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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act.
Large accelerated filer             Accelerated filer            
Non-accelerated filer                         Smaller reporting company             
Emerging growth company        
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Exchange on Which Registered
Common Stock, par value $0.001 per share
 
SIVB
 
The Nasdaq Stock Market LLC
Depositary shares, each representing a 1/40th ownership interest in a share of 5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock, Series A
 
SIVBP
 
The Nasdaq Stock Market LLC
At April 30, 2020, 51,513,227 shares of the registrant’s common stock ($0.001 par value) were outstanding.


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Glossary of Acronyms that may be used in this Report

AFS— Available-for-Sale
APIC— Additional Paid-in Capital
ASC— Accounting Standards Codification
ASU— Accounting Standards Update
CET— Common Equity Tier
EHOP— Employee Home Ownership Program of the Company
EPS— Earnings Per Share
ERI— Energy and Resource Innovation
ESOP— Employee Stock Ownership Plan of the Company
ESPP— 1999 Employee Stock Purchase Plan of the Company
FASB— Financial Accounting Standards Board
FDIC— Federal Deposit Insurance Corporation
FHLB— Federal Home Loan Bank
FRB— Federal Reserve Bank
FTE— Full-Time Employee
FTP— Funds Transfer Pricing
GAAP— Accounting principles generally accepted in the United States of America
HTM— Held-to-Maturity
IASB— International Accounting Standards Board
IPO— Initial Public Offering
IRS— Internal Revenue Service
IT— Information Technology
LIBOR— London Interbank Offered Rate
M&A— Merger and Acquisition
SEC— Securities and Exchange Commission
SPD-SVB— SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China)
TDR— Troubled Debt Restructuring
UK— United Kingdom
VIE— Variable Interest Entity

3

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(Dollars in thousands, except par value and share data)

March 31,
2020

December 31,
2019
Assets:




Cash and cash equivalents

$
9,561,448


$
6,781,783

Available-for-sale securities, at fair value (cost of $12,044,717 and $13,894,348, respectively)

12,648,064


14,014,919

Held-to-maturity securities, at amortized cost and net of allowance for credit losses of $230 and $0 (fair value of $14,131,154 and $14,115,272, respectively) (1)

13,574,289


13,842,946

Non-marketable and other equity securities

1,200,595


1,213,829

Total investment securities

27,422,948


29,071,694

Loans, amortized cost

35,968,085


33,164,636

Allowance for credit losses: loans

(548,963
)

(304,924
)
Net loans

35,419,122


32,859,712

Premises and equipment, net of accumulated depreciation and amortization

154,780


161,876

Goodwill
 
137,823

 
137,823

Other intangible assets, net
 
48,072

 
49,417

Lease right-of-use assets
 
206,392

 
197,365

Accrued interest receivable and other assets

2,059,055


1,745,233

Total assets

$
75,009,640


$
71,004,903

Liabilities and total equity:




Liabilities:




Noninterest-bearing demand deposits

$
42,902,200


$
40,841,570

Interest-bearing deposits

19,009,757


20,916,237

Total deposits

61,911,957


61,757,807

Short-term borrowings

3,138,162


17,430

Lease liabilities
 
227,271

 
218,847

Other liabilities

2,200,953


2,041,752

Long-term debt

348,076


347,987

Total liabilities

67,826,419


64,383,823

Commitments and contingencies (Note 15 and Note 18)





SVBFG stockholders’ equity:




Preferred stock, $0.001 par value, 20,000,000 shares authorized; 350,000 shares issued and outstanding

340,138


340,138

Common stock, $0.001 par value, 150,000,000 shares authorized; 51,490,342 shares and 51,655,607 shares issued and outstanding, respectively

52


52

Additional paid-in capital

1,489,240


1,470,071

Retained earnings

4,612,785


4,575,601

Accumulated other comprehensive income

592,534


84,445

Total SVBFG stockholders’ equity

7,034,749


6,470,307

Noncontrolling interests

148,472


150,773

Total equity

7,183,221


6,621,080

Total liabilities and total equity

$
75,009,640


$
71,004,903


 
(1)
Prior to our adoption of Accounting Standard Update (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) on January 1, 2020, the allowance for credit losses (ACL) related to held-to-maturity (HTM) securities was not applicable and is therefore presented as $0 at December 31, 2019. See "Adoption of New Accounting Standards" in Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
See accompanying notes to interim consolidated financial statements (unaudited).

4


SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 

Three months ended March 31,
(Dollars in thousands, except per share amounts)

2020

2019
Interest income:




Loans

$
382,569


$
394,144

Investment securities:




Taxable

154,385


126,717

Non-taxable

12,824


10,937

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

17,624


19,216

Total interest income

567,402


551,014

Interest expense:




Deposits

37,398


27,907

Borrowings

5,867


10,221

Total interest expense

43,265


38,128

Net interest income

524,137


512,886

Provision for credit losses

243,480


28,551

Net interest income after provision for credit losses

280,657


484,335

Noninterest income:




Gains on investment securities, net

46,055


29,028

Gains on equity warrant assets, net

13,395


21,305

Client investment fees
 
43,393

 
44,482

Foreign exchange fees

47,505


38,048

Credit card fees

28,304


27,483

Deposit service charges

24,589


20,939

Lending related fees

13,125


13,937

Letters of credit and standby letters of credit fees

11,542


9,354

Investment banking revenue
 
46,867

 
49,795

Commissions
 
16,022

 
14,108

Other

11,137


11,897

Total noninterest income

301,934


280,376

Noninterest expense:




Compensation and benefits

255,586


238,061

Professional services

38,705


36,986

Premises and equipment

26,940


21,700

Net occupancy

18,346


16,048

Business development and travel

14,071


15,354

FDIC and state assessments

5,234


3,979

Other

40,703


33,536

Total noninterest expense

399,585


365,664

Income before income tax expense

183,006


399,047

Income tax expense

49,357


107,435

Net income before noncontrolling interests

133,649


291,612

Net loss (income) attributable to noncontrolling interests

1,973


(2,880
)
Preferred stock dividends
 
(3,369
)
 

Net income available to common stockholders

$
132,253


$
288,732

Earnings per common share—basic

$
2.56


$
5.49

Earnings per common share—diluted

2.55


5.44

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

5


SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 

Three months ended March 31,
(Dollars in thousands)

2020

2019
Net income before noncontrolling interests

$
133,649


$
291,612

Other comprehensive income, net of tax:

 
 
 
Change in foreign currency cumulative translation gains and losses:

 
 
 
Foreign currency translation (losses) gains

(9,120
)

2,806

Related tax benefit (expense)

2,556


(782
)
Change in unrealized gains and losses on available-for-sale securities:

