 
 
Allowance for loan losses
 
(128,465
)
 
 
 
 
 
(118,635
)
 
 
 
 
Other assets (6)
 
2,331,939

 
 
 
 
 
1,770,761

 
 
 
 
Total assets
 
$
31,745,630

 
 
 
 
 
$
22,093,298

 
 
 
 
Funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
NOW deposits
 
$
159,316

 
$
155

 
0.39
%
 
$
140,725

 
$
122

 
0.35
%
Money market deposits
 
5,338,785

 
2,561

 
0.19

 
3,220,618

 
1,552

 
0.19

Money market deposits in foreign offices
 
201,821

 
38

 
0.08

 
133,084

 
32

 
0.10

Time deposits
 
150,731

 
92

 
0.24

 
179,361

 
169

 
0.38

Sweep deposits in foreign offices
 
1,853,930

 
222

 
0.05

 
1,682,901

 
210

 
0.05

Total interest-bearing deposits
 
7,704,583

 
3,068

 
0.16

 
5,356,689

 
2,085

 
0.16

Short-term borrowings
 
4,554

 

 

 
24,019

 
43

 
0.72

5.375% Senior Notes
 
348,284

 
4,830

 
5.56

 
348,066

 
4,823

 
5.56

Junior Subordinated Debentures
 
54,962

 
848

 
6.19

 
55,138

 
832

 
6.05

6.05% Subordinated Notes
 
51,470

 
130

 
1.01

 
53,766

 
119

 
0.89

Total interest-bearing liabilities
 
8,163,853

 
8,876

 
0.44

 
5,837,678

 
7,902

 
0.54

Portion of noninterest-bearing funding sources
 
21,317,930

 
 
 
 
 
14,303,608

 
 
 
 
Total funding sources
 
29,481,783

 
8,876

 
0.12

 
20,141,286

 
7,902

 
0.15

Noninterest-bearing funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
19,472,542

 
 
 
 
 
13,257,481

 
 
 
 
Other liabilities
 
398,492

 
 
 
 
 
290,381

 
 
 
 
SVBFG stockholders’ equity
 
2,397,386

 
 
 
 
 
1,924,902

 
 
 
 
Noncontrolling interests
 
1,313,357

 
 
 
 
 
782,856

 
 
 
 
Portion used to fund interest-earning assets
 
(21,317,930
)
 
 
 
 
 
(14,303,608
)
 
 
 
 
Total liabilities, noncontrolling interest, and SVBFG stockholders’ equity
 
$
31,745,630

 
 
 
 
 
$
22,093,298

 
 
 
 
Net interest income and margin
 
 
 
$
205,392

 
2.79
%
 
 
 
$
170,516

 
3.40
%
Total deposits
 
$
27,177,125

 
 
 
 
 
$
18,614,170

 
 
 
 
Reconciliation to reported net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments for taxable equivalent basis
 
 
 
(427
)
 
 
 
 
 
(435
)
 
 
Net interest income, as reported
 
 
 
$
204,965

 
 
 
 
 
$
170,081

 
 
 
 
(1)
Includes average interest-earning deposits in other financial institutions of $342 million and $157 million for the three months ended June 30, 2014 and 2013, respectively. For the three months ended June 30, 2014 and 2013, balances also include $2.5 billion and $404 million, respectively, deposited at the Federal Reserve Bank, earning interest at the Federal Funds target rate.
(2)
Yields on available-for-sale securities are based on amortized cost, and therefore do not give effect to unrealized changes in fair value that are reflected in other comprehensive income.
(3)
Interest income on non-taxable investment securities are 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 $21.3 million and $20.3 million for the three months ended June 30, 2014 and 2013, respectively.

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(6)
Average investment securities of $1.8 billion and $1.4 billion for the three months ended June 30, 2014 and 2013, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable and other securities.
Average Balances, Rates and Yields for the Six Months Ended June 30, 2014 and 2013
 
 
Six months ended June 30,
 
 
2014
 
2013
(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)
 
$
2,848,215

 
$
3,579

 
0.25
%
 
$
757,501

 
$
1,453

 
0.39
%
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
12,758,090

 
108,335

 
1.71

 
10,572,031

 
90,409

 
1.72

Non-taxable (3)
 
68,177

 
2,040

 
6.03

 
83,374

 
2,471

 
5.98

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
887,478

 
9,509

 
2.16

 

 

 

Non-taxable (3)
 
14,326

 
406

 
5.71

 

 

 

Total loans, net of unearned income (4) (5)
 
10,925,007

 
295,852

 
5.46

 
8,852,488

 
255,529

 
5.82

Total interest-earning assets
 
27,501,293

 
419,721

 
3.08

 
20,265,394

 
349,862

 
3.48

Cash and due from banks
 
161,862

 
 
 
 
 
289,590

 
 
 
 
Allowance for loan losses
 
(134,734
)
 
 
 
 
 
(117,069
)
 
 
 
 
Other assets (5)
 
2,239,200

 
 
 
 
 
1,765,402

 
 
 
 
Total assets
 
$
29,767,621

 
 
 
 
 
$
22,203,317

 
 
 
 
Funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
NOW deposits
 
$
155,050

 
$
291

 
0.38
%
 
$
138,095

 
$
239

 
0.35
%
Money market deposits
 
4,962,911

 
4,973

 
0.20

 
3,132,310

 
3,047

 
0.20

Money market deposits in foreign offices
 
196,796

 
84

 
0.09

 
124,420

 
60

 
0.10

Time deposits
 
159,343

 
192

 
0.24

 
175,900

 
342

 
0.39

Sweep deposits in foreign offices
 
1,778,665

 
432

 
0.05

 
1,807,008

 
448

 
0.05

Total interest-bearing deposits
 
7,252,765

 
5,972

 
0.17

 
5,377,733

 
4,136

 
0.16

Short-term borrowings
 
4,768

 

 

 
49,339

 
71

 
0.29

5.375% Senior Notes
 
348,256

 
9,658

 
5.59

 
348,040

 
9,644

 
5.59

Junior Subordinated Debentures
 
54,984

 
1,687

 
6.19

 
55,159

 
1,664

 
6.08

6.05% Subordinated Notes
 
51,717

 
255

 
0.99

 
54,023

 
232

 
0.87

Total interest-bearing liabilities
 
7,712,490

 
17,572

 
0.46

 
5,884,294

 
15,747

 
0.54

Portion of noninterest-bearing funding sources
 
19,788,803

 
 
 
 
 
14,381,100

 
 
 
 
Total funding sources
 
27,501,293

 
17,572

 
0.13

 
20,265,394

 
15,747

 
0.16

Noninterest-bearing funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
18,183,692

 
 
 
 
 
13,321,635

 
 
 
 
Other liabilities
 
397,354

 
 
 
 
 
324,954

 
 
 
 
SVBFG stockholders’ equity
 
2,249,425

 
 
 
 
 
1,895,768

 
 
 
 
Noncontrolling interests
 
1,224,660

 
 
 
 
 
776,666

 
 
 
 
Portion used to fund interest-earning assets
 
(19,788,803
)
 
 
 
 
 
(14,381,100
)
 
 
 
 
Total liabilities, noncontrolling interest, and SVBFG stockholders’ equity
 
$
29,767,621

 
 
 
 
 
$
22,203,317

 
 
 
 
Net interest income and margin
 
 
 
$
402,149

 
2.95
%
 
 
 
$
334,115

 
3.32
%
Total deposits
 
$
25,436,457

 
 
 
 
 
$
18,699,368

 
 
 
 
Reconciliation to reported net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments for taxable equivalent basis
 
 
 
(856
)
 
 
 
 
 
(865
)
 
 
Net interest income, as reported
 
 
 
$
401,293

 
 
 
 
 
$
333,250

 
 
 
 
(1)
Includes average interest-earning deposits in other financial institutions of $330 million and $167 million for the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, balances also include $2.3 billion and $0.4 billion, respectively, deposited at the FRB, earning interest at the Federal Funds target rate.
(2)
Yields on available-for-sale securities are based on amortized cost, and therefore do not give effect to unrealized changes in fair value that are reflected in other comprehensive income.
(3)
Interest income on non-taxable investment securities are presented on a fully taxable-equivalent basis using the federal statutory income tax rate of 35.0 percent for all periods presented.

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(4)
Nonaccrual loans are reflected in the average balances of loans.
(5)
Interest income includes loan fees of $46 million and $37 million for the six months ended June 30, 2014 and 2013, respectively.
(6)
Average investment securities of $1.7 billion and $1.4 billion for the six months ended June 30, 2014 and 2013, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable and other securities.
Provision for Loan Losses
Our provision for loan losses 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 risks of the loan portfolio. The following table summarizes our allowance for loan losses for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Allowance for loan losses, beginning balance
 
$
123,542

 
$
112,205

 
$
142,886

 
$
110,651

Provision for loan losses
 
1,947

 
18,572

 
2,441

 
24,385

Gross loan charge-offs
 
(6,382
)
 
(15,375
)
 
(27,532
)
 
(21,001
)
Loan recoveries
 
1,621

 
4,169

 
2,933

 
5,536

Allowance for loan losses, ending balance
 
$
120,728

 
$
119,571

 
$
120,728

 
$
119,571

Provision for loan losses as a percentage of period-end total gross loans (annualized)
 
0.07
%
 
0.77
%
 
0.04
%
 
0.51
%
Gross loan charge-offs as a percentage of average total gross loans (annualized)
 
0.23

 
0.68

 
0.50

 
0.47

Net loan charge-offs as a percentage of average total gross loans (annualized)
 
0.17

 
0.49

 
0.45

 
0.35

Allowance for loan losses as a percentage of period-end total gross loans
 
1.06

 
1.23

 
1.06

 
1.23

Period-end total gross loans
 
$
11,437,300

 
$
9,705,464

 
$
11,437,300

 
$
9,705,464

Average total gross loans
 
11,166,021

 
9,100,420

 
11,010,328

 
8,929,012

Our provision for loan losses was $1.9 million for the three months ended June 30, 2014, compared to a provision of $18.6 million for the comparable 2013 period. The provision of $1.9 million for the second quarter of 2014 was primarily driven by $5.3 million from period-end loan growth and $4.8 million in net charge-offs, offset by a reserve release of $6.0 million due to the improvement of the credit quality of our overall loan portfolio and a $2.1 million decrease in the reserve for impaired loans resulting from a decrease in impaired loan balances from repayments and charge-offs. The provision of $18.6 million for the three months ended June 30, 2013 was primarily driven by $8.8 million from period-end loan growth, as well as to provide for net charge-offs and a modest increase in our reserve for impaired loans.
Gross loan charge-offs of $6.4 million for the second quarter of 2014 included $3.9 million of charge-offs from four software clients and $1.7 million from one client in our other commercial loans portfolio, of which a total of $1.4 million was previously reserved for in the first quarter of 2014. Net loan charge-offs of $4.8 million represented 0.17 percent of average total gross loans, compared to net charge offs of $11.2 million, or 0.49 percent of average total gross loans for the comparable 2013 period. The decrease in net charge offs, as a percentage of average total gross loans, of 32 basis points reflected the continued improvement in the credit quality of our loan portfolio.
We had a provision for loan losses of $2.4 million for the six months ended June 30, 2014, compared to a provision of $24.4 million for the comparable 2013 period. The provision of $2.4 million for the six months ended June 30, 2014 was primarily due to $24.6 million of net charge-offs and $5.2 million from period-end loan growth, offset by a $16.6 million decrease in the reserve for impaired loans resulting from a decrease in impaired loan balances from repayments and charge-offs and a reserve release of $10.8 million due to the improvement of the credit quality of our overall loan portfolio.
Gross loan charge-offs of $27.5 million for the six months ended June 30, 2014 were primarily from our hardware and software client portfolios. Loan recoveries of $2.9 million for the six months ended June 30, 2014 were primarily from our hardware client portfolio. The provision of $24.4 million for the six months ended June 30, 2013 was primarily driven by net charge-offs of $15.5 million and period-end loan growth.
See “Consolidated Financial Condition—Credit Quality and Allowance for Loan Losses” below and Note 6—“Loans and Allowance for Loan Losses” 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.

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Noninterest Income
A summary of noninterest income for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Non-GAAP core fee income:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange fees
 
$
17,928

 
$
13,667

 
31.2
 %
 
$
35,124

 
$
27,863

 
26.1
 %
Credit card fees
 
10,249

 
7,609

 
34.7

 
20,531

 
15,057

 
36.4

Deposit service charges
 
9,611

 
8,907

 
7.9

 
19,218

 
17,700

 
8.6

Lending related fees (1)
 
5,876

 
4,596

 
27.9

 
12,179

 
8,570

 
42.1

Client investment fees
 
3,519

 
3,524

 
(0.1
)
 
6,937

 
6,999

 
(0.9
)
Letters of credit and standby letters of credit fees
 
2,810

 
3,654

 
(23.1
)
 
6,950

 
7,089

 
(2.0
)
Total non-GAAP core fee income (2)
 
49,993

 
41,957

 
19.2

 
100,939

 
83,278

 
21.2

(Losses) gains on investment securities, net
 
(57,320
)
 
40,561

 
NM

 
166,592

 
67,999

 
145.0

Gains on derivative instruments, net
 
12,775

 
8,087

 
58.0

 
36,942

 
18,379

 
101.0

Other
 
8,762

 
7,634

 
14.8

 
19,962

 
7,187

 
177.8

Total noninterest income
 
$
14,210

 
$
98,239

 
(85.5
)
 
$
324,435

 
$
176,843

 
83.5

 
NM - Not meaningful
(1)
Lending related fees consists of fee income associated with credit commitments such as unused commitment fees, syndication fees and other loan processing fees and, historically, has been included in other noninterest income. Prior period amounts have been reclassified to conform to the current period presentation.
(2)
The following table provides a reconciliation of GAAP noninterest income to non-GAAP core fee income:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
GAAP noninterest income (as reported)
 
$
14,210

 
$
98,239

 
(85.5
)%
 
$
324,435

 
$
176,843

 
83.5
%
Less: (losses) gains on investment securities, net
 
(57,320
)
 
40,561

 
NM

 
166,592

 
67,999

 
145.0

Less: gains on derivative instruments, net
 
12,775

 
8,087

 
58.0

 
36,942

 
18,379

 
101.0

Less: other noninterest income
 
8,762

 
7,634

 
14.8

 
19,962

 
7,187

 
177.8

Non-GAAP core fee income (1)
 
$
49,993

 
$
41,957

 
19.2

 
$
100,939

 
$
83,278

 
21.2

 
NM - Not meaningful
(1)
This non-GAAP measure represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control.
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 Debt Fund Investments, the entire income or loss from funds where we own significantly less than 100% of the investment. We are required under GAAP to consolidate 100% of the results of entities that we are deemed to control, 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 non-GAAP tables presented below for noninterest income and net gains on investment securities exclude noncontrolling interests. 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 certain items that represent income attributable to investors other than us and our 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, not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.

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The following table provides a summary of non-GAAP noninterest income, net of noncontrolling interests for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
Non-GAAP noninterest income, net of  noncontrolling interests (Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
GAAP noninterest income (as reported)
 
$
14,210


$
98,239

 
(85.5
)%
 
$
324,435


$
176,843

 
83.5
%
Less: (losses) income attributable to noncontrolling interests, including carried interest
 
(35,325
)
 
30,751

 
NM

 
151,393

 
53,241

 
184.4

Non-GAAP noninterest income, net of noncontrolling interests
 
$
49,535

 
$
67,488

 
(26.6
)
 
$
173,042

 
$
123,602

 
40.0

 
NM - Not meaningful
(Losses) gains on Investment Securities, Net
Net (losses) gains on investment securities include both gains and losses from our non-marketable and other securities, as well as gains and losses from sales of our available-for-sale securities portfolio, when applicable.
Our available-for-sale, and held-to-maturity, securities portfolios are primarily fixed income investment portfolios that are managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. Sales of equity securities, held as a result of our exercised warrants, results in net gains or losses on investment securities and is within the guidelines of our investment policy of managing our liquidity position and interest rate risk. Though infrequent, the sale of investment securities in our fixed income portfolio may result in net gains or losses and is also within the guidelines of our investment policy.
Our non-marketable and other securities portfolio primarily represents investments in venture capital and private equity funds, venture debt funds and private and public portfolio companies. We experience variability in the performance of our non-marketable and other securities from quarter to quarter, 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, or changes in liquidity events and general economic and market conditions. Unrealized gains from non-marketable and other 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 from investment securities and 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 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, the actual sales of securities and the timing of such actual sales.
For the three months ended June 30, 2014, we had net losses on investment securities of $57.3 million, compared to $40.6 million in net gains for the comparable 2013 period. Net losses on investment securities, net of noncontrolling interests, were $22.1 million for the three months ended June 30, 2014, compared to net gains of $9.5 million for the comparable 2013 period.
Net losses, net of noncontrolling interests, of $22.1 million for the three months ended June 30, 2014 were primarily driven by the following:
Losses of $16.8 million from our managed direct venture funds, mainly due to the decrease in the public company stock price of FireEye.
Losses of $16.5 million from our equity securities holdings, primarily attributable to the sale of shares of FireEye common stock (acquired through the exercise of certain warrants), the stock price of which decreased since March 31, 2014.
Gains of $8.6 million from our strategic and other investments, primarily driven by distributions from strategic venture capital fund investments as well as the sale of one of our direct equity investments, for which we recorded a realized gain of $4.7 million.
Gains of $3.0 million from our managed funds of funds, primarily related to unrealized valuation adjustments of two of our funds of funds.

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For the six months ended June 30, 2014, we had net gains on investment securities of $166.6 million, compared to $68.0 million for the comparable 2013 period. Net gains on investment securities, net of noncontrolling interests, were $15.3 million for the six months ended June 30, 2014, compared to net gains of $14.6 million for the comparable 2013 period.
The losses, net of noncontrolling interests, of $15.3 million for the six months ended June 30, 2014 were primarily driven by the following:
Losses of $16.5 million from our equity securities holdings, primarily attributable to the sale of shares of FireEye common stock (acquired through the exercise of certain warrants), the stock price of which decreased since March 31, 2014.
Gains of $13.0 million from our managed funds of funds, primarily related to unrealized valuation adjustments of three of our funds of funds and.
Gains of $12.3 million from our strategic and other investments, primarily driven by distributions from strategic venture capital fund investments as well as the acquisition of one of our direct equity investments during the second quarter of 2014, for which we recorded a gain of $4.7 million.
Gains of $3.8 million from our managed direct venture funds, driven by net valuation gains from stock performance of public companies.
Gains of $3.0 million from our investments in debt funds, primarily from unrealized valuation increases from the investments within the funds.
The following tables provide a summary of non-GAAP net gains on investment securities, net of noncontrolling interests, for the three and six months ended June 30, 2014 and 2013:
(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 June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Total (losses) gains on investment securities, net
 
$
38,478

 
$
(87,548
)
 
$
(356
)
 
$
(16,480
)
 
$
8,586

 
$
(57,320
)
Less: (losses) gains attributable to noncontrolling interests, including carried interest
 
35,507

 
(70,746
)
 
(1
)
 

 

 
(35,240
)
Non-GAAP net (losses) gains on investment securities, net of noncontrolling interests
 
$
2,971

 
$
(16,802
)
 
$
(355
)
 
$
(16,480
)
 
$
8,586

 
$
(22,080
)
Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Total gains on investment securities, net
 
$
33,626

 
$
987

 
$
1,799

 
$
775

 
$
3,374

 
$
40,561

Less: gains (losses) attributable to noncontrolling interests, including carried interest
 
30,021

 
1,047

 
(1
)
 

 

 
31,067

Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests
 
$
3,605

 
$
(60
)
 
$
1,800

 
$
775

 
$
3,374

 
$
9,494

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Total gains (losses) on investment securities, net
 
$
149,926

 
$
18,154

 
$
2,645

 
$
(16,420
)
 
$
12,287

 
$
166,592

Less: gains (losses) attributable to noncontrolling interests, including carried interest
 
136,958

 
14,368

 
(14
)
 

 

 
151,312

Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests
 
$
12,968

 
$
3,786

 
$
2,659

 
$
(16,420
)
 
$
12,287

 
$
15,280

Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Total gains on investment securities, net
 
$
56,428

 
$
2,843

 
$
3,552

 
$
730

 
$
4,446

 
$
67,999

Less: gains (losses) attributable to noncontrolling interests, including carried interest
 
50,823

 
2,543

 
(3
)
 

 

 
53,363

Non-GAAP net gains on investment securities, net of noncontrolling interests
 
$
5,605

 
$
300

 
$
3,555

 
$
730

 
$
4,446

 
$
14,636


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Gains on Derivative Instruments, Net
A summary of gains on derivative instruments, net, for the three and six months ended June 30, 2014 and 2013 is as follows:
  
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Equity warrant assets (1)
 
 
 
 
 
 
 
 
 
 
 
 
Gains on exercises, net
 
$
3,553

 
$
1,611

 
120.5
 %
 
$
21,955

 
$
2,425

 
NM

Cancellations and expirations
 
(429
)
 
(118
)
 
NM

 
(516
)
 
(222
)
 
132.4

Changes in fair value
 
9,205

 
5,697

 
61.6

 
16,263

 
8,492

 
91.5

Net gains on equity warrant assets
 
12,329

 
7,190

 
71.5

 
37,702

 
10,695

 
NM

Gains on foreign exchange forward contracts, net:
 
 
 
 
 
 
 
 
 
 
 
 
Gains on client foreign exchange forward contracts, net (2)
 
170

 
124

 
37.1

 
472

 
173

 
172.8

Gains (losses) on internal foreign exchange forward contracts, net (3)
 
538

 
712

 
(24.4
)
 
(491
)
 
6,912

 
(107.1
)
Total gains (losses) on foreign exchange forward contracts, net
 
708

 
836

 
(15.3
)
 
(19
)
 
7,085

 
(100.3
)
Changes in fair value of interest rate swaps
 
(13
)
 
(33
)
 
(60.6
)
 
(25
)
 
27

 
(192.6
)
Net (losses) gains on other derivatives (4)
 
(249
)
 
94

 
NM

 
(716
)
 
572

 
NM

Gains on derivative instruments, net
 
$
12,775

 
$
8,087

 
58.0

 
$
36,942

 
$
18,379

 
101.0

 
 
 
 NM—Not meaningful
(1)
At June 30, 2014, we held warrants in 1,383 companies, compared to 1,302 companies at June 30, 2013.
(2)
Represents the net gains for foreign exchange forward contracts executed on behalf of clients, excluding any spread or fees earned in connection with these trades.
(3)
Represents the change in the fair value of foreign exchange forward contracts used to economically reduce our foreign exchange exposure related to certain foreign currency denominated instruments. Refer to revaluation of foreign currency instruments included in the line item "other" within noninterest income for the amount we were able to partially offset.
(4)
Primarily represents the change in fair value of loan conversion options held by SVB Financial.
Net gains on derivative instruments were $12.8 million for the three months ended June 30, 2014, compared to net gains of $8.1 million for the comparable 2013 period. The increase in net gains on derivative instruments was primarily attributable to the following:
Net gains on equity warrant assets of $12.3 million for the three months ended June 30, 2014, compared to $7.2 million for the comparable 2013 period. The $5.1 million increase was primarily due to net gains of $9.2 million from changes in warrant valuations, primarily attributable to our private company warrant portfolio, compared to net gains of $5.7 million for the comparable 2013 period.
Net gains of $0.5 million on foreign exchange forward contracts hedging certain of our foreign currency denominated instruments for the three months ended June 30, 2014, compared to $0.7 million for the comparable 2013 period. The lower gains for the three months ended June 30, 2014 were primarily attributable to the weakening of the U.S. Dollar against the Euro and Pound Sterling, and were offset by losses of $0.7 million from the revaluation of foreign currency denominated instruments that are included in the line item "other" within noninterest income as noted below.
Net gains on derivative instruments were $36.9 million for the six months ended June 30, 2014, compared to net gains of $18.4 million for the comparable 2013 period. The increase in net gains on derivative instruments was primarily attributable to the following:
Net gains on equity warrant assets of $37.7 million for the six months ended June 30, 2014, compared to $10.7 million for the comparable 2013 period. The $27.0 million increase was primarily due to net gains of $22.0 million from the exercise of equity warrant assets, primarily reflective of the exercise and conversion of our FireEye equity warrants, compared to $2.4 million for the comparable 2013 period. Additionally, net gains of $16.3 million came from changes

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in warrant valuations driven by valuation increases from IPO and M&A activity, primarily consisting of unrealized valuation gains from holdings in existing public companies in our equity warrant portfolio, compared to net gains of $8.5 million for the comparable 2013 period.
Net losses of $0.5 million on foreign exchange forward contracts hedging certain of our foreign currency denominated instruments for the six months ended June 30, 2014, compared to net gains of $6.9 million for the comparable 2013 period. The losses recognized for the three months ended June 30, 2014 were primarily attributable to the strengthening of the U.S. Dollar against the Euro and Pound Sterling and were offset by gains of $0.3 million from the revaluation of foreign currency denominated instruments that are included in the line item "other" within noninterest income as noted below.
Foreign Exchange Fees
Foreign exchange fees were $17.9 million and $35.1 million for the three and six months ended June 30, 2014, respectively, compared to $13.7 million and $27.9 million for the comparable 2013 periods. The increase was primarily due to improved business conditions for our clients, which has resulted in an increase in the number of trades and commissioned notional volumes.
Credit Card Fees
Credit card fees were $10.2 million and $20.5 million for the three and six months ended June 30, 2014, respectively, compared to $7.6 million and $15.1 million for the comparable 2013 periods. The increase reflects increased client utilization of our credit card products and custom payment solutions from new and existing clients.
Lending Related Fees
Lending related fees were $5.9 million and $12.2 million for the three and six months ended June 30, 2014, respectively, compared to $4.6 million and $8.6 million for the comparable 2013 periods. The increase was primarily due to an increase in unused commitment fees as our loan commitments available for funding balance increased from $9.8 billion to $13.6 billion.
Client Investment Fees
Client investment fees were $3.5 million and $6.9 million for the three and six months ended June 30, 2014, respectively, compared to $3.5 million and $7.0 million for the comparable 2013 periods. The nominal change was reflective of lower margins earned on certain products due to the overall low rates in the short-term fixed income markets. There was an increase in average client investment funds driven by our clients’ increased utilization of our off-balance sheet products managed by SVB Asset Management, as well as our sweep product. The increases in average balances were partially offset by historically low yields on certain products. The following table summarizes average client investment funds for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in millions)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Client directed investment assets (1)
 
$
7,513

 
$
6,847

 
9.7
%
 
$
7,347

 
$
6,872

 
6.9
%
Client investment assets under management (2)
 
16,102

 
11,498

 
40.0

 
14,808

 
11,403

 
29.9

Sweep money market funds
 
6,537

 
4,856

 
34.6

 
6,489

 
4,570

 
42.0

Total average client investment funds (3)
 
$
30,152

 
$
23,201

 
30.0

 
$
28,644

 
$
22,845

 
25.4

 
 
(1)
Comprised of mutual funds and Repurchase Agreement Program assets.
(2)
These funds represent investments in third party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(3)
Client investment funds are maintained at third party financial institutions and are not recorded on our balance sheet.