 
 
 
Unrealized holding gains

543,881


46,836

Related tax expense

(150,746
)

(13,045
)
Reclassification adjustment for (gains) losses included in net income

(61,165
)

3,630

Related tax expense (benefit)

16,953


(1,010
)
Amortization of unrealized holding gains on securities transferred from available-for-sale to held-to-maturity

(552
)

(674
)
Related tax benefit

153


188

Change in unrealized gains and losses on cash flow hedges:
 
 
 
 
Unrealized gains
 
231,920

 
1,102

Related tax expense
 
(64,281
)
 
(307
)
Reclassification adjustment for (gains) losses included in net income
 
(2,089
)
 
3

Related tax expense (benefit)
 
579

 
(1
)
Other comprehensive income, net of tax

508,089


38,746

Comprehensive income

641,738


330,358

Comprehensive loss (income) attributable to noncontrolling interests

1,973


(2,880
)
Comprehensive income attributable to SVBFG

$
643,711


$
327,478


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

6


SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
 

Preferred Stock
 
Common Stock

Additional
Paid-in Capital

Retained Earnings

Accumulated
Other
Comprehensive Income (Loss)

Total SVBFG
Stockholders’ Equity

Noncontrolling Interests

Total Equity
(Dollars in thousands)

 
Shares

Amount






Balance at December 31, 2018

$

 
52,586,498

 
$
53

 
$
1,378,438

 
$
3,791,838

 
$
(54,120
)

$
5,116,209


$
148,634


$
5,264,843

Cumulative adjustment for the adoption of premium amortization on purchased callable debt securities, net of tax (ASU 2017-08) (1)


 

 

 

 
(583
)
 


(583
)



(583
)
Acquisition of SVB Leerink


 

 

 

 

 




5,256


5,256

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


 
209,743

 

 
(2,936
)
 

 


(2,936
)



(2,936
)
Common stock issued under ESOP


 
14,442

 

 
3,506

 

 


3,506




3,506

Net income


 

 

 

 
288,732

 


288,732


2,880


291,612

Capital calls and distributions, net


 

 

 

 

 




(15,720
)

(15,720
)
Net change in unrealized gains and losses on AFS securities, net of tax


 

 

 

 

 
36,411


36,411




36,411

Amortization of unrealized holding gains on securities transferred from AFS to HTM, net of tax
 

 

 

 

 

 
(486
)
 
(486
)
 

 
(486
)
Foreign currency translation adjustments, net of tax
 

 

 

 

 

 
2,024

 
2,024

 

 
2,024

Net change in unrealized gains and losses on cash flow hedges, net of tax

 

 

 

 

 

 
797

 
797

 

 
797

Share-based compensation, net
 

 

 

 
15,122

 

 

 
15,122

 

 
15,122

Common stock repurchases
 

 
(488,578
)
 
(1
)
 

 
(116,022
)
 

 
(116,023
)
 

 
(116,023
)
Balance at March 31, 2019

$

 
52,322,105


$
52


$
1,394,130


$
3,963,965


$
(15,374
)

$
5,342,773


$
141,050


$
5,483,823

Balance at December 31, 2019

$
340,138

 
51,655,607

 
$
52

 
$
1,470,071

 
$
4,575,601

 
$
84,445

 
$
6,470,307

 
$
150,773

 
$
6,621,080

Cumulative adjustment for the day one adoption of ASC 326, net of tax (1)
 

 

 

 

 
(35,049
)
 

 
(35,049
)
 

 
(35,049
)
Common stock issued under employee benefit plans, net of restricted stock cancellations


 
66,864

 

 
(3,031
)
 

 


(3,031
)



(3,031
)
Common stock issued under ESOP


 
12,094

 

 
2,447

 

 


2,447




2,447

Net income (loss)


 

 

 

 
135,622

 


135,622


(1,973
)

133,649

Capital calls and distributions, net


 

 

 

 

 




(328
)

(328
)
Net change in unrealized gains and losses on AFS securities, net of tax


 

 

 

 

 
348,923


348,923




348,923

Amortization of unrealized holding gains on securities transferred from AFS to HTM, net of tax


 

 

 

 

 
(399
)

(399
)



(399
)
Foreign currency translation adjustments, net of tax


 

 

 

 

 
(6,564
)

(6,564
)



(6,564
)
Net change in unrealized gains and losses on cash flow hedges, net of tax
 

 

 

 

 

 
166,129

 
166,129

 

 
166,129

Share-based compensation, net


 

 

 
19,171

 

 


19,171




19,171

Common stock repurchases
 

 
(244,223
)
 


 

 
(60,020
)
 

 
(60,020
)
 

 
(60,020
)
Dividends on preferred stock
 

 

 

 

 
(3,369
)
 

 
(3,369
)
 

 
(3,369
)
Other, net
 

 

 

 
582

 

 

 
582

 

 
582

Balance at March 31, 2020

340,138

 
51,490,342


$
52


$
1,489,240


$
4,612,785


$
592,534


$
7,034,749


$
148,472


$
7,183,221


 
(1)
See "Adoption of New Accounting Standards" in Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
  See accompanying notes to interim consolidated financial statements (unaudited).

7


SVB FINANCIAL GROUP AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 

Three months ended March 31,
(Dollars in thousands)

2020

2019
Cash flows from operating activities:




Net income before noncontrolling interests

$
133,649


$
291,612

Adjustments to reconcile net income to net cash provided by operating activities:




Provision for credit losses

243,480


28,551

Changes in fair values of equity warrant assets, net of proceeds from exercises

18,574

 
(10,248
)
Changes in fair values of derivatives, net

(63,034
)

(3,068
)
Gains on investment securities, net

(46,055
)
 
(29,028
)
Distributions of earnings from non-marketable and other equity securities
 
12,346

 
15,619

Depreciation and amortization

24,824


20,830

Amortization of premiums and discounts on investment securities, net

13,565


1,606

Amortization of share-based compensation

19,171


15,122

Amortization of deferred loan fees

(33,016
)

(35,276
)
Deferred income tax benefit

(60,126
)

(8,834
)
Excess tax benefit from exercise of stock options and vesting of restricted shares
 
(2,575
)
 
(2,804
)
Losses from the write-off of premises and equipment
 

 
52

Changes in other assets and liabilities:




Accrued interest receivable and payable, net

23,982


(3,361
)
Accounts receivable and payable, net

(45,311
)

30,447

Income tax receivable and payable, net

66,581


94,552

Accrued compensation

(236,834
)

(253,769
)
Foreign exchange spot contracts, net

(12,583
)

169,079

Proceeds from termination of interest rate swaps
 
180,500

 

Other, net

(69,013
)

19,668

Net cash provided by operating activities

168,125


340,750

Cash flows from investing activities:




Purchases of available-for-sale securities

(1,538,553
)

(204,328
)
Proceeds from sales of available-for-sale securities

2,654,212


1,171,564

Proceeds from maturities and paydowns of available-for-sale securities

785,692


116,001

Purchases of held-to-maturity securities

(358,650
)


Proceeds from maturities and paydowns of held-to-maturity securities

646,212


428,433

Purchases of non-marketable and other equity securities

(12,177
)

(16,165
)
Proceeds from sales and distributions of capital of non-marketable and other equity securities

45,720


19,979

Net increase in loans

(2,796,409
)

(505,516
)
Purchases of premises and equipment

(25,088
)

(5,504
)
Acquisition of SVB Leerink, net of cash acquired
 

 
(100,037
)
Net (cash used) provided by for investing activities

(599,041
)

904,427

Cash flows from financing activities:




Net increase in deposits

154,150


2,998,297

Net increase (decrease) in short-term borrowings

3,120,732


(616,957
)
(Distributions to noncontrolling interests), net of contributions from noncontrolling interests

(328
)

(15,720
)
Payment of preferred stock dividend
 
(3,369
)
 

Common stock repurchases
 
(60,020
)
 
(116,023
)
Proceeds from issuance of common stock, ESPP and ESOP, net of restricted stock awards

(584
)

570

Net cash provided by financing activities

3,210,581


2,250,167

Net increase in cash and cash equivalents

2,779,665


3,495,344

Cash and cash equivalents at beginning of period

6,781,783


3,571,539

Cash and cash equivalents at end of period

$
9,561,448


$
7,066,883

Supplemental disclosures:




Cash paid during the period for:




Interest

$
46,145


$
46,548

Income taxes

31,988


17,570

Noncash items during the period:




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

$
348,923


$
36,411

Distributions of stock from investments

3,119


1,276

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

8


SVB FINANCIAL GROUP AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
Basis of Presentation
SVB Financial Group is a diversified financial services company, as well as a bank holding company and a financial holding company. SVB Financial was incorporated in the state of Delaware in March 1999. Through our various subsidiaries and divisions, we offer a diverse set of banking and financial products and services to support our clients of all sizes and stages throughout their life cycles. In these notes to our unaudited interim consolidated financial statements, when we refer to “SVB Financial Group,” “SVBFG," the “Company,” “we,” “our,” “us” or use similar words, we mean SVB Financial Group and all of its subsidiaries collectively, including Silicon Valley Bank (the “Bank”), unless the context requires otherwise. When we refer to “SVB Financial” or the “Parent” we are referring only to the parent company, SVB Financial Group (not including subsidiaries).
The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary to fairly present our financial position, results of operations and cash flows in accordance with GAAP. Such unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results to be expected for any future periods. These unaudited interim consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).
Use of Estimates and Assumptions
The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates may change as new information is obtained. Significant items that are subject to such estimates include measurements of fair value, the valuation of non-marketable and other equity securities, the valuation of equity warrant assets and the adequacy of the allowance for credit losses for loans and for unfunded credit commitments.
Principles of Consolidation and Presentation
Our unaudited interim consolidated financial statements include the accounts of SVB Financial Group and consolidated entities. We consolidate voting entities in which we have control through voting interests or entities through which we have a controlling financial interest in a variable interest entity (“VIE”). We determine whether we have a controlling financial interest in a VIE by determining if we have: (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses or (c) the right to receive the expected returns of the entity. Generally, we have significant variable interests if our commitments to a limited partnership investment represent a significant amount of the total commitments to the entity. We also evaluate the impact of related parties on our determination of variable interests in our consolidation conclusions. We consolidate VIEs in which we are the primary beneficiary based on a controlling financial interest. If we are not the primary beneficiary of a VIE, we record our pro-rata interests based on our ownership percentage.
VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. We assess VIEs to determine if we are the primary beneficiary of a VIE. A primary beneficiary is defined as a variable interest holder that has a controlling financial interest. A controlling financial interest requires both: (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) obligation to absorb losses or receive benefits of a VIE that could potentially be significant to a VIE. Under this analysis, we also evaluate kick-out rights and other participating rights, which could provide us a controlling financial interest. The primary beneficiary of a VIE is required to consolidate the VIE.
We also evaluate fees paid to managers of our limited partnership investments. We exclude those fee arrangements that are not deemed to be variable interests from the analysis of our interests in our investments in VIEs and the determination of a primary beneficiary, if any. Fee arrangements based on terms that are customary and commensurate with the services provided are deemed not to be variable interests and are, therefore, excluded.

9


All significant intercompany accounts and transactions with consolidated entities have been eliminated. We have not provided financial or other support during the periods presented to any VIE that we were not previously contractually required to provide.
Reclassifications
Certain prior period amounts primarily related to the adoption of the Accounting Standard Update (ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) ("ASU 2016-13" or "CECL") as mentioned below have been reclassified to conform to current period presentations.
Summary of Significant Accounting Policies
With the exception of the updated accounting policies listed below, the accompanying unaudited interim consolidated financial statements have been prepared on a consistent basis with the accounting policies described in Consolidated Financial Statements and Supplementary Data — Note 2 — “Summary of Significant Accounting Policies” under Part II, Item 8 of our 2019 Form 10-K.
Loans
Loans are reported at amortized cost which consists of the principal amount outstanding, net of unearned loan fees. Unearned loan fees reflect unamortized deferred loan origination and commitment fees net of unamortized deferred loan origination costs. In addition to cash loan fees, we often obtain equity warrant assets that give us an option to purchase a position in a client company's stock in consideration for providing credit facilities. The grant date fair values of these equity warrant assets are deemed to be loan fees and are deferred as unearned income and recognized as an adjustment of loan yield through loan interest income. The net amount of unearned loan fees is amortized into loan interest income over the contractual terms of the underlying loans and commitments using the constant effective yield method, adjusted for actual loan prepayment experience, or the straight-line method, as applicable.
Allowance for Credit Losses: Loans
The allowance for credit losses for loans considers credit risk and is adjusted by a provision for expected credit losses ("ECL") charged to expense and reduced by the charge-off of loan amounts, net of recoveries. Our allowance for credit losses is an estimate of expected losses inherent with the Company's existing loans at the balance sheet date. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain.
Portfolio Segments
The estimation of ECL on loans process involves procedures to appropriately consider the unique characteristics of our six loan portfolio segments. Our six portfolio segments are determined by using the following risk dimensions: (i) underwriting methodology, (ii) industry niche and (iii) life stage. The six portfolio segments are further disaggregated into ten classes of financing receivable, or risk-based segments, and represents the level at which credit risk is monitored. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process to estimate ECL. The following provides additional information regarding our six portfolio segments:
(i)
Investor Dependent - Accelerator (Early-Stage) and Growth (Mid-Stage and Later-Stage)
Investor Dependent loans are made primarily to technology and life science/healthcare companies in both our Accelerator (Early-Stage) and Growth practices (Mid-Stage and Later-Stage). Investor Dependent loans typically have modest or negative cash flows and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture capital firms or others, or in some cases, a successful sale to a third party or an IPO. Venture capital firms may provide financing selectively, at reduced amounts, or on less favorable terms, which may have an adverse effect on our borrowers' ability to repay their loans to us. When repayment is dependent upon the next round of venture investment and there is an indication that further investment is unlikely or will not occur, it is often likely that the company would need to be sold to repay the debt in full. If reasonable efforts have not yielded a likely buyer willing to repay all debt at the close of the sale or on commercially viable terms, the account will most likely be deemed to be impaired and charged-off.
We further disaggregate Investor Dependent loans into three subcategories. Early-Stage consists of pre-revenue, development-stage companies and companies that are in the early phases of commercialization, with revenues of up to $5 million. Mid-Stage companies consist of growth-stage enterprises with revenues of between $5 million and $15 million or, in the case of biotechnology, pre-revenue clinical-stage companies. Later-Stage consists of companies with revenues of $15 million or more. This disaggregation is based in part on the materially different historical loss rate we