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The following table summarizes period-end client investment funds at June 30, 2014 and December 31, 2013:
(Dollars in millions)
 
June 30, 2014
 
December 31, 2013
 
% Change
Client directed investment assets
 
$
6,979

 
$
7,073

 
(1.3
)%
Client investment assets under management
 
16,960

 
12,677

 
33.8

Sweep money market funds
 
6,437

 
6,613

 
(2.7
)
Total period-end client investment funds
 
$
30,376

 
$
26,363

 
15.2

Other Noninterest Income
A summary of other noninterest income for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Fund management fees
 
$
3,559

 
$
2,940

 
21.1
%
 
$
6,314

 
$
5,709

 
10.6
 %
Service-based fee income
 
2,252

 
2,001

 
12.5

 
4,279

 
3,805

 
12.5

(Losses) gains on revaluation of foreign currency instruments (1)
 
(685
)
 
(586
)
 
16.9

 
293

 
(7,650
)
 
(103.8
)
Other (2)
 
3,636

 
3,279

 
10.9

 
9,076

 
5,323

 
70.5

Total other noninterest income
 
$
8,762

 
$
7,634

 
14.8

 
$
19,962

 
$
7,187

 
177.8

 
 
(1)
Represents the revaluation of foreign currency denominated financial instruments issued and held by us, primarily loans, deposits and cash. These instruments partially offset the impact of changes in internal foreign exchange forward contracts. Refer to internal foreign exchange forward contracts, net included within gains on derivative instruments as noted above.
(2)
Includes dividends on FHLB/FRB stock, correspondent bank rebate income and other fee income.

Other noninterest income was $8.8 million for the three months ended June 30, 2014, compared to $7.6 million for the comparable 2013 period. The increase of $1.2 million for the three month period was primarily due to an increase in fund management fees and other noninterest income.
The increase of $12.8 million for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was primarily due to the following:
Increase of $7.9 million from gains on the revaluation of foreign currency instruments of $0.3 million for the six months ended June 30, 2014, compared to losses of $7.7 million for the comparable 2013 period. The gain was offset by net losses of $0.5 million for the six months ended June 30, 2014, compared to net gains of $6.9 million for the comparable period of 2013, on internal foreign exchange forward contracts economically hedging certain of these instruments, which are included within noninterest income in the line item "gains on derivative instruments" as noted above. This resulted in net losses of $0.2 million and $0.8 million for the six months ended June 30, 2014 and 2013, respectively.
Increase of $3.8 million in other income primarily related to a gain on one of our foreign investment holdings.
Overall Summary of Investments in FireEye

During the six months ended June 30, 2014: (i) we sold all shares of FireEye common stock acquired through the exercise of certain warrants, and (ii) our managed direct venture funds distributed certain shares of FireEye common stock to the underlying limited partners of the funds. As of June 30, 2014, we still held through our managed funds approximately 4.9 million shares of FireEye common stock (“FireEye Shares”).

During the six months ended June 30, 2014, net gains, related to FireEye, were $29.3 million ($6.6 million net of noncontrolling interests) and consisted of the following:

$15.2 million gain from the exercise and conversion of our warrants during the first quarter of 2014 as we exercised the warrants at a share price of $88.19 on March 4, 2014 compared to the December 31, 2013 price of $43.61,

$14.0 million of realized losses from the sales of all FireEye warrant shares,


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$66.5 million ($12.8 million net of noncontrolling interests) of realized gains from the distribution of shares held by our managed direct venture funds, and

$38.4 million ($7.5 million net of noncontrolling interests) of unrealized losses primarily from the decreased valuation of the remaining FireEye Shares held through our managed funds.

From June 30, 2014 to August 6, 2014, the market price of FireEye's common stock decreased by 24% from $40.55 to $30.78. Based on this decrease, we would expect a total decrease in the pre-tax valuation of the FireEye Shares during this time period of approximately $48 million ($9 million, net of noncontrolling interests). (This is a non-GAAP financial measure. See reconciliation below.)

Investment gains or losses relating to the FireEye Shares are subject to FireEye’s stock price, which is subject to market conditions and various other factors. Additionally, the decrease in the pre-tax valuation of the FireEye Shares, specifically noted in the paragraph above, are currently unrealized losses. Any losses (or gains) relating to the FireEye Shares that will actually become realized is subject to a variety of factors, including among other things, changes in prevailing market prices and timing of any sales of securities, which are subject to our securities sales and governance processes. None of the FireEye related investments currently are subject to a lock-up agreement.

The table below sets forth a reconciliation of the non-GAAP financial measure discussed above:

Non-GAAP losses on investments securities, net of noncontrolling interests (Dollars in millions)
 
Through August 6, 2014
GAAP losses on certain non-marketable and other securities
 
$
48

Less: losses attributable to noncontrolling interests, including carried interest
 
39

Non-GAAP losses on certain non-marketable and other securities, net of noncontrolling interests
 
$
9


Noninterest Expense
A summary of noninterest expense for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014

2013
 
% Change
 
2014
 
2013
 
% Change
Compensation and benefits
 
$
99,820

 
$
84,742

 
17.8
%
 
$
202,327

 
$
173,446

 
16.7
 %
Professional services
 
21,113

 
16,633

 
26.9

 
42,302

 
33,793

 
25.2

Premises and equipment
 
12,053

 
11,402

 
5.7

 
23,635

 
22,127

 
6.8

Business development and travel
 
9,249

 
7,783

 
18.8

 
19,443

 
16,055

 
21.1

Net occupancy
 
7,680

 
5,795

 
32.5

 
15,000

 
11,562

 
29.7

FDIC assessments
 
4,945

 
2,853

 
73.3

 
9,073

 
6,235

 
45.5

Correspondent bank fees
 
3,274

 
3,049

 
7.4

 
6,477

 
6,104

 
6.1

Provision for unfunded credit commitments
 
2,185

 
1,347

 
62.2

 
3,308

 
3,361

 
(1.6
)
Other
 
13,127

 
9,688

 
35.5

 
24,317

 
19,623

 
23.9

Total noninterest expense
 
$
173,446

 
$
143,292

 
21.0

 
$
345,882

 
$
292,306

 
18.3

Included in noninterest expense is expense attributable to noncontrolling interests. See below for a summary of non-GAAP noninterest expense and non-GAAP 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 operating efficiency ratio, which excludes noncontrolling interests. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by:

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(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 operating efficiency ratio, both net of noncontrolling interests for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
Non-GAAP operating efficiency ratio, net of noncontrolling interests (Dollars in thousands, except ratios)
 
2014

2013
 
% Change
 
2013
 
2013
 
% Change
GAAP noninterest expense
 
$
173,446

 
$
143,292

 
21.0
 %
 
$
345,882

 
$
292,306

 
18.3
 %
Less: amounts attributable to noncontrolling interests
 
5,267

 
2,867

 
83.7

 
8,588

 
5,727

 
50.0

Non-GAAP noninterest expense, net of noncontrolling interests
 
$
168,179

 
$
140,425

 
19.8

 
$
337,294

 
$
286,579

 
17.7

GAAP taxable equivalent net interest income
 
$
205,392

 
$
170,516

 
20.5

 
$
402,149

 
$
334,115

 
20.4

Less: (losses) income attributable to noncontrolling interests
 
(5
)
 
20

 
(125.0
)
 
3

 
44

 
(93.2
)
Non-GAAP taxable equivalent net interest income, net of noncontrolling interests
 
$
205,397

 
$
170,496

 
20.5

 
$
402,146

 
$
334,071

 
20.4

GAAP noninterest income
 
$
14,210

 
$
98,239

 
(85.5
)
 
$
324,435

 
$
176,843

 
83.5

Non-GAAP noninterest income, net of noncontrolling interests
 
49,535

 
67,488

 
(26.6
)
 
173,042

 
123,602

 
40.0

GAAP taxable equivalent revenue
 
$
219,602

 
$
268,755

 
(18.3
)
 
$
726,584

 
$
510,958

 
42.2

Non-GAAP taxable equivalent revenue, net of noncontrolling interests
 
$
254,932

 
$
237,984

 
7.1

 
$
575,188

 
$
457,673

 
25.7

GAAP operating efficiency ratio
 
78.98
%
 
53.32
%
 
48.1

 
47.60
%
 
57.21
%
 
(16.8
)
Non-GAAP operating efficiency ratio (1)
 
65.97
%
 
59.01
%
 
11.8

 
58.64
%
 
62.62
%
 
(6.4
)
 
 
 
(1)
The non-GAAP operating efficiency ratio is calculated by dividing non-GAAP noninterest expense by non-GAAP total taxable-equivalent income.
Compensation and Benefits Expense
The following table provides a summary of our compensation and benefits expense for the three and six months ended June 30, 2014 and 2013:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Compensation and benefits
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and wages
 
$
45,157

 
$
39,209

 
15.2
%
 
$
89,510

 
$
78,532

 
14.0
%
Incentive compensation & ESOP
 
27,746

 
21,660

 
28.1

 
54,194

 
43,853

 
23.6

Other employee benefits (1)
 
26,917

 
23,873

 
12.8

 
58,623

 
51,061

 
14.8

Total compensation and benefits
 
$
99,820

 
$
84,742

 
17.8

 
$
202,327

 
$
173,446

 
16.7

Period-end full-time equivalent employees
 
1,786

 
1,657

 
7.8

 
1,786

 
1,657

 
7.8

Average full-time equivalent employees
 
1,768

 
1,657

 
6.7

 
1,751

 
1,656

 
5.7

 
 
(1)
Other employee benefits includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), warrant and retention program plans, agency fees and other employee related expenses.

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Compensation and benefits expense was $99.8 million for the three months ended June 30, 2014, compared to $84.7 million for the comparable 2013 period. The key changes in factors affecting compensation and benefits expense were as follows:
An increase of $5.9 million in salaries and wages expense, primarily due to annual merit increases effective March 2014 and an increase in the number of average FTEs. Average FTEs increased by 111 to 1,768 FTEs for the three months ended June 30, 2014, compared to 1,657 FTEs for the comparable 2013 period, primarily to support our product development, operational and sales and advisory teams, as well as to support our commercial banking operations and initiatives.
An increase of $6.1 million in incentive compensation and ESOP expense, primarily reflective of our strong performance in the first half of 2014 and an increase in the number of average FTEs compared to the second quarter of 2013.
An increase of $3.0 million in other employee benefits, primarily due to an increase in share-based plan expense mainly as a result of the increase in the valuation of our common stock as well as an increase in contract agency fees to support our marketing and commercial banking operations teams.
Compensation and benefits expense was $202.3 million for the six months ended June 30, 2014, compared to $173.4 million for the comparable 2013 period. The key changes in factors affecting compensation and benefits expense were as follows:
An increase of $11.0 million in salaries and wages expense, primarily due to annual merit increases effective March 2014 and an increase in the number of average FTEs. Average FTEs increased by 95 to 1,751 FTEs for the six months ended June 30, 2014, compared to 1,656 FTEs for the comparable 2013 period.
An increase of $10.3 million in incentive compensation and ESOP expense, primarily reflective of our strong performance in the first half of 2014 and an increase in the number of average FTEs compared to the first half of 2013.
An increase of $7.6 million in other employee benefits, primarily due to an increase in share-based plan expense mainly as a result of the increase in the valuation of our common stock as well as an increase in contract agency fees to support our commercial banking operations and marketing teams. The remaining increases related to various other employee benefits.
Our variable compensation plans primarily consist of our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, 401(k) and ESOP Plan, Retention Program and Warrant Incentive Plan (See descriptions in our 2013 Form 10-K). Total costs incurred under these plans were $30.2 million and $65.0 million for the three and six months ended June 30, 2014, respectively, compared to $25.2 million and $53.0 million for the comparable 2013 periods, respectively. These amounts are included in total compensation and benefits expense discussed above.
Professional Services
Professional services expense was $21.1 million and $42.3 million for the three and six months ended June 30, 2014, respectively, compared to $16.6 million and $33.8 million for the comparable 2013 periods. The increase was primarily due to increased consulting fees related to our ongoing business and IT infrastructure initiatives.
Business Development and Travel
Business development and travel was $9.2 million and $19.4 million for the three and six months ended June 30, 2014, respectively, compared to $7.8 million and $16.1 million for the comparable 2013 periods. The increase was primarily due to an increase in client related events supporting the growth of our business as well as employee related expenses due to the increase in average FTEs.
Net Occupancy
Net occupancy expense was $7.7 million and $15.0 million for the three and six months ended June 30, 2014, respectively, compared to $5.8 million and $11.6 million for the comparable 2013 periods. The increases were reflective of lease renewals at higher rates, reflective of market conditions, and the expansion of certain existing offices.
FDIC Assessments
FDIC assessments expense was $4.9 million and $9.1 million for the three and six months ended June 30, 2014, respectively, compared to $2.9 million and $6.2 million for the comparable 2013 periods, respectively. The increase was primarily due to the increase of $8.6 billion in average assets since the second quarter of 2013.
Provision for Unfunded Credit Commitments