10


have experienced with each cohort, with historical loss rates being the highest in the Early-Stage segment, and declining in the Mid-Stage and Later-Stage segments, as a function of the relatively higher enterprise value and asset coverage that is created as a company progresses through the various stages of development.
(ii)
Cash Flow Dependent
Cash Flow Dependent loans are made primarily to technology and life science/healthcare companies, which include Sponsor Led Buyout lending, and require the borrower to maintain cash flow from operations that is sufficient to service all debt. Borrowers must demonstrate normalized cash flow in excess of all fixed charges associated with operating the business. Sponsor Led Buyout loans are typically used to assist a select group of experienced private equity sponsors with the acquisition of businesses and are larger in size, and repayment is generally dependent upon the cash flows of the acquired company. The acquired companies are typically established, later-stage businesses of scale and characterized by reasonable levels of leverage and loan structures that include meaningful financial covenants. The sponsor's equity contribution is often 50 percent or more of the acquisition price.
(iii)     Balance Sheet Dependent
Balance Sheet Dependent loans are made primarily to technology and life science/healthcare companies, which include asset-based loans, and are structured to require constant current asset coverage (i.e., cash, cash equivalents, accounts receivable and, to a much lesser extent, inventory) in an amount that exceeds the outstanding debt. These loans are generally made to companies in our Growth and Corporate Finance practices. The repayment of these arrangements is dependent on the financial condition, and payment ability, of third parties with whom our clients do business. As a result of the adoption of CECL and in connection with the revised approach to portfolio disaggregation discussed above, certain loans that were previously considered to be Balance Sheet Dependent have been reclassified as Investor Dependent - Later-Stage.
(iv)
Private Equity/Venture Capital
The vast majority of our Private Equity/Venture Capital portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds' remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are often secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.
(v)
Private Bank
Our Private Bank clients are primarily private equity/venture capital professionals and senior executives in the innovation companies they support. We offer a customized suite of private banking services, including mortgages, home equity lines of credit, restricted stock purchase loans, real estate secured home equity capital call lines of credit and other secured and unsecured lending products, as well as cash and wealth management services. In addition, we provide real estate secured loans to eligible employees through our Employee Home Ownership Program.
(vi)
Premium Wine and Other
Our Premium Wine clients primarily consist of premium wine producers across the Western United States, primarily in California's Napa Valley, Sonoma County and Central Coast regions, as well as the Pacific Northwest. Our other loan portfolio segment primarily includes our community development loans made as part of our responsibilities under the Community Reinvestment Act.
We maintain a systematic process for the evaluation of individual loans and portfolio segments for inherent risk of estimated credit losses for loans. At the time of approval, each loan in our portfolio is assigned a credit risk rating. Credit risk ratings are assigned on a scale of 1 to 10, with 1 representing loans with a low risk of nonpayment, 9 representing loans with the highest risk of nonpayment and 10 representing loans which have been charged-off. The credit risk ratings for each loan are monitored and updated on an ongoing basis. This credit risk rating process includes, but is not limited to, consideration of such factors as payment status, the financial condition and operating performance of the borrower, borrower compliance with loan covenants, underlying collateral values and performance trends, the degree of access to additional capital, the presence of credit enhancements such as third party guarantees (where applicable), the degree to which the borrower is sensitive to external factors and the depth and experience of the borrower's management team. Our policies require a committee of senior management to review, at least quarterly, credit relationships with a credit risk rating of 5 through 9 that exceed specific dollar values.

11


Expected Credit Loss Measurement
The methodology for estimating the amount of ECL reported in the allowance for credit losses has two main components: (1) ECL assessed on a collective basis for pools of loans that share similar risk characteristics which includes a qualitative adjustment based on management’s assessment of the risks that may lead to a future loan loss experience different from our historical loan loss experience and (2) ECL assessed for individual loans that do not share similar risk characteristics with other loans. We do not estimate ECL on accrued interest receivable ("AIR") on loans as AIR is reversed or written off when the full collection of the AIR related to a loan becomes doubtful. AIR on loans totaled $111.8 million at March 31, 2020 and $119.1 million at December 31, 2019 and is reported in "Accrued interest receivable and other assets" in our unaudited interim consolidated balance sheets.
While the evaluation process of our allowance for credit losses on loans uses historical and other objective information, the classification of loans and the estimate of the allowance for credit losses for loans rely on the judgment and experience of our management. A committee comprised of senior management evaluates the adequacy of the allowance for credit losses for loans, which includes review of loan portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
Loans That Share Similar Risk Characteristics With Other Loans
We derive an estimated ECL assumption from a non-discounted cash flow approach based on our portfolio segments discussed above. This approach incorporates: (1) probability of default ("PD"), (2) loss given default ("LGD") and (3) exposure at default ("EAD"), over the estimated life of the exposure. PD and LGD assumptions are developed based on quantitative models and inherent risk of credit loss, both of which involve significant judgement. Renewals and extensions within our control are not considered in the estimated contractual term of a loan. However, we include potential extensions if management has a reasonable expectation that we will execute a TDR with the borrower. The quantitative models are based on historical credit loss experience, adjusted for probability-weighted economic scenarios. These scenarios are used to support a reasonable and supportable forecast period of three years for all portfolio segments. To the extent the remaining contractual lives of loans in the portfolio extend beyond this three-year period, we revert to historical averages gradually over the remaining contractual lives, adjusted for prepayments. The macroeconomic scenarios are reviewed on a quarterly basis.    
We also apply a qualitative factor adjustment to the results obtained through our quantitative ECL models to consider relevant qualitative factors that relate to the environment in which the entity operates and are specific to the borrower. These adjustments are based upon our assessment of the risks that may lead to a future loan loss experience different from our historical loan loss experience. These risks are aggregated to become our qualitative allocation. Based on our qualitative assessment estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period and may include, but is not limited to, consideration of the following factors:
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
Changes in the nature and volume of the portfolio and in the terms of loans;
Changes in the experience, ability and depth of lending management and other relevant staff;
Changes in the volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans;
Changes in the quality of the institution’s loan review system;
Changes in the value of underlying collateral for collateral-dependent loans;
The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.
Loans That Do Not Share Similar Risk Characteristics
We monitor our loan pools to ensure all assets therein continue to share similar risk characteristics with other financial assets inside the pool. Changes in credit risk, borrower circumstances or the recognition of write-offs may indicate that a loan's risk profile has changed, and the asset should be removed from its current pool. For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ECL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral will