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We recorded a provision for unfunded credit commitments of $2.2 million and $3.3 million for the three and six months ended June 30, 2014, respectively, compared to a provision of $1.3 million and $3.4 million for the comparable 2013 periods, respectively. The provision of $2.2 million for the three months ended June 30, 2014 was primarily reflective of a $1.2 billion increase in total unfunded commitments during the second quarter of 2014. The provision of $3.3 million for the six months ended June 30, 2014 was primarily reflective of a $3.8 billion increase in total unfunded credit commitments during the six months ended June 30, 2014.
Other Noninterest Expense
A summary of other noninterest expense for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Client services
 
$
2,586

 
$
1,856

 
39.3
%
 
$
4,945

 
$
3,791

 
30.4
%
Tax credit fund amortization
 
2,502

 
1,338

 
87.0

 
4,530

 
2,655

 
70.6

Data processing services
 
2,041

 
1,882

 
8.4

 
4,268

 
3,794

 
12.5

Telephone
 
1,538

 
1,512

 
1.7

 
3,286

 
3,069

 
7.1

Postage and supplies
 
716

 
680

 
5.3

 
1,485

 
1,218

 
21.9

Dues and publications
 
636

 
445

 
42.9

 
1,133

 
903

 
25.5

Other
 
3,108

 
1,975

 
57.4

 
4,670

 
4,193

 
11.4

Total other noninterest expense
 
$
13,127

 
$
9,688

 
35.5

 
$
24,317

 
$
19,623

 
23.9

 
Other noninterest expense was $13.1 million for the three months ended June 30, 2014, compared to $9.7 million for the comparable 2013 period. The increase of $3.4 million for the three month period was primarily due to the increase in tax credit fund amortization expense of $1.2 million reflective of approximately $10.9 million in additional tax credit fund investment purchases and $1.1 million primarily due to certain non-recurring expenses and an increase in licensing and fees.
Other noninterest expense was $24.3 million for the six months ended June 30, 2014, compared to $19.6 million for the comparable 2013 period. The increase of $4.7 million for the six month period was primarily due to the increase in tax credit fund amortization expense of $1.9 million reflective of approximately $23.2 million in additional tax credit fund investment purchases and an increase of $1.2 million in client services expense as a result of increased cash management services for our clients.

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Net Income Attributable to Noncontrolling Interests
Included in net income is income and expense attributable to noncontrolling interests. The relevant amounts allocated to investors in our consolidated subsidiaries, other than us, are reflected under “Net Income Attributable to Noncontrolling Interests” on our statements of income.
In the table below, noninterest income consists primarily of investment gains and losses from our consolidated funds. Noninterest expense is primarily related to management fees paid by our managed funds to SVB Financial’s subsidiaries as the funds’ general partners. A summary of net income attributable to noncontrolling interests for the three and six months ended June 30, 2014 and 2013 is as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Net interest loss (income) (1)
 
$
5

 
$
(20
)
 
(125.0
)%
 
$
(3
)
 
$
(44
)
 
(93.2
)%
Noninterest loss (income) (1)
 
43,961

 
(31,498
)
 
NM

 
(158,177
)
 
(54,786
)
 
188.7

Noninterest expense (1)
 
5,267

 
2,867

 
83.7

 
8,588

 
5,727

 
50.0

Carried interest (loss) income (2)
 
(8,636
)
 
747

 
NM

 
6,784

 
1,545

 
NM

Net loss (income) attributable to noncontrolling interests
 
$
40,597

 
$
(27,904
)
 
NM

 
$
(142,808
)
 
$
(47,558
)
 
NM

 
 
NM—Not meaningful
(1)
Represents noncontrolling interests’ share in net interest income, noninterest income and noninterest expense.
(2)
Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds.
Income Taxes
Our effective income tax expense rate was 39.8 percent for the three months ended June 30, 2014, compared to 38.2 percent for the three months ended June 30, 2013. The components of our tax rate are consistent for the second quarter and first half of 2014 and 2013, respectively. Our effective income tax expense rate was 39.4 percent for the six months ended June 30, 2014, compared to 38.7 percent for the comparable 2013 period. The increases in the tax rates were primarily attributable to lower tax credits from our tax advantaged investments.
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.
Operating Segment Results
We have three segments for which we report our financial information: Global Commercial Bank, SVB Private Bank and SVB Capital.
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reporting segments. Please refer to Note 10—”Segment Reporting” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
Our primary source of revenue is from net interest income, which is primarily the difference between interest earned on loans, net of FTP, and interest paid on deposits, net of FTP. Accordingly, our segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which an earnings credit is given for deposits raised, and an earnings charge is made for funded loans.
We also evaluate performance based on provision for loan 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 taxes 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. The following is our reportable segment information for the three and six months ended June 30, 2014 and 2013:

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Global Commercial Bank
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Net interest income
 
$
178,488

 
$
154,586

 
15.5
 %
 
$
354,191

 
$
303,522

 
16.7
 %
Provision for loan losses
 
(1,841
)
 
(18,190
)
 
(89.9
)
 
(2,648
)
 
(24,397
)
 
(89.1
)
Noninterest income
 
53,021

 
48,361

 
9.6

 
111,658

 
94,902

 
17.7

Noninterest expense
 
(123,679
)
 
(101,246
)
 
22.2

 
(245,604
)
 
(205,585
)
 
19.5

Income before income tax expense
 
$
105,989

 
$
83,511

 
26.9

 
$
217,597

 
$
168,442

 
29.2

Total average loans, net of unearned income
 
$
9,971,725

 
$
8,203,231

 
21.6

 
$
9,867,841

 
$
8,036,833

 
22.8

Total average assets
 
29,218,349

 
20,442,613

 
42.9

 
27,405,141

 
20,491,451

 
33.7

Total average deposits
 
26,324,070

 
18,137,218

 
45.1

 
24,610,629

 
18,219,590

 
35.1

 
Three months ended June 30, 2014 compared to the three months ended June 30, 2013
Income before income tax expense from our Global Commercial Bank (“GCB”) increased to $106.0 million for the three months ended June 30, 2014, compared to $83.5 million for the comparable 2013 period. Income before income tax expense was primarily driven by higher interest income due to strong average loan growth, reflective of our outstanding deposit growth, and a lower provision for loan losses as the quality of the loan portfolio continued to improve. The key components of GCB's performance for the three months ended June 30, 2014 compared to the comparable 2013 period are discussed below.
Net interest income from our GCB increased by $23.9 million for the three months ended June 30, 2014, primarily due to a $13.0 million increase in loan interest income resulting mainly from an increase in average loan balances, partially offset by lower loan yields. Additionally, GCB had a $16.0 million increase in the FTP earned for deposits due to strong average deposit growth. These increases were partially offset by a $4.6 million decrease in the FTP earned for deposits from decreases in market interest rates.
GCB had a provision for loan losses of $1.8 million for the three months ended June 30, 2014, compared to $18.2 million for the comparable 2013 period. The provision of $1.8 million for the three months ended June 30, 2014 was primarily driven from period-end loan growth and net charge-offs, offset by a reserve release due to the improvement of the credit quality of our overall loan portfolio and a decrease in the reserve for impaired loans resulting from a decrease in impaired loan balances from repayments and charge-offs. The provision of $18.2 million for the three months ended June 30, 2013 was primarily attributable to period-end loan growth, as well as to provide for net charge-offs and a modest increase in our reserve for impaired loans.
Noninterest income increased by $4.7 million for the three months ended June 30, 2014, primarily related to higher foreign exchange fees, credit card fees and unused commitment fees. The increase in foreign exchange fees was primarily due to improved business conditions for our clients, which has resulted in an increase in the number of trades and commissioned notional volumes. The increase in credit card fees was primarily due to increases in client volumes and the addition of new credit card clients. The increase in unused commitment fees was primarily due to an increase in unfunded credit commitments.
Noninterest expense increased by $22.4 million for the three months ended June 30, 2014, primarily due to increases in compensation and benefits expenses related to our salaries and wages and incentive plan/ESOP expenses. The increase in our salaries and wages expenses was primarily due to an increase in the average number of FTEs at GCB, which increased by 95 to 1,440 FTEs for the three months ended June 30, 2014, compared to 1,345 FTEs for the comparable 2013 period. The increase in average FTEs was attributable to increases in positions for product development, operational and sales and advisory, as well as to support our commercial banking operations and initiatives. The increase in our incentive compensation plan/ESOP expenses were primarily related to our strong performance in the second quarter of 2014 and our current expectation that we will exceed our internal performance targets for 2014. Net occupancy costs for GCB also increased due to the impact of lease renewals at higher rates, reflective of market conditions, and the expansion of certain existing offices.
Six months ended June 30, 2014 compared to the six months ended June 30, 2013
Net interest income from our Global Commercial Bank (“GCB”) increased by $50.7 million for the six months ended June 30, 2014, primarily due to an increase in loan interest income resulting mainly from an increase in average loan balances and an increase in the FTP earned for deposits due to deposit growth. These increases were partially offset by a decrease in the FTP earned for deposits from decreases in market interest rates.
We had a provision for loan losses for GCB of $2.6 million for the six months ended June 30, 2014, compared to a provision of $24.4 million for the comparable 2013 period. The provision of $2.6 million for the six months ended June 30, 2014 was

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primarily due to net charge-offs and period-end loan growth and offset by a decrease in our reserve for impaired loans due to repayments on impaired loan balances and improvement in the overall credit quality of gross performing loans. The provision for the comparable 2013 period was primarily due to period-end loan growth, as well as to provide for net charge-offs and a modest increase in our reserve for impaired loans.
Noninterest income increased by $16.8 million for the six months ended June 30, 2014, primarily due to an increase in foreign exchange fees, credit card fees and unused commitment fees. The increase in foreign exchange fees was primarily due to improving business conditions for our clients and increased volatility in foreign markets, which has resulted in an improvement in our spread as well as a higher number of trades. The increase in credit card fees was primarily due to the addition of new credit card clients and an increase in client activity. The increase in unused commitment fees was primarily due to an increase in unfunded credit commitments.
Noninterest expense increased by $40.0 million for the six months ended June 30, 2014, primarily due to an increase in salaries and wages, net occupancy and professional services. The increase in salaries and wages was primarily due to an increase in the average number of FTEs at GCB, which increased by 84 to 1,428 for the six months ended June 30, 2014, compared to 1,344 for the comparable 2013 period. The increase in average FTEs was attributable to increases in positions for product development, operational and sales and advisory, as well as to support our commercial banking operations and initiatives. Net occupancy costs increased due to the impact of lease renewals at higher rates, reflective of market conditions, and the expansion of certain existing offices. The increase in professional services was to support our ongoing business and IT infrastructure initiatives.
SVB Private Bank
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Net interest income
 
$
9,293

 
$
5,927

 
56.8
 %
 
$
16,185

 
$
12,031

 
34.5
%
(Provision for) reduction of loan losses
 
(106
)
 
(382
)
 
(72.3
)
 
207

 
12

 
NM

Noninterest income
 
356

 
253

 
40.7

 
630

 
487

 
29.4

Noninterest expense
 
(2,640
)
 
(1,848
)
 
42.9

 
(5,135
)
 
(3,779
)
 
35.9

Income before income tax expense
 
$
6,903

 
$
3,950

 
74.8

 
$
11,887

 
$
8,751

 
35.8

Total average loans, net of unearned income
 
$
1,119,503

 
$
871,746

 
28.4

 
$
1,084,894

 
$
858,351

 
26.4

Total average assets
 
985,225

 
881,298

 
11.8

 
974,853

 
865,777

 
12.6

Total average deposits
 
791,261

 
472,613

 
67.4

 
768,300

 
471,648

 
62.9

 
NM - Not meaningful
Three months ended June 30, 2014 compared to the three months ended June 30, 2013
Net interest income from SVB Private Bank increased by $3.4 million for the three months ended June 30, 2014, primarily due to a $3.3 million increase in loan interest income resulting primarily from an increase in average loan balances and loan yields.
Noninterest expense increased by $0.8 million for the three months ended June 30, 2014, primarily driven by expenses related to our new Wealth Advisory practice.
Six months ended June 30, 2014 compared to the six months ended June 30, 2013
Net interest income from SVB Private Bank increased by $4.2 million for the six months ended June 30, 2014, primarily due to an increase in loan interest income resulting primarily from an increase in average loan balances.
Noninterest expense increased by $1.4 million for the six months ended June 30, 2014, primarily driven by expenses related to our new Wealth Advisory practice.