12


be determined by the most recent appraisal, as adjusted to reflect a reasonable marketing period for the sale of the asset(s) and an estimate of reasonable selling expenses. Collateral-dependent loans will have independent appraisals completed and accepted at least annually.
Allowance for Credit Losses: Unfunded Credit Commitments
We maintain a separate allowance for credit losses for unfunded credit commitments which is included in other liabilities and the related ECL in our provision for credit losses. We estimate the amount of expected losses by using historical trends to calculate a probability of an unfunded credit commitment being funded and derive historical lifetime expected loss factors for each portfolio segment similar to our funded loan ECL. The collectively assessed ECL for unfunded credit commitments also includes the same qualitative allocations applied for our funded loan ECL. For unfunded credit commitments related to loans that do not share similar risk characteristics with other loans, where applicable, a separate estimate of ECL will be included in our total allowance for credit losses on unfunded credit commitments. Loan commitments that are determined to be unconditionally cancellable by the Company do not require an allowance for credit losses.
Investment Securities
Available-for-Sale Securities and the Allowance for Credit Losses on Available-for-Sale Securities
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed to earn an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification and meeting our asset/liability management objectives. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of SVBFG's stockholders' equity, until realized.
We analyze available-for-sale securities for impairment related to credit losses each quarter. Market valuations represent the current fair value of a security at a specified point in time and incorporates the risk of timing of interest due and the return of principal over the contractual life of each security. Gains and losses on securities are realized when there is a sale of the security prior to maturity. A credit impairment is recognized through a valuation allowance against the security with an offset through earnings; the allowance is limited to the amount that fair value, calculated as the present value of expected future cash flow discounted at the security’s effective interest rate, is less than the amortized cost basis. We separate the amount of the impairment related to credit losses, if any, and the amount due to all other factors. The credit loss component is recognized in earnings and recorded as an allowance for credit losses for AFS securities.
Held-to-Maturity Securities and the Allowance for Credit Losses on Held-to-Maturity Securities
Debt securities purchased with the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are recorded at amortized cost, net of any allowance for credit losses.
We measure ECL on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the exception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ECL. Our municipal bond portfolio primarily consists of highly rated bonds and currently carry ratings no lower than Aa3. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for current conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year. We do not estimate ECL on accrued interest receivable ("AIR") from held-to-maturity securities as AIR is reversed or written off when the full collection of the AIR related to a security becomes doubtful. AIR from held-to-maturity securities totaled $41.5 million at March 31, 2020 and $45.2 million at December 31, 2019 and is reported in "Accrued interest receivable and other assets" in our unaudited interim consolidated balance sheets.
Expected credit loss on municipal bonds that do not share common risk characteristics with our collective portfolio are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows and the recorded amortized cost basis of the security.

Adoption of New Accounting Standards
Financial Instruments - Credit Losses
In June 2016, the FASB issued a new Accounting Standard Update (ASU 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), which amends the incurred loss impairment methodology in current GAAP with a methodology that reflects a current expected credit loss measurement to estimate the allowance for credit losses over the contractual life of the financial assets (including loans, unfunded credit commitments and HTM securities) and

13


requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. While the CECL model does not apply to available-for-sale debt securities, ASU 2016-13 does require entities to record an allowance for credit losses when recognizing credit losses for available-for-sale securities, rather than reduce the amortized cost of the securities by direct write-offs, which allows for reversal of credit impairments in future periods based on improvements in credit. We adopted the guidance on January 1, 2020, using a modified retrospective approach. We recognized the cumulative effect of initially applying CECL as an adjustment to the opening balance of retained earnings, net of tax. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
We completed a comprehensive implementation process that included loss forecasting model development, evaluation of technical accounting topics, updates to our allowance for credit loss accounting policies, reporting processes and related internal controls, overall operational readiness for our adoption of CECL as well as parallel runs for CECL alongside our previous allowance process. We provided quarterly updates to senior management and to the Audit and Credit Committees of the Board of Directors throughout the implementation process. For additional details regarding our allowance for credit losses methodology, see Note 7 — “Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Based on our loan, unfunded credit commitment, and HTM security portfolios composition at December 31, 2019, and the then current economic environment, the cumulative effect of the changes to our consolidated balance sheets at January 1, 2020, for the adoption of CECL were as follows:

(Dollars in thousands)
 
Balance at December 31, 2019
 
Adjustments Due to Adoption of ASC 326
 
Balance at
January 1, 2020
Assets:
 
 
 
 
 
 
Allowance for credit losses: loans
 
$
304,924

 
$
25,464

 
$
330,388

Allowance for credit losses: held-to-maturity securities
 

 
174

 
174

Deferred tax assets
 
28,433

 
13,415

 
41,848

Other liabilities:
 
 
 
 
 
 
Allowance for credit losses: unfunded credit commitments
 
67,656

 
22,826

 
90,482

Stockholders' equity:
 
 
 
 
 
 
Retained earnings, net of tax
 
4,575,601

 
(35,049
)
 
4,540,552


Prior to the effective adoption date of CECL, Federal banking regulatory agencies had provided relief for the initial capital decrease at adoption by allowing the impact to be phased-in over three years on a straight-line basis. Subsequent to our adoption of CECL, Federal banking regulatory agencies provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by the Coronavirus Disease 2019 pandemic ("COVID-19") as well as the significant resources required to implement CECL. At the time of the adoption of CECL, we were not expecting to utilize the initial relief provided by the Federal banking regulatory agencies as the initial capital decrease at adoption did not have a material impact to our capital ratios; however, the impact to our capital from subsequent increases in our allowance for credit losses from the day one adoption impact related to COVID-19 economic factors was deemed significant. As a result, we have elected to use the regulatory capital phase-in under the interim final rule. Refer to the "Capital Resources" section under Part I, Item 2 of this report for additional details.
Additionally, under the prior guidance, our loan portfolio and credit quality disclosures were disaggregated based on client market segments. Upon adoption of CECL, our technology (software/internet and hardware) and life science/healthcare market segments are disclosed by the portfolio segment that aligns with their respective underwriting methodology and the level at which credit risk is now monitored by management. The primary underwriting method for our technology and life science/healthcare portfolios are classified as investor dependent (early-stage and growth), cash flow dependent or balance sheet dependent, as noted above, and prior period amounts were reclassified for comparability. There are no other material changes to our current market segments.
Other Adopted Accounting Pronouncements
In August 2018, the FASB issued a new Accounting Standard Update (ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement). The ASU primarily modifies certain disclosures with respect to Level 3 fair value measurements. We adopted the guidance on January 1, 2020. The adoption did not have an impact on our consolidated financial position or results of operations and did not have a material impact on the disclosures in our notes to our unaudited interim consolidated financial statements.

14


2.
Stockholders' Equity and EPS
Accumulated Other Comprehensive Income
The following table summarizes the items reclassified out of accumulated other comprehensive income into the Consolidated Statements of Income (unaudited) for the three months ended March 31, 2020 and 2019:
 
 
 
 
Three months ended March 31,
(Dollars in thousands)
 
Income Statement Location
 
2020
 
2019
Reclassification adjustment for (gains) losses on available-for-sale securities included in net income
 
Gains on investment securities, net
 
$
(61,165
)
 
$
3,630

Related tax expense (benefit)
 
Income tax expense
 
16,953

 
(1,010
)
Reclassification adjustment for (gains) losses on cash flow hedges included in net income
 
Net interest income
 
(2,089
)
 
3

Related tax expense (benefit)
 
Income tax expense
 
579

 
(1
)
Total reclassification adjustment for (gains) losses included in net income, net of tax
 
 
 
$
(45,722
)
 
$
2,622


The table below summarizes the activity relating to net gains and losses on our cash flow hedges included in accumulated other comprehensive income for the three months ended March 31, 2020 and 2019. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the termination of our cash flow hedges during the three months ended March 31, 2020. Over the next 12 months, we expect that approximately $63.5 million in accumulated other comprehensive income ("AOCI") at March 31, 2020, related to unrealized gains will be reclassified out of AOCI and recognized in net income.
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Balance, beginning of period, net of tax
 
$
(2,130
)
 
$

Net increase in fair value, net of tax
 
167,639

 
795

Net realized (gain) loss reclassified to net income, net of tax
 
(1,510
)
 
2

Balance, end of period, net of tax
 
$
163,999

 
$
797


EPS

Basic EPS is the amount of earnings available to each share of common stock outstanding during the reporting period. Diluted EPS is the amount of earnings available to each share of common stock outstanding during the reporting period adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental shares issuable for stock options and restricted stock unit awards outstanding under our 2006 Equity Incentive Plan and our ESPP. Potentially dilutive common shares are excluded from the computation of dilutive EPS in periods in which the effect would be antidilutive.

15


The following is a reconciliation of basic EPS to diluted EPS for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars and shares in thousands, except per share amounts)
 
2020
 
2019
Numerator:
 
 
 
 
Net income available to common stockholders
 
$
132,253

 
$
288,732

Denominator:
 
 
 
 
Weighted average common shares outstanding—basic
 
51,565

 
52,587

Weighted average effect of dilutive securities:
 
 
 
 
Stock options and ESPP
 
217

 
297

Restricted stock units and awards
 
162

 
225

Weighted average common shares outstanding—diluted
 
51,944

 
53,109

Earnings per common share:
 
 
 
 
Basic
 
$
2.56

 
$
5.49

Diluted
 
2.55

 
5.44



The following table summarizes the weighted-average common shares excluded from the diluted EPS calculation due to the antidilutive effect for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Shares in thousands)
 
2020
 
2019
Stock options
 
206

 
91

Restricted stock units
 
119

 
134

Total
 
325

 
225


Stock Repurchase Program
On October 24, 2019, our Board of Directors authorized a new stock repurchase program that enables us to repurchase up to $350 million of our outstanding common stock. This program expires on October 29, 2020. For the three months ended March 31, 2020, we repurchased 244,223 shares of our outstanding common stock for $60.0 million under the new stock repurchase program.
Preferred Stock
On December 9, 2019, the Company issued depositary shares representing an ownership interest in 350,000 shares of Series A Preferred Stock with $0.001 par value and liquidation preference of $1,000 per share, or $25 per depositary share. All preferred shares were issued in the form of depositary shares, with each depositary share representing a 1/40th ownership interest in a share of the preferred stock. The Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or other obligation of the Company. Dividends are approved by the Board of Directors and, if declared, are payable quarterly, in arrears, at a rate per annum equal to 5.25 percent. The Series A Preferred Stock is redeemable at the Company’s option, in whole or in part, on or after February 15, 2025. Prior to February 15, 2025, the Series A Preferred Stock is redeemable at the Company’s option, in whole and not in part, following any change in laws or regulations that would not allow the Company to treat the full liquidation value of the Series A Preferred Stock as Tier 1 capital for purposes of the capital adequacy guidelines of the Board of Governors of the Federal Reserve System ("the Federal Reserve"). The redemption amount is computed at the per share liquidation preference plus any declared but unpaid dividends. Redemptions are subject to certain regulatory provisions, including approval of the Federal Reserve.
As of March 31, 2020, there were 350,000 shares issued and outstanding of Series A Preferred Shares, which had a carrying value of $340.1 million and liquidation preference of $350.0 million.
The following table summarizes our preferred stock at March 31, 2020:
Series
 
Description
 
Amount outstanding (in millions)
 
Carrying value
(in millions)
 
Shares issued and outstanding
 
Par Value
 
Ownership interest per depository share
 
Liquidation preference per depository share
 
2020 dividends paid per depository share
Series A
 
5.250% Fixed-Rate Non-Cumulative Perpetual Preferred Stock
 
$
350

 
$
340.1

 
350,000
 
$
0.001

 
1/40th
 
$
25

 
$
0.24



16


3.
Share-Based Compensation
For the three months ended March 31, 2020 and 2019, we recorded share-based compensation and related tax benefits as follows: 
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Share-based compensation expense
 
$
19,171

 
$
15,122

Income tax benefit related to share-based compensation expense
 
(4,440
)
 
(3,327
)