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SVB Capital
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
% Change
 
2014
 
2013
 
% Change
Net interest income
 
$
29

 
$
3

 
NM

 
$
43

 
$
4

 
NM
Noninterest (loss) income
 
(3,119
)
 
7,281

 
(142.8
)
 
34,553

 
12,722

 
171.6
Noninterest expense
 
(3,144
)
 
(2,757
)
 
14.0

 
(5,779
)
 
(5,143
)
 
12.4
(Loss) income before income tax expense
 
$
(6,234
)
 
$
4,527

 
NM

 
$
28,817

 
$
7,583

 
NM
Total average assets
 
$
342,924

 
$
269,771

 
27.1

 
$
342,451

 
$
254,343

 
34.6
 
 
NM - Not meaningful
SVB Capital’s components of noninterest (loss) income primarily include net gains and losses on non-marketable and other securities, carried interest and fund management fees. All components of (loss) income before income tax expense 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. Results for a particular period may not be indicative of future performance.
Three months ended June 30, 2014 compared to the three months ended June 30, 2013
SVB Capital had a noninterest loss of $3.1 million for the three months ended June 30, 2014, compared to noninterest income of $7.3 million for the comparable 2013 period. The loss was primarily due to net losses on investment securities and the related reduction of carried interest. SVB Capital’s components of noninterest (loss) income primarily include the following:
Net losses on investment securities of $6.8 million for the three months ended June 30, 2014, compared to net gains of $4.2 million for the comparable 2013 period. The net losses on investment securities of $6.8 million for the three months ended June 30, 2014 were primarily driven by unrealized valuation losses and reductions in carried interest allocations in two of our managed direct venture funds, related to FireEye. These losses were partially offset by gains from our strategic and other investments, which were primarily driven by strong distributions from strategic venture capital fund investments as well as the sale of one of our direct equity investments, for which we recorded a realized gain of $4.7 million.
Fund management fees of $3.6 million and $2.9 million for the three months ended June 30, 2014 and 2013, respectively. Fund management fees increased due to the addition of the Capital Partners III, LP fund in 2014.
Six months ended June 30, 2014 compared to the six months ended June 30, 2013
Noninterest (loss) income increased by $21.8 million to $34.6 million for the six months ended June 30, 2014, primarily due to net gains on investment securities. SVB Capital’s components of noninterest (loss) income primarily include the following:
Net gains on investment securities of $27.5 million for the six months ended June 30, 2014, compared to net gains of $7.2 million for the comparable 2013 period. The net gains on investment securities of $27.5 million for the six months ended June 30, 2014 were primarily driven by unrealized valuation increases and carried interest allocations in two of our managed direct venture funds, related to FireEye, as well as unrealized valuation gains from our managed funds of funds and gains from our strategic and other investments, which were primarily driven by strong distributions from strategic venture capital fund investments as well as the sale of one of our direct equity investments, for which we recorded a realized gain of $4.7 million.
Fund management fees of $6.3 million for the six months ended June 30, 2014, compared to $5.7 million for the comparable 2013 period. Fund management fees increased due to the addition of the Capital Partners III, LP fund in 2014.
Consolidated Financial Condition
Our total assets, total liabilities and stockholders' equity were $33.3 billion at June 30, 2014, an increase of $6.9 billion, or 26.1 percent, compared to $26.4 billion at December 31, 2013. Below is a summary of the individual components driving the changes in total assets, total liabilities and stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents totaled $2.6 billion at June 30, 2014, an increase of $1.1 billion, or 72.2 percent, compared to $1.5 billion at December 31, 2013. The increase was primarily reflective of a $5.7 billion increase in average deposits and $0.4 billion in net proceeds from our stock offering, offset by an increase of $4.2 billion in average investment securities and $0.9 billion in average loans.
As of June 30, 2014 and December 31, 2013, $1.7 billion and $715 million, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $443 million and $300 million, respectively.
Investment Securities
Investment securities totaled $18.9 billion at June 30, 2014, an increase of $5.3 billion, or 39.1 percent, compared to $13.6 billion at December 31, 2013. Our investment securities portfolio consists of an available-for-sale securities portfolio and a held-to-maturity portfolio, both of which primarily represent interest-earning investment securities, and a non-marketable and other securities portfolio, which primarily represents investments managed as part of our funds management business. The increase of $5.3 billion included an increase of $5.1 billion in our fixed income securities portfolio as well as an increase of $0.2 billion in non-marketable and other securities. The major components of the change are explained below.
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 as well as addressing our asset/liability management objectives. Available-for-sale securities were $11.7 billion at June 30, 2014, a decrease of $0.3 billion, or 2.6 percent, compared to $12.0 billion at December 31, 2013. The decrease was primarily due to a $5.4 billion transfer of securities out of our available-for-sale securities portfolio into a held-to-maturity securities portfolio as discussed below and paydowns, scheduled maturities and called maturities of $1.1 billion. These decreases were partially offset by the purchase of new available-for-sale securities of $6.0 billion. Purchases of new investments of $6.0 billion were primarily comprised of fixed-rate U.S. Treasury securities.
Securities classified as available-for-sale are carried at fair market value with changes in fair market value recorded as unrealized gains or losses in a separate component of shareholders equity. Securities classified as held-to-maturity are accounted for at cost with no adjustments for changes in fair value.
Held-to-Maturity Securities
During the second quarter of 2014, we re-designated certain securities from the classification of “available-for-sale” to “held-to-maturity”. The securities re-designated primarily consisted of agency-issued mortgage securities and CMOs with a total carrying value of $5.4 billion at June 1, 2014. At the time of re-designation the securities had unrealized gains totaling $22.5 million, net of tax, recorded in accumulated other comprehensive income and are being amortized over the life of the securities in a manner consistent with the amortization of a premium or discount. Our decision to re-designate the securities was based on our ability and intent to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding.


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During June 2014, new investments of $120 million increased the period-end held-to-maturity security balance to $5.5 billion at June 30, 2014. Average held-to-maturity securities were $1.8 billion for the second quarter of 2014. The purchases of new investments of $120 million were primarily comprised of fixed-rate and agency-issued mortgage securities.
Securities classified as held-to-maturity are accounted for at cost with no adjustments for changes in fair value. For securities re-designated as held-to-maturity from available-for-sale, the unrealized gains at the date of transfer will continue to be reported as a separate component of shareholders' equity and amortized as mentioned above.
Portfolio duration is a standard measure used to approximate changes in the market value of fixed income instruments due to a change in market interest rates. The measure is an estimate based on the level of current market interest rates, expectations for changes in the path of forward rates and the effect of forward rates on mortgage prepayment speed assumptions. As such, portfolio duration will fluctuate with changes in market interest rates. Changes in portfolio duration are also impacted by changes in the mix of longer versus shorter term-to-maturity securities. At June 30, 2014 and December 31, 2013, our estimated fixed income securities portfolio duration was 3.1 years and 3.3 years, respectively.
Non-Marketable and Other Securities
Our non-marketable and other securities portfolio primarily represents investments in venture capital and private equity funds, debt funds and private and public portfolio companies. A majority of these investments are managed through our SVB Capital funds business in funds of funds and direct venture and private equity funds. Included in our non-marketable and other 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 securities compared to the amounts attributable to SVBFG.
Non-marketable and other securities were $1.8 billion at June 30, 2014, an increase of $0.2 billion, or 10.1 percent, compared to $1.6 billion at December 31, 2013. The increase was primarily attributable to valuation gains in our managed funds of funds and managed direct venture funds, primarily driven by valuation gains in existing public portfolio holdings and fund investments. The following table summarizes the carrying value (as reported) of non-marketable and other securities compared to the amounts attributable to SVBFG (which generally represents the carrying value times our ownership percentage) at June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Carrying value  
(as reported)
 
Amount attributable     
to SVBFG
 
Carrying value  
(as reported)
 
Amount attributable  
to SVBFG
Non-marketable securities (fair value accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments (1)
 
$
1,040,522

 
$
78,122

 
$
862,972

 
$
76,505

Other venture capital investments (2)
 
43,747

 
1,941

 
32,839

 
2,097

Other securities (fair value accounting) (3)
 
281,639

 
20,193

 
321,374

 
23,058

Non-marketable securities (equity method accounting):
 
 
 
 
 
 
 
 
Other investments
 
137,845

 
137,845

 
142,883

 
142,883

Low income housing tax credit funds
 
95,395

 
95,395

 
72,241

 
72,241

Non-marketable securities (cost method accounting):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
142,136

 
142,136

 
148,994

 
148,994

Other investments
 
15,951

 
15,951

 
14,191

 
14,191

Total non-marketable and other securities
 
$
1,757,235

 
$
491,583

 
$
1,595,494

 
$
479,969


(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 June 30, 2014 and December 31, 2013:

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June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Carrying value  
(as reported)
 
Amount
attributable     
to SVBFG
 
Carrying value  
(as reported)
 
Amount
attributable  
to SVBFG
SVB Strategic Investors Fund, LP
 
$
27,075

 
$
3,401

 
$
29,104

 
$
3,656

SVB Strategic Investors Fund II, LP
 
92,617

 
7,939

 
96,185

 
8,244

SVB Strategic Investors Fund III, LP
 
257,489

 
15,117

 
260,272

 
15,280

SVB Strategic Investors Fund IV, LP
 
307,600

 
15,380

 
226,729

 
11,337

Strategic Investors Fund V Funds
 
191,024

 
279

 
118,181

 
184

Strategic Investors Fund VI Funds
 
38,879

 
60

 
7,944

 
12

SVB Capital Preferred Return Fund, LP
 
61,573

 
13,270

 
59,028

 
12,722

SVB Capital—NT Growth Partners, LP
 
63,026

 
22,002

 
61,126

 
21,339

SVB Capital Partners II, LP
 
595

 
30

 
708

 
36

Other private equity fund
 
644

 
644

 
3,695

 
3,695

Total venture capital and private equity fund investments
 
$
1,040,522

 
$
78,122

 
$
862,972

 
$
76,505

(2)
The following table shows the amounts of other venture capital investments held by the following consolidated funds and amounts attributable to SVBFG for each fund at June 30, 2014 and December 31, 2013:
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Carrying value  
(as reported)
 
Amount
attributable     
to SVBFG
 
Carrying value  
(as reported)
 
Amount
attributable  
to SVBFG
Silicon Valley BancVentures, LP
 
$
6,177

 
$
661

 
$
6,564

 
$
702

SVB Capital Partners II, LP
 
18,471

 
938

 
22,684

 
1,152

Capital Partners III, LP
 
15,000

 
65

 

 

SVB Capital Shanghai Yangpu Venture Capital Fund
 
4,099

 
277

 
3,591

 
243

Total other venture capital investments
 
$
43,747

 
$
1,941

 
$
32,839

 
$
2,097

(3)
Investments classified as other securities (fair value accounting) represent direct equity investments in public companies held by our consolidated funds. At June 30, 2014, the amount primarily includes total unrealized gains of $193.9 million in one public company, FireEye. The extent to which any unrealized gains (or losses) will become realized is subject to a variety of factors, including among other things, changes in prevailing market prices and the timing of any sales or distribution of securities, which are subject to our securities sales and governance processes and may also be constrained by lock-up agreements. None of the FireEye related investments currently are subject to a lock-up agreement.
Volcker Rule
The Volcker Rule is a part of the Dodd-Frank Act and prohibits certain investments, and relationships with, certain privately offered funds (“covered funds”).  Under the final rules of the Dodd-Frank Act, the regulations implementing the Volcker Rule, these prohibitions and restrictions will apply to SVB Financial, the Bank and any affiliate of SVB Financial or the Bank (including the SVB Capital funds).  SVB Financial maintains investments in certain venture capital and private equity funds, which are covered funds under the Volcker Rule, that it did not organize; maintains investments in covered funds that it organized, which investments exceed a three percent per fund limit that is generally imposed by the Volcker Rule; and it has aggregate investments in covered funds that may exceed three percent of its Tier 1 capital, which is another limit generally imposed by the Volcker Rule.  SVB Financial (including its affiliates) expects, therefore, that it will be required to reduce the level of its investments in covered funds and to forego investment opportunities in certain funds in the future.  SVB Financial is generally required by the final rules to come into conformance with all these requirements by July 2015.  The time period to divest an investment that is not permitted by the final rule  Volcker Rule may be extended by the Federal Reserve Board, on a case-by-case basis, for up to two one-year extensions (which may be granted on a case-by-case or industry-wide basis), and, on a case-by-case basis, up to one additional five-year extension for certain investments that are considered illiquid.  We intend to seek the maximum extensions (up to July 2022) available to us.  However, there is no guarantee that the Federal Reserve Board will grant any of these extensions.  If we are not successful in obtaining one or more of these extensions or if the Federal Reserve does not otherwise provide any relief of from the restrictions under the Volcker Rule on a broader basis, we may be forced to divest certain of our investments on terms that may not be favorable to us.

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We currently estimate that our total venture capital and private equity fund investments deemed to be prohibited covered fund interests and therefore subject to the Volcker Rule restrictions, have, as of June 30, 2014, an aggregate carrying value of approximately $256.5 million (and an aggregate fair value of $343.6 million). These covered fund interests are comprised of interests attributable, solely, to the Company in our consolidated managed funds and certain of our non-marketable securities.
We continue to assess the financial impact of these rules on our fund investments, as well as the impact of other Volcker restrictions on other areas of our business. (See “Risk Factors” under Item 1A of Part I of our 2013 Form 10-K.)