Unrecognized Compensation Expense
As of March 31, 2020, unrecognized share-based compensation expense was as follows:
(Dollars in thousands)
 
  Unrecognized  
Expense
 
Weighted Average Expected
Recognition Period 
- in Years  
Stock options
 
$
12,668

 
2.35
Restricted stock units and awards
 
95,440

 
2.66
Total unrecognized share-based compensation expense
 
$
108,108

 
 

Share-Based Payment Award Activity
The table below provides stock option information related to the 2006 Equity Incentive Plan for the three months ended March 31, 2020:
 
 
Options
 
Weighted
Average
 Exercise Price 
 
Weighted Average Remaining Contractual Life - in Years  
 
Aggregate
  Intrinsic Value  
of In-The-
Money
Options
Outstanding at December 31, 2019
 
625,407

 
$
169.33

 
 
 
 
Granted
 
1,316

 
244.69

 
 
 
 
Exercised
 
(50,733
)
 
85.32

 
 
 
 
Forfeited
 
(2,399
)
 
224.87

 
 
 
 
Outstanding at March 31, 2020
 
573,591

 
176.70

 
3.63
 
$
11,973,716

Vested and expected to vest at March 31, 2020
 
560,684

 
174.94

 
3.58
 
11,967,072

Exercisable at March 31, 2020
 
310,688

 
131.01

 
2.34
 
10,376,626


The aggregate intrinsic value of outstanding options shown in the table above represents the pre-tax intrinsic value based on our closing stock price of $151.08 as of March 31, 2020. The total intrinsic value of options exercised during the three months ended March 31, 2020 was $8.3 million, compared to $7.5 million for the comparable 2019 period.
The table below provides information for restricted stock units and awards under the 2006 Equity Incentive Plan for the three months ended March 31, 2020:
 
 
Shares    
 
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2019
 
847,972

 
$
236.54

Granted
 
46,027

 
217.97

Vested
 
(77,900
)
 
205.91

Forfeited
 
(19,591
)
 
220.12

Nonvested at March 31, 2020
 
796,508

 
238.86



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4.
Variable Interest Entities
Our involvement with VIEs includes our investments in venture capital and private equity funds, debt funds, private and public portfolio companies and qualified affordable housing projects.
The following table presents the carrying amounts and classification of significant variable interests in consolidated and unconsolidated VIEs as of March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
Consolidated VIEs
 
Unconsolidated VIEs
 
Maximum Exposure to Loss in Unconsolidated VIEs
March 31, 2020:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
9,322

 
$

 
$

Non-marketable and other equity securities (1)
 
261,049

 
722,600

 
722,600

Accrued interest receivable and other assets
 
1,374

 

 

Total assets
 
$
271,745

 
$
722,600

 
$
722,600

Liabilities:
 
 
 
 
 
 
Other liabilities (1)
 
1,677

 
348,272

 

Total liabilities
 
$
1,677

 
$
348,272

 
$

December 31, 2019:
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,629

 
$

 
$

Non-marketable and other equity securities (1)
 
270,057

 
689,360

 
689,360

Accrued interest receivable and other assets
 
1,117

 

 

Total assets
 
$
278,803

 
$
689,360

 
$
689,360

Liabilities:
 
 
 
 
 
 
Other liabilities (1)
 
2,854

 
302,031

 

Total liabilities
 
$
2,854

 
$
302,031

 
$

 
 
(1)
Included in our unconsolidated non-marketable and other equity securities portfolio at March 31, 2020 and December 31, 2019 are investments in qualified affordable housing projects of $500.8 million and $458.5 million, respectively, and related other liabilities consisting of unfunded commitments of $348.3 million and $302.0 million, respectively.

Non-marketable and other equity securities
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies and qualified affordable housing projects. A majority of these investments are through third- party funds held by SVB Financial in which we do not have controlling or significant variable interests. These investments represent our unconsolidated VIEs in the table above. Our non-marketable and other equity securities portfolio also includes investments from SVB Capital. SVB Capital is the funds management business of SVB Financial Group, which focuses primarily on venture capital investments. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. We have a controlling and significant variable interest in four of these SVB Capital funds and consolidate these funds for financial reporting purposes.
All investments are generally nonredeemable, and distributions are expected to be received through the liquidation of the underlying investments throughout the life of the investment fund. Investments may only be sold or transferred subject to the notice and approval provisions of the underlying investment agreement. Subject to applicable regulatory requirements, including the Volcker Rule, we also make commitments to invest in venture capital and private equity funds. For additional details, see Note 15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
The Bank also has variable interests in low income housing tax credit funds, in connection with fulfilling its responsibilities under the Community Reinvestment Act (“CRA”), that are designed to generate a return primarily through the realization of federal tax credits. These investments are typically limited partnerships in which the general partner, other than the Bank, holds the power over significant activities of the VIE; therefore, these investments are not consolidated. For additional information on

18


our investments in qualified affordable housing projects, see Note 6 — “Investment Securities" of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
As of March 31, 2020, our exposure to loss with respect to the consolidated VIEs is limited to our net assets of $270.1 million and our exposure to loss for our unconsolidated VIEs is equal to our investment in these assets of $722.6 million.
5.
Cash and Cash Equivalents
The following table details our cash and cash equivalents at March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
March 31, 2020

December 31, 2019
Cash and due from banks (1)
 
$
9,159,690

 
$
6,492,443

Securities purchased under agreements to resell (2)
 
401,758

 
289,340

Total cash and cash equivalents
 
$
9,561,448

 
$
6,781,783

 
 
(1)
At March 31, 2020 and December 31, 2019, $7.2 billion and $3.7 billion, respectively, of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate, and interest-earning deposits in other financial institutions were $1.4 billion and $2.1 billion, respectively.
(2)
At March 31, 2020 and December 31, 2019, securities purchased under agreements to resell were collateralized by U.S. Treasury securities and U.S. agency securities with aggregate fair values of $409.8 million and $295.3 million, respectively. None of these securities were sold or repledged as of March 31, 2020 and December 31, 2019.
6.
Investment Securities
Our investment securities portfolio consists of: (i) an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest-earning investment securities, and (ii) a non-marketable and other equity securities portfolio, which primarily represents investments managed as part of our funds management business, investments in qualified affordable housing projects, as well as public equity securities held as a result of equity warrant assets exercised.
Available-for-Sale Securities
The major components of our available-for-sale investment securities portfolio at March 31, 2020 and December 31, 2019 are as follows:
 
 
March 31, 2020
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
3,745,238

 
$
298,602

 
$

 
$
4,043,840

U.S. agency debentures
 
100,000

 
1,687

 

 
101,687

Foreign government debt securities
 
22,169

 
1

 
(18
)
 