Loans
Loans, net of unearned income were $11.3 billion at June 30, 2014, an increase of $0.4 billion, or 4.1 percent, compared to $10.9 billion at December 31, 2013. Unearned income was $89 million at both June 30, 2014 and December 31, 2013. Total gross loans were $11.4 billion at June 30, 2014, an increase of $0.4 billion, or 4.0 percent, compared to $11.0 billion at December 31, 2013. The increase came primarily from our venture capital/private equity portfolio for capital call lines of credit. The breakdown of total gross loans and total loans as a percentage of total gross loans by category is as follows:
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Amount
 
Percentage 
 
Amount
 
Percentage 
Commercial loans:
 
 
 
 
 
 
 
 
Software
 
$
4,250,824

 
37.2
%
 
$
4,141,358

 
37.7
%
Hardware
 
1,154,639

 
10.1

 
1,224,480

 
11.1

Venture capital/private equity
 
2,670,600

 
23.3

 
2,408,426

 
21.9

Life science
 
1,176,928

 
10.3

 
1,181,266

 
10.7

Premium wine
 
176,441

 
1.5

 
151,255

 
1.4

Other
 
247,159

 
2.1

 
291,630

 
2.7

Total commercial loans
 
9,676,591

 
84.5

 
9,398,415

 
85.5

Real estate secured loans:
 
 
 
 
 
 
 
 
Premium wine
 
547,674

 
4.8

 
515,942

 
4.7

Consumer
 
984,197

 
8.6

 
873,070

 
7.9

Other
 
30,633

 
0.3

 
31,033

 
0.3

Total real estate secured loans
 
1,562,504

 
13.7

 
1,420,045

 
12.9

Construction loans
 
76,389

 
0.7

 
77,165

 
0.7

Consumer loans
 
121,816

 
1.1

 
99,643

 
0.9

Total gross loans
 
$
11,437,300

 
100.0

 
$
10,995,268

 
100.0


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Loan Concentration
The following table provides a summary of loans by size and category. The breakout of the categories is based on total client balances (individually or in the aggregate) as of June 30, 2014:
 
 
June 30, 2014
(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
 
$
1,112,014

 
$
674,464

 
$
974,576

 
$
964,586

 
$
525,184

 
$
4,250,824

Hardware
 
233,347

 
178,221

 
258,831

 
221,183

 
263,057

 
1,154,639

Venture capital/private equity
 
381,529

 
374,730

 
627,605

 
267,241

 
1,019,495

 
2,670,600

Life science
 
319,943

 
275,492

 
245,339

 
143,492

 
192,662

 
1,176,928

Premium wine (1)
 
77,825

 
42,887

 
16,576

 
39,153

 

 
176,441

Other
 
125,167

 
31,935

 
32,371

 
22,929

 
34,757

 
247,159

Commercial loans
 
2,249,825

 
1,577,729

 
2,155,298

 
1,658,584

 
2,035,155

 
9,676,591

Real estate secured loans:
 
 
 
 
 
 
 
 
 
 
 
 
Premium wine (1)
 
144,994

 
155,791

 
157,752

 
58,897

 
30,240

 
547,674

Consumer (2)
 
850,195

 
104,220

 
9,782

 
20,000

 

 
984,197

Other
 
2,500

 
5,000

 

 
23,133

 

 
30,633

Real estate secured loans
 
997,689

 
265,011

 
167,534

 
102,030

 
30,240

 
1,562,504

Construction loans
 
11,285

 
41,646

 
23,458

 

 

 
76,389

Consumer loans (2)
 
64,451

 
21,827

 
420

 
3,118

 
32,000

 
121,816

Total gross loans
 
$
3,323,250

 
$
1,906,213

 
$
2,346,710

 
$
1,763,732

 
$
2,097,395

 
$
11,437,300

 
 
(1)
Premium wine clients can have loan balances included in both commercial loans and real estate secured loans, the total of which are used for the breakout of the above categories.
(2)
Consumer loan clients have loan balances included in both real estate secured loans and other consumer loans, the total of which are used for the breakout of the above categories.
At June 30, 2014, gross loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $3.9 billion, or 33.8 percent of our portfolio. These loans represented 121 clients, and of these loans, none were on nonaccrual status as of June 30, 2014.

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The following table provides a summary of loans by size and category. The breakout of the categories is based on total client balances (individually or in the aggregate) as of December 31, 2013:
 
 
December 31, 2013
(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
 
$
1,031,179

 
$
647,060

 
$
905,815

 
$
832,375

 
$
724,929

 
$
4,141,358

Hardware
 
280,794

 
205,705

 
187,140

 
235,973

 
314,868

 
1,224,480

Venture capital/private equity
 
328,073

 
248,787

 
371,980

 
201,193

 
1,258,393

 
2,408,426

Life science
 
332,991

 
262,420

 
249,749

 
122,426

 
213,680

 
1,181,266

Premium wine (1)
 
77,431

 
24,667

 
24,810

 
24,347

 

 
151,255

Other
 
131,351

 
48,698

 

 
76,581

 
35,000

 
291,630

Commercial loans
 
2,181,819

 
1,437,337

 
1,739,494

 
1,492,895

 
2,546,870

 
9,398,415

Real estate secured loans:
 
 
 
 
 
 
 
 
 
 
 
 
Premium wine (1)
 
136,748

 
128,291

 
146,439

 
73,594

 
30,870

 
515,942

Consumer loans (2)
 
760,693

 
82,545

 
9,832

 
20,000

 

 
873,070

Other
 
2,500

 
5,000

 

 
23,533

 

 
31,033

Real estate secured loans
 
899,941

 
215,836

 
156,271

 
117,127

 
30,870

 
1,420,045

Construction loans
 
16,432

 
48,359

 
12,374

 

 

 
77,165

Consumer loans (2)
 
46,019

 
20,022

 
600

 
3,003

 
29,999

 
99,643

Total gross loans
 
$
3,144,211

 
$
1,721,554

 
$
1,908,739

 
$
1,613,025

 
$
2,607,739

 
$
10,995,268

 
 
 
(1)
Premium wine clients can have loan balances included in both commercial loans and real estate secured loans, the total of which are used for the breakout of the above categories.
(2)
Consumer loan clients have loan balances included in both real estate secured loans and other consumer loans, the total of which are used for the breakout of the above categories.
At December 31, 2013, gross loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $4.2 billion, or 38.4 percent of our portfolio. These loans represented 122 clients, and of these loans, none were on nonaccrual status as of December 31, 2013.
The credit profile of our clients varies across our loan portfolio, based on the nature of the lending we do for different market segments. Our technology and life sciences loan portfolio includes loans to clients at all stages of their life cycles, beginning with our SVB Accelerator practice, which serves our emerging or early-stage clients. Loans provided to early-stage clients represent a relatively small percentage of our overall portfolio at 10.3 percent of total gross loans at June 30, 2014, compared to 9.2 percent at December 31, 2013. Typically these loans are made to companies with 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 capitalist firms or others, or in some cases, a successful sale to a third party or an IPO. Venture capital firms may provide financing at lower levels, more selectively or on less favorable terms, which may have an adverse effect on our borrowers that are otherwise dependent on such financing 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 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.
At June 30, 2014, our lending to venture capital/private equity firms represented 23.3 percent of total gross loans, compared to 21.9 percent of total gross loans at December 31, 2013. Many of these clients have 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.
At June 30, 2014, sponsor-led buyout loans represented 15.9 percent of total gross loans, compared to 12.5 percent of total gross loans at December 31, 2013. These loans are typically larger in nature and repayment is generally dependent upon the cash flows of the acquired company. However, these loans are typically highly-secured and therefore carry lower credit risk. The increase from December 31, 2013 to June 30, 2014 was primarily due to the use, by us, of an expanded definition for loans in the sponsor-led buyout loan portfolio.
At June 30, 2014, our asset-based lending, which consists primarily of working capital lines and accounts receivable factoring represented 7.4 percent and 3.5 percent, respectively, of total gross loans, compared to 7.3 percent and 4.2 percent, respectively

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at December 31, 2013. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business.
Approximately 39.3 percent of our outstanding total gross loan balances as of June 30, 2014 were to borrowers based in California compared to 39.7 percent as of December 31, 2013. Other than California, there are no states with gross loan balances greater than 10 percent.
See generally “Risk Factors–Credit Risks” set forth under Item 1A, Part I in our 2013 Form 10-K.
Credit Quality Indicators
As of June 30, 2014, our criticized and impaired loans represented 5.5 percent of our total gross loans. This compares to 5.7 percent at December 31, 2013. The decrease in criticized loans was reflective of the overall improvement of the credit quality of our loan portfolio. A majority of our criticized loans are from our SVB Accelerator portfolio, serving our emerging or early stage clients. Loans to early stage clients make up 10.3 percent of our loan portfolio. It is common for an emerging or 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. This situation typically lasts only a few weeks and, in our experience, generally resolves itself with a subsequent round of venture funding. As a result, we expect that each of our early-stage clients will be managed through our criticized portfolio during a portion of their life cycle. Criticized loan levels will continue to vary but are expected to remain within the current range.
Credit Quality and Allowance for Loan Losses
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:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
Gross nonperforming, past due, and restructured loans:
 
 
 
 
Impaired loans
 
$
22,346

 
$
51,649

Loans past due 90 days or more still accruing interest
 
93

 
99

Total nonperforming loans
 
22,439

 
51,748

OREO and other foreclosed assets
 
1,745

 
1,001

Total nonperforming assets
 
$
24,184

 
$
52,749

Performing TDRs
 
$
1,132

 
$
403

Nonperforming loans as a percentage of total gross loans
 
0.20
%
 
0.47
%
Nonperforming assets as a percentage of total assets
 
0.07

 
0.20

Allowance for loan losses
 
$
120,728

 
$
142,886

As a percentage of total gross loans
 
1.06
%
 
1.30
%
As a percentage of total gross nonperforming loans
 
538.03

 
276.12

Allowance for loan losses for impaired loans
 
$
4,681

 
$
21,277

As a percentage of total gross loans
 
0.04
%
 
0.19
%
As a percentage of total gross nonperforming loans
 
20.86

 
41.12

Allowance for loan losses for total gross performing loans
 
$
116,047

 
$
121,609

As a percentage of total gross loans
 
1.01
%
 
1.11
%
As a percentage of total gross performing loans
 
1.02

 
1.11

Total gross loans
 
$
11,437,300

 
$
10,995,268

Total gross performing loans
 
11,414,861

 
10,943,520

Reserve for unfunded credit commitments (1)
 
33,319

 
29,983

As a percentage of total unfunded credit commitments
 
0.25
%
 
0.26
%
Total unfunded credit commitments (2)
 
$
13,569,982

 
$
11,470,722

 
 
 
(1)
The “Reserve for unfunded credit commitments” is included as a component of other liabilities. See “Provision for Unfunded Credit Commitments” above for a discussion of the changes to the reserve.

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(2)
Includes unfunded loan commitments and letters of credit.
Our allowance for loan losses as a percentage of total gross loans decreased to 1.06 percent at June 30, 2014, compared to 1.30 percent at December 31, 2013. This decrease was driven by a decrease in reserves for impaired loans primarily due to repayments of impaired loans as well as the improvement in the credit quality of the gross performing loan portfolio. Our reserve percentage for performing loans decreased to 1.02 percent at June 30, 2014, compared to 1.11 percent at December 31, 2013, primarily due to the continued strong performance of our performing loan portfolio.
Our nonperforming loans were $22.4 million at June 30, 2014, compared to $51.7 million at December 31, 2013. Our impaired loan balance decreased $29.3 million as a result of $23.8 million in net repayments and $18.9 million in charge-offs, offset by $13.4 million in new impaired loans. The allowance for loan losses related to impaired loans was $4.7 million at June 30, 2014, compared to $21.3 million at December 31, 2013.
Average impaired loans for the three and six months ended June 30, 2014 were $26.8 million and $31.3 million, respectively, compared to $41.5 million and $41.4 million for the comparable 2013 periods. If the impaired loans had not been impaired, $0.4 million and $0.8 million in interest income would have been recorded for the three and six months ended June 30, 2014 compared to $0.6 million and $1.2 million for the comparable 2013 periods.
Accrued Interest Receivable and Other Assets
A summary of accrued interest receivable and other assets at June 30, 2014 and December 31, 2013 is as follows:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
 
% Change      
Derivative assets, gross (1)
 
$
107,979

 
$
127,114

 
(15.1
)%
Foreign exchange spot contract assets, gross
 
136,823

 
73,423

 
86.3

Accrued interest receivable
 
79,135

 
67,772

 
16.8

FHLB and Federal Reserve Bank stock
 
41,026

 
40,632

 
1.0

Accounts receivable
 
18,447

 
15,773

 
17.0

Deferred tax assets
 

 
68,237

 
(100.0
)
Other assets
 
82,382

 
72,159

 
14.2

Total accrued interest receivable and other assets
 
$
465,792

 
$
465,110

 
0.1

 
 
 
(1)
See “Derivatives” 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 $63.4 million was primarily due to increased client trade activity at period-end, and is consistent with the increase in foreign exchange spot contract liabilities (see “Other Liabilities” section below).
Accrued Interest Receivable
Accrued interest receivable consists of interest on our investment securities and loans. The increase of $11.4 million was primarily due to an increase in interest receivable on our loans due to an increase in our average loan portfolio as well as an increase in interest receivable on our investment securities from growth in our fixed income investment portfolio.
Deferred Tax Assets
Our deferred taxes moved to a net liability position as of June 30, 2014. See "Other Liabilities - Net Deferred Tax Liabilities" below.

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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 June 30, 2014 and December 31, 2013: 
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
 
% Change 
Assets:
 
 
 
 
 
 
Equity warrant assets
 
$
88,905

 
$
103,513

 
(14.1
)%
Foreign exchange forward and option contracts
 
11,090

 
15,530

 
(28.6
)
Interest rate swaps
 
5,692

 
6,492

 
(12.3
)
Loan conversion options
 
53

 
314

 
(83.1
)
Client interest rate derivatives
 
2,239

 
1,265

 
77.0

Total derivative assets
 
$
107,979

 
$
127,114

 
(15.1
)
Liabilities:
 
 
 
 
 
 
Foreign exchange forward and option contracts
 
$
(10,744
)
 
$
(12,617
)
 
(14.8
)
Client interest rate derivatives
 
(2,420
)
 
(1,396
)
 
73.4

Total derivative liabilities
 
$
(13,164
)
 
$
(14,013
)
 
(6.1
)
Equity Warrant Assets
In connection with negotiating credit facilities and certain other services, we often obtain rights to acquire stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science industries. At June 30, 2014, we held warrants in 1,383 companies, compared to 1,320 companies at December 31, 2013. The change in fair value of equity warrant assets is recorded in gains on derivatives instruments, 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 six months ended June 30, 2014 and 2013: 
 
 
Three months ended June 30,
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
 
$
91,135

 
$
72,333

 
$
103,513

 
$
74,272

New equity warrant assets
 
3,352

 
3,941

 
7,431

 
6,444

Non-cash increases in fair value
 
9,774

 
5,697

 
16,832

 
8,492

Exercised equity warrant assets (1)
 
(14,927
)
 
(5,269
)
 
(38,355
)
 
(12,402
)
Terminated equity warrant assets
 
(429
)
 
(118
)
 
(516
)
 
(222
)
Balance, end of period
 
$
88,905

 
$
76,584

 
$
88,905

 
$
76,584

 
 
(1) Includes $12.1 million from the exercise of our FireEye warrants during the three months ended March 31, 2014.

Foreign Exchange Forward and Foreign Currency Option Contracts
We enter into foreign exchange forward contracts and foreign currency option contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients’ need. For each forward or option contract entered into with our clients, we enter into an opposite way forward or option contract with a correspondent bank, which mitigates the risk of fluctuations in currency rates. We also enter into forward contracts with correspondent banks to economically reduce our foreign exchange exposure related to certain foreign currency denominated instruments. Revaluations 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 related losses. Further, we anticipate performance by all counterparties. Our net exposure for foreign exchange forward and foreign currency option contracts at June 30, 2014 and December 31, 2013 amounted to $0.3 million and $2.9 million, respectively. For additional information on our foreign exchange forward contracts and foreign currency option contracts, see Note 8- “Derivative Financial Instruments” of the “Notes to the Consolidated Financial Statements” under Part I, Item I in this report.


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Interest Rate Swaps
For information on our interest rate swaps, see Note 8–“Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Deposits
Deposits were $28.4 billion at June 30, 2014, an increase of $5.9 billion, or 26.2 percent, compared to $22.5 billion at December 31, 2013. The increase was driven by increases in our noninterest-demand and money market deposits of $4.3 billion and $1.6 billion, respectively, primarily related to strong financing, IPO and M&A activity during the second quarter of 2014 resulting in increased balances from existing clients and also reflective of growth from new clients, including strong levels of early-stage and venture capital/private client additions. At June 30, 2014, 28.6 percent of our total deposits were interest-bearing deposits, compared to 29.3 percent at December 31, 2013.
At June 30, 2014, the aggregate balance of time deposit accounts individually equal to or greater than $100,000 totaled $142 million, compared to $197 million at December 31, 2013. At June 30, 2014, all 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.
Short-Term Borrowings
Short-term borrowings were $4.9 million at June 30, 2014, compared to $5.1 million at December 31, 2013. The decrease was due to a reduction in the amount of collateral held from our counterparties in relation to exposures in our favor on outstanding derivative contracts, primarily our interest rate swap agreement related to our 6.05% Subordinated Notes.
Long-Term Debt
Our long-term debt was $454 million at June 30, 2014 and $455 million at December 31, 2013. As of both June 30, 2014 and December 31, 2013, long-term debt included our 5.375% Senior Notes, 6.05% Subordinated Notes and 7.0% Junior Subordinated Debentures. For more information on our long-term debt, see Note 7–“Short-term Borrowings and Long-Term Debt” of the “Notes to Interim Consolidated Financial Statements (unaudited)”.
Other Liabilities
A summary of other liabilities at June 30, 2014 and December 31, 2013 is as follows:
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
 
% Change  
Foreign exchange spot contract liabilities, gross
 
$
273,702

 
$
90,725

 
201.7
 %
Accrued compensation
 
68,286

 
117,134

 
(41.7
)
Reserve for unfunded credit commitments
 
33,319

 
29,983

 
11.1

Derivative liabilities, gross (1)
 
13,164

 
14,013

 
(6.1
)
Net deferred tax liabilities
 
3,891

 

 

Other
 
166,711

 
152,731

 
9.2

Total other liabilities
 
$
559,073

 
$
404,586

 
38.2

 
 
(1)
See “Derivatives” section above.
Foreign Exchange Spot Contract Liabilities
Foreign exchange spot contract liabilities represent unsettled client trades at the end of the period. The increase of $183 million was primarily due to increased client trade activity at period-end, and is consistent with the increase in foreign exchange spot contract assets. (See “Accrued Interest Receivable and Other Assets” section above).
Accrued Compensation
Accrued compensation includes amounts for our Incentive Compensation Plans, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, ESOP/profit sharing and other compensation arrangements. The decrease of $49 million was primarily the result of 2013 incentive compensation payouts during the first quarter of 2014, partially offset by additional accruals for the six months ended June 30, 2014.

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Reserve for Unfunded Credit Commitments
Our reserve for unfunded credit commitments increased to $33.3 million at June 30, 2014, compared to $30.0 million at December 31, 2013, due primarily to a $2.1 billion increase in unfunded credit commitments from $11.5 billion to $13.6 billion for the six months ended June 30, 2014.
Net Deferred Tax Liabilities
As of June 30, 2014, we were in a net deferred tax liability position of $3.9 million, compared to a net deferred tax asset position of $68.2 million at December 31, 2013. The net deferred tax liability position is primarily reflective of a deferred tax liability resulting from the increase in the fair value of our investment securities portfolio of approximately $118.7 million due to the decrease in period-end market interest rates.
Noncontrolling Interests
Noncontrolling interests totaled $1.3 billion and $1.1 billion at June 30, 2014 and December 31, 2013, respectively. The increase of $149.2 million was primarily due to net income attributable to noncontrolling interests of $142.8 million for the six months ended June 30, 2014, driven by gains on investment securities and carried interest of $137.0 million from our managed funds of funds and $14.4 million from our managed direct venture funds.
Fair Value Measurements
The following table summarizes our financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013. 
 
 
June 30, 2014
 
December 31, 2013
(Dollars in thousands)
 
Total Balance  
 
Level 3     
 
Total Balance  
 
Level 3     
Assets carried at fair value
 
$
13,146,677

 
$
1,177,228

 
$
13,331,120

 
$
1,314,951

As a percentage of total assets
 
39.5
%
 
3.5
%
 
50.5
%
 
5.0
%
Liabilities carried at fair value
 
$
13,164

 
$

 
$
14,013

 
$

As a percentage of total liabilities
 
%
 
%
 
0.1
%
 
%
 
 
Level 1 and 2
 
Level 3
 
Level 1 and 2
 
Level 3
Percentage of assets measured at fair value
 
91.0
%
 
9.0
%
 
90.1
%
 
9.9
%
As of June 30, 2014, our available-for-sale securities, consisting primarily of U.S. Treasuries, agency-issued mortgage-backed securities and debentures issued by the U.S. government and its agencies, totaled $11.7 billion, or 88.8 percent of our portfolio of assets measured at fair value on a recurring basis, compared to $12.0 billion, or 89.9 percent, as of December 31, 2013. With the exception of U.S. Treasuries, which are classified as Level 1, these instruments were classified as Level 2 because their valuations were based on indicative prices corroborated by observable market quotes or valuation techniques with all significant inputs derived from or corroborated by observable market data. The fair value of our available-for-sale securities portfolio is sensitive to changes in levels of market interest rates and market perceptions of credit quality of the underlying securities. Market valuations and impairment analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis. Assets valued using Level 2 measurements also include equity warrant assets in shares of public company capital stock, marketable securities, interest rate swaps, foreign exchange forward and option contracts, loan conversion options and client interest rate derivatives.
Financial assets valued using Level 3 measurements consist of our investments in venture capital and private equity funds and direct equity investments in privately and publicly held companies, as well as equity warrant assets in shares of private and public company capital stock.
During the three and six months ended June 30, 2014, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $52.9 million and $293.1 million (which is inclusive of noncontrolling interest), respectively, primarily due to valuation increases in underlying fund investments in our managed funds and from our equity warrant assets, as well as gains from liquidity events and distributions. During the three and six months ended June 30, 2013, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $39.3 million and $65.4 million (which is inclusive of noncontrolling interest), respectively.
The valuation of non-marketable securities and equity warrant assets in shares of private company capital stock is subject to significant judgment. The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a

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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 “Risk Factors” set forth in our 2013 Form 10-K).
Capital Resources
We maintain an adequate capital base to support anticipated asset growth, operating needs and unexpected credit risks, and to ensure that SVB Financial and the Bank are in compliance with all regulatory capital guidelines. 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 with 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 stress tests allow us to assess the impact of adverse changes in the economy and interest rates on our capital adequacy position.
Common Stock
To support the continued growth of our balance sheet, during the second quarter of 2014, we issued and sold in a registered public offering 4,485,000 shares of common stock at a price of $101.00 per share. We received net proceeds of $434.9 million after deducting underwriting discounts and commissions, of which $400 million was contributed to the Bank for capital purposes.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $2.7 billion at June 30, 2014, an increase of $0.7 billion, or 36.1 percent, compared to $2.0 billion at December 31, 2013. This increase was primarily due to the $434.9 million in proceeds received in conjunction with the common stock equity offering as mentioned above and net income of $142.1 million for the six months ended June 30, 2014. Additionally, the increase in the net balance of our accumulated other comprehensive income to $50.3 million from a net loss of $48.8 million at December 31, 2013, was primarily driven by a $164.3 million increase in the fair value of our fixed income security portfolios ($98.1 million net of tax), which resulted from a decrease in period-end market interest rates compared to the prior year end.
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 capital adequacy guidelines issued by the Federal Reserve Board and the California Department of Financial Institutions. To be classified as “adequately capitalized” under these capital guidelines, minimum ratios for (i) total risk-based capital, (ii)Tier 1 risk-based capital and (iii) Tier 1 leverage ratio for bank holding companies and banks are 8.0%, 4.0% and 4.0%, respectively.
To be classified as “well capitalized” under these capital guidelines, minimum ratios for total risk-based capital and Tier 1 risk-based capital for bank holding companies and banks are 10.0% and 6.0%, respectively. Under the same capital adequacy guidelines, a well-capitalized state member bank must maintain a minimum Tier 1 leverage ratio of 5.0%. There is no Tier 1 leverage requirement for a holding company to be deemed well-capitalized.
Regulatory capital ratios for SVB Financial and the Bank exceeded minimum federal regulatory guidelines for a well-capitalized depository institution as of June 30, 2014 and December 31, 2013. Capital ratios for SVB Financial and the Bank, compared to the minimum regulatory ratios to be considered “well capitalized” and “adequately capitalized”, are set forth below:
 
 
June 30, 2014
 
December 31, 2013
 
Minimum ratio to be  
“Well Capitalized”
 
Minimum ratio to be
“Adequately Capitalized” 
SVB Financial:
 
 
 
 
 
 
 
 
Total risk-based capital ratio
 
15.36
%
 
13.13
%
 
10.0
%
 
8.0
%
Tier 1 risk-based capital ratio
 
14.42

 
11.94

 
6.0

 
4.0

Tier 1 leverage ratio
 
8.74

 
8.31

 
N/A  

 
4.0

Tangible common equity to tangible assets ratio (1)(2)
 
8.03

 
7.44

 
N/A  

 
N/A  

Tangible common equity to risk-weighted assets ratio (1)(2)
 
14.52

 
11.63

 
N/A  

 
N/A  

Bank:
 
 
 
 
 
 
 
 
Total risk-based capital ratio
 
13.41
%
 
11.32
%
 
10.0
%
 
8.0
%
Tier 1 risk-based capital ratio
 
12.45

 
10.11

 
6.0

 
4.0

Tier 1 leverage ratio
 
7.51

 
7.04

 
5.0

 
4.0

Tangible common equity to tangible assets ratio (1)(2)
 
7.22

 
6.59

 
N/A  

 
N/A  

Tangible common equity to risk-weighted assets ratio (1)(2)
 
12.65

 
9.87

 
N/A  

 
N/A  

 
 
 
(1)
See below for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.
(2)
The Federal Reserve Bank has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio. However, we believe these ratios provide meaningful supplemental information regarding our capital levels and are therefore provided above.
Our regulatory capital ratios (total risk-based capital, tier 1 risk-based capital and tier 1 leverage ratios) for both SVB Financial and the Bank increased compared to December 31, 2013, primarily reflective of growth in retained earnings and SVB Financial's common stock offering during May 2014, which resulted in the issuance of 4,485,000 shares and net proceeds of $434.9 million, of which $400 million was contributed to the Bank and had a positive impact on Bank level capital ratios. The increase in our total risk-based capital ratios and tier 1 risk-based capital ratios reflect the increase in regulatory capital partially offset by the increase in risk-weighted assets during the period, primarily due to loan growth. The increase in our tier 1 leverage ratios reflect the increase in regulatory capital partially offset by the increase in total average assets during the period, primarily due to the significant growth in client deposits which flowed into our investment securities portfolio, cash and loans. All of our capital ratios are above the levels to be considered “well capitalized" under 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, this financial measure should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. These ratios are calculated by dividing total SVBFG stockholder’s equity, by total period-end assets and risk-weighted assets, after reducing both amounts by acquired intangibles, if any. The manner in which this ratio is calculated varies among companies. Accordingly, our ratio is not necessarily comparable to similar measures of other companies. The following table provides a reconciliation of non-GAAP financial measures with financial measures defined by GAAP for SVB Financial and the Bank for the periods ending June 30, 2014 and December 31, 2013:

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SVB Financial
 
Bank
Non-GAAP tangible common equity and tangible assets (dollars in thousands, except ratios)
 
June 30,
2014
 
December 31,
2013
 
June 30,
2014
 
December 31,
2013
GAAP SVBFG stockholders’ equity
 
$
2,675,739

 
$
1,966,270

 
$
2,284,663

 
$
1,639,024

Less:
 
 
 
 
 
 
 
 
Intangible assets
 

 

 

 

Tangible common equity
 
$
2,675,739

 
$
1,966,270

 
$
2,284,663

 
$
1,639,024

GAAP Total assets
 
$
33,309,016

 
$
26,417,189

 
$
31,634,882

 
$
24,854,119

Less:
 
 
 
 
 
 
 
 
Intangible assets
 

 

 

 

Tangible assets
 
$
33,309,016

 
$
26,417,189

 
$
31,634,882

 
$
24,854,119

Risk-weighted assets
 
$
18,429,007

 
$
16,901,501

 
$
18,059,726

 
$
16,612,870

Tangible common equity to tangible assets
 
8.03
%
 
7.44
%
 
7.22
%
 
6.59
%
Tangible common equity to risk-weighted assets
 
14.52

 
11.63

 
12.65

 
9.87

The tangible common equity to tangible assets ratio increased for SVB Financial and the Bank due to increases in total equity. See "SVBFG Stockholders’ Equity" above for further details on changes to the individual components of our equity balance.
For both SVB Financial and the Bank, the tangible common equity to risk-weighted assets ratios increased due to increases in total equity, partially offset by increases in risk-weighted assets, which primarily reflects our growth in our period-end unfunded loan commitments.
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 11—“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/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 11—“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.

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Our deposit base is, and historically has been, our primary source of liquidity. Our deposit levels and cost of deposits may fluctuate from time to time due to a variety of factors, including market conditions, prevailing interest rates, changes in client deposit behaviors, availability of insurance protection, and our offering of deposit products. At June 30, 2014, our period-end total deposit balances increased by $5.9 billion to $28.4 billion, compared to $22.5 billion at December 31, 2013. The overall increase in deposit balances was due to the addition of new clients and increased fundraising activity by our venture capital/private equity clients.
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.
On a stand-alone basis, SVB Financial’s primary liquidity channels include dividends from the Bank, its portfolio of liquid assets, and its ability to raise debt and capital. The ability of the Bank to pay dividends is subject to certain regulations described in “Business—Supervision and Regulation—Restriction on Dividends” under Part I, Item 1 of our 2013 Form 10-K.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for the six months ended June 30, 2014 and 2013. For further details, see our "Interim Consolidated Statements of Cash Flows" under Part I, Item 1 of this report.
 
 
Six months ended June 30,
(Dollars in thousands)
 
2014
 
2013
Average cash and cash equivalents
 
$
3,010,077

 
$
1,047,091

Percentage of total average assets
 
10.1
%
 
4.7
%
Net cash provided by operating activities
 
$
201,267

 
$
32,986

Net cash (used for) provided by investing activities
 
(5,429,080
)
 
441,320

Net cash provided by (used for) financing activities
 
6,338,865

 
(610,038
)
Net increase (decrease) in cash and cash equivalents
 
$
1,111,052

 
$
(135,732
)
Average cash and cash equivalents increased by $2.0 billion, or 187.5 percent, to $3.0 billion for the six months ended June 30, 2014, compared to $1.0 billion for the comparable 2013 period. The increase was primarily due to the continued strong growth in client deposit balances. Average deposits increased by $6.7 billion to $25.4 billion for the six months ended June 30, 2014 when compared to $18.7 billion for the six months ended June 30, 2013.
Cash provided by operating activities was $201 million for the six months ended June 30, 2014, primarily reflective of net income before noncontrolling interests of $285 million and an increase in cash from unsettled client purchases of foreign exchange spot contracts of $120 million, partially offset by non-cash net gains on investment securities of $167 million.
Cash used for investing activities of $5.4 billion for the six months ended June 30, 2014 included $6.0 billion for purchases of available-for-sale securities and $440 million for the increase in loan balances, partially offset by $1.1 billion from maturities and paydowns from our fixed income securities investments.
Cash provided by financing activities was $6.3 billion for the six months ended June 30, 2014, primarily reflective of a net increase of $5.9 billion in deposits and $435 million in proceeds received in conjunction with the common stock equity offering in the second quarter of 2014.
Cash and cash equivalents at June 30, 2014 were $2.6 billion, compared to $0.9 billion at June 30, 2013.
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. These risks are not considered significant interest rate sensitive risks and no separate quantitative information concerning them is presented herein.

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Interest rate risk is managed by our ALCO. ALCO reviews the market valuation and 12-month forward looking earnings sensitivity of assets and liabilities to changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and current market conditions. Adherence to relevant policies, which are approved by the Finance Committee of our Board of Directors, is monitored on an ongoing basis.
Management of interest rate risk is carried out 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 derivative instruments to assist in managing interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the economic value of equity and net interest income under a variety of interest rate scenarios, balance sheet forecasts and proposed strategies. The simulation model provides a dynamic assessment of interest rate sensitivity embedded in our balance sheet which measures the potential variability in forecasted results relating to changes in market interest rates over time. We review our interest rate risk position on a quarterly basis at a minimum.
Model Simulation and Sensitivity Analysis
One application of the aforementioned simulation model involves measurement of the impact of market interest rate changes on our 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. A second application of the simulation model measures the impact of market interest rate changes on our net interest income (“NII”) assuming a static balance sheet as of the period-end reporting date. The market interest rate changes that affect us are principally short-term interest rates and include the following: (1) National Prime and SVB Prime rates; (2) 1-month and 3-month LIBOR; and (3) Fed 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, deposit pricing generally follows overall changes in short-term interest rates.
The following table presents our EVE and NII sensitivity exposure at June 30, 2014 and December 31, 2013, related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points.
 
 
Estimated
 
Estimated Increase In EVE
 
Estimated
 
Estimated Increase/
(Decrease) In NII
Change in interest rates (basis points)
 
EVE
 
Amount
 
Percent
 
NII
 
Amount
 
Percent
 
 
(Dollars in thousands) 
June 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
+200
 
$
5,839,526

 
$
900,786

 
18.2
 %
 
$
1,040,553

 
$
170,427

 
19.6
 %
+100
 
5,381,053

 
442,313

 
9.0

 
947,475

 
77,349

 
8.9

 
4,938,740

 

 

 
870,126

 

 

-100
 
4,672,693

 
(266,047
)
 
(5.4
)
 
844,680

 
(25,446
)
 
(2.9
)
-200
 
4,839,644

 
(99,096
)
 
(2.0
)
 
819,986

 
(50,140
)
 
(5.8
)
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
+200
 
$
4,656,411

 
$
477,866

 
11.4
 %
 
$
990,190

 
$
161,314

 
19.5
 %
+100
 
4,382,397

 
203,852

 
4.9

 
899,336

 
70,460

 
8.5

 
4,178,545

 

 

 
828,876

 

 

-100
 
3,960,086

 
(218,459
)
 
(5.2
)
 
826,222

 
(2,654
)
 
(0.3
)
-200
 
4,041,604

 
(136,941
)
 
(3.3
)
 
822,448

 
(6,428
)
 
(0.8
)
Economic Value of Equity
The estimated EVE in the preceding table is based on a combination of valuation methodologies including a discounted cash flow analysis and a multi-path lattice based valuation. Both methodologies use publicly available market interest rates. The model simulations and calculations are highly assumption-dependent and will change regularly as our asset/liability structure changes, as interest rate environments evolve, and as we change our assumptions in response to relevant market or business circumstances. These calculations do not reflect the changes that we anticipate or may make to reduce our EVE exposure in response to a change in market interest rates 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 and basis risk, 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

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not intended to represent, and should not be construed to represent the underlying value. In addition, we assume different deposit balance decay rates for each interest rate scenario based on a historical deposit study of our clients.
Our base case EVE at June 30, 2014 increased from December 31, 2013 by $0.8 billion, primarily due to the change in balance sheet mix and flatter market yield curves due to market conditions. The flatter market yield curve has a $285 million negative impact on the EVE, which offsets some of the positive impact from changes in balance sheet mix. The change in balance sheet mix was reflective of period-end increases of $1.1 billion in cash and cash equivalents, $5.3 billion in fixed income investment securities, and $442 million in loans, partially offset by an increase of $5.9 billion in deposits. EVE sensitivity increased in both the simulated upward and downward interest rate movements due to a $4.3 billion increase in noninterest-bearing deposits. In the simulated downward 200 bps interest rate movement, a relatively smaller decrease in EVE is due to the limited market value impact on deposits. The limited impact on deposits is attributed to deposit rates being at or near their absolute floors and a relative increase deposit balances.
12-Month Net Interest Income Simulation
Our expected 12-month NII at June 30, 2014 increased by $41 million as compared to December 31, 2013, primarily due to an increase in average cash and cash equivalents of $1.0 billion, an increase of $5.1 billion in our fixed income securities portfolio and an increase in average loans of $442 million. The increase in 12-month NII primarily reflects an increase in the average total earning assets, partially offset by lower yields on investments and loans as well as an increase of $1.5 billion in interest-bearing deposits. NII sensitivity in the simulated upward interest rate movement, measured as a percentage change from the base or "no change" simulation, stayed relative unchanged, while the simulated downward interest rate movements increased. The NII sensitivity increased in the simulated downward interest rate movements due to lower market yield curves compared to levels on March 31, 2014. The change in market yield curve increased the estimated prepayment of mortgage securities which are assumed to be reinvested at lower market rates and, in turn, reduce interest income earned.
The simulation model used in the above analysis embeds floors in our interest rate scenarios, which prevent model benchmark rates from moving below 0.0%. 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 management discretion. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our overall sensitivity.
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
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.

PART II–OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to Note 14–“Legal Matters” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
ITEM 1A. RISK FACTORS
There are no material changes from the risk factors set forth in our 2013 Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
See Index to Exhibits at end of report.

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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.
 
 
  
SVB Financial Group
 
 
Date: August 8, 2014
  
/s/ MICHAEL DESCHENEAUX
 
  
Michael Descheneaux
 
  
Chief Financial Officer
 
  
(Principal Financial Officer)
 
 
 
  
SVB Financial Group
 
 
Date: August 8, 2014
  
/s/ KAMRAN HUSAIN
 
  
Kamran Husain
 
  
Chief Accounting Officer
 
  
(Principal Accounting Officer)

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INDEX TO EXHIBITS
 
Exhibit
Number    
 
Exhibit Description
 
Incorporated by Reference
 
 Filed
 Herewith  
Form
 
File No.
 
Exhibit  
 
Filing Date
 
3.1
 
Restated Certificate of Incorporation
 
8-K
 
000-15637
 
3.1
 
May 31, 2005
 
 
3.2
 
Amended and Restated Bylaws
 
8-K
 
000-15637
 
3.2
 
July 27, 2010
 
 
3.3
 
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock
 
8-K
 
000-15637
 
3.3
 
December 8, 2008
 
 
3.4
 
Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series B
 
8-K
 
000-15637
 
3.4
 
December 15, 2008
 
 
4.1
 
Junior Subordinated Indenture, dated as of October 30, 2003 between SVB Financial and Wilmington Trust Company, as trustee
 
8-K
 
000-15637
 
4.12
 
November 19, 2003
 
 
4.2
 
7.0% Junior Subordinated Deferrable Interest Debenture due October 15, 2033 of SVB Financial
 
8-K
 
000-15637
 
4.13
 
November 19, 2003
 
 
4.3
 
Amended and Restated Trust Agreement, dated as of October 30, 2003, by and among SVB Financial as Depositor, Wilmington Trust Company as Property Trustee, Wilmington Trust Company as Delaware Trustee, and the Administrative Trustees named therein
 
8-K
 
000-15637
 
4.14
 
November 19, 2003
 
 
4.4
 
Certificate Evidencing 7% Cumulative Trust Preferred Securities of SVB Capital II, dated as of October 30, 2003
 
8-K
 
000-15637
 
4.15
 
November 19, 2003
 
 
4.5
 
Guarantee Agreement, dated as of October 30, 2003, between SVB Financial and Wilmington Trust Company, as Trustee
 
8-K
 
000-15637
 
4.16
 
November 19, 2003
 
 
4.6
 
Agreement as to Expenses and Liabilities, dated as of October 30, 2003, between SVB Financial and SVB Capital II
 
8-K
 
000-15637
 
4.17
 
November 19, 2003
 
 
4.7
 
Certificate Evidencing 7% Common Securities of SVB Capital II, dated as of October 30, 2003
 
8-K
 
000-15637
 
4.18
 
November 19, 2003
 
 
4.8
 
Officers’ Certificate and Company Order, dated as of October 30, 2003, relating to the 7.0% Junior Subordinated Deferrable Interest Debentures due October 15, 2033
 
8-K
 
000-15637
 
4.19
 
November 19, 2003
 
 
4.9
 
Indenture, dated September 20, 2010, by and between SVB Financial Group and U.S. Bank National Association, as trustee
 
8-K
 
000-15637
 
4.1
 
September 20, 2010
 
 
4.10
 
Form of 5.375% Senior Note due 2020
 
8-K
 
000-15637
 
4.2
 
September 20, 2010
 
 
*10.1
 
Amended and Restated Deferred Compensation Plan
 
 
 
 
 
 
 
 
 
X
31.1
 
Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Executive Officer
 
 
 
 
 
 
 
 
 
X
31.2
 
Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Financial Officer
 
 
 
 
 
 
 
 
 
X
32.1
 
Section 1350 Certifications
 
 
 
 
 
 
 
 
 
**
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
X
 
*
Denotes management contract or any compensatory plan, contract or arrangement
**
Furnished herewith

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