22,152

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
4,758,167

 
185,347

 
(2
)
 
4,943,512

Agency-issued collateralized mortgage obligations—fixed rate
 
1,409,673

 
56,002

 

 
1,465,675

Agency-issued commercial mortgage-backed securities
 
2,009,470

 
61,728

 

 
2,071,198

Total available-for-sale securities
 
$
12,044,717

 
$
603,367

 
$
(20
)
 
$
12,648,064



19


 
 
December 31, 2019
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Carrying
Value
Available-for-sale securities, at fair value:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
6,815,874

 
$
82,267

 
$
(4,131
)
 
$
6,894,010

U.S. agency debentures
 
100,000

 

 
(453
)
 
99,547

Foreign government debt securities
 
9,037

 
1

 

 
9,038

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
4,109,372

 
39,438

 
(19
)
 
4,148,791

Agency-issued collateralized mortgage obligations—fixed rate
 
1,520,414

 
17,929

 

 
1,538,343

Agency-issued commercial mortgage-backed securities
 
1,339,651

 
1,078

 
(15,539
)
 
1,325,190

Total available-for-sale securities
 
$
13,894,348

 
$
140,713

 
$
(20,142
)
 
$
14,014,919


The following table summarizes sale activity of available-for-sale securities during the three months ended March 31, 2020 and 2019 as recorded in the line item “Gains on investment securities, net," a component of noninterest income:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Sales proceeds
 
$
2,654,212

 
$
1,171,564

Net realized gains and losses:
 
 
 
 
Gross realized gains
 
61,165

 

Gross realized losses
 

 
(3,630
)
Net realized gains (losses)
 
$
61,165

 
$
(3,630
)

The following tables summarize our available-for-sale securities in an unrealized loss position for which an allowance for credit losses has not been recorded and summarized into categories of less than 12 months, or 12 months or longer, as of March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
 
Less than 12 months
 
12 months or longer (1)
 
Total
(Dollars in thousands)
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign government debt securities
 
13,292

 
(18
)
 

 

 
13,292

 
(18
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
626

 
(2
)
 

 

 
626

 
(2
)
Total available-for-sale securities (1)
 
$
13,918

 
$
(20
)
 
$

 
$

 
$
13,918

 
$
(20
)
 
 
(1)
As of March 31, 2020, we identified a total of 2 investments that were in unrealized loss positions, and neither position was in an unrealized loss position for a period of time greater than 12 months. Based on our analysis of the securities in an unrealized loss position as of March 31, 2020, the decline in value is unrelated to credit loss and is related to changes in market interest rates since purchase and therefore changes in value for securities are included in other comprehensive income. Market valuations and credit loss analyses on assets in the available-for-sale securities portfolio are reviewed and monitored on a quarterly basis. As of March 31, 2020, we do not intend to sell any of our securities in an unrealized loss position prior to recovery of our amortized cost basis, and it is more likely than not that we will not be required to sell any of our securities prior to recovery of our amortized cost basis. None of the investments in our available-for-sale securities portfolio were past due as of March 31, 2020.

20


 
 
December 31, 2019
 
 
Less than 12 months
 
12 months or longer (1)
 
Total
(Dollars in thousands)
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
 
Fair Value of
Investments
 
Unrealized
Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
971,572

 
$
(3,996
)
 
$
449,850

 
$
(135
)
 
$
1,421,422

 
$
(4,131
)
U.S. agency debentures
 
99,547

 
(453
)
 

 

 
99,547

 
(453
)
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
4,014

 
(19
)
 

 

 
4,014

 
(19
)
Agency-issued commercial mortgage-backed securities
 
1,027,232

 
(15,539
)
 

 

 
1,027,232

 
(15,539
)
Total available-for-sale securities (1)
 
$
2,102,365

 
$
(20,007
)
 
$
449,850

 
$
(135
)
 
$
2,552,215

 
$
(20,142
)
 
 
(1)
As of December 31, 2019, we identified a total of 58 investments that were in unrealized loss positions, of which 12 investments totaling $0.4 billion with unrealized losses of $0.1 million have been in an unrealized loss position for a period of time greater than 12 months.
The following table summarizes the fixed income securities, carried at fair value, classified as available-for-sale as of March 31, 2020 by the remaining contractual principal maturities. For U.S. Treasury securities, U.S. agency debentures and foreign government debt securities, the expected maturity is the actual contractual maturity of the notes. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments.
 
 
March 31, 2020
(Dollars in thousands)
 
Total
 
One Year
or Less
 
After One
Year to
Five Years
 
After Five
Years to
Ten Years
 
After
Ten Years
U.S. Treasury securities
 
$
4,043,840

 
$
110,935

 
$
1,626,096

 
$
2,306,809

 
$

U.S. agency debentures
 
101,687

 

 

 
101,687

 

Foreign government debt securities
 
22,152

 
22,152

 

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
4,943,512

 

 

 

 
4,943,512

Agency-issued collateralized mortgage obligations—fixed rate
 
1,465,675

 

 
1,094

 

 
1,464,581

Agency-issued commercial mortgage-backed securities
 
2,071,198

 

 

 
803,536

 
1,267,662

Total
 
$
12,648,064

 
$
133,087

 
$
1,627,190

 
$
3,212,032

 
$
7,675,755



21


Held-to-Maturity Securities

The components of our held-to-maturity investment securities portfolio at March 31, 2020 and December 31, 2019 are as follows:
 
 
March 31, 2020
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Allowance for Credit Losses (2)
Held-to-maturity securities, at cost:
 
 
 
 
 
 
 
 
 
 
U.S. agency debentures (1)
 
$
453,353

 
$
14,799

 
$

 
$
468,152

 
$

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
6,662,878

 
310,896

 
(90
)
 
6,973,684

 

Agency-issued collateralized mortgage obligations —fixed rate
 
1,482,205

 
30,323

 
(4
)
 
1,512,524

 

Agency-issued collateralized mortgage obligations—variable rate
 
170,774

 

 
(1,652
)
 
169,122

 

Agency-issued commercial mortgage-backed securities
 
2,644,968

 
98,806

 
(512
)
 
2,743,262

 

Municipal bonds and notes
 
2,160,341

 
105,860

 
(1,791
)
 
2,264,410

 
230

Total held-to-maturity securities
 
$
13,574,519

 
$
560,684

 
$
(4,049
)
 
$
14,131,154

 
$
230

 
 
(1)
Consists of pools of Small Business Investment Company debentures issued and guaranteed by the U.S. Small Business Administration, an independent agency of the United States.
(2) Refer to Note 1 - "Basis of Presentation" of the "Notes to Interim Consolidated Financial Statements (unaudited)" under Part i, Item 1 of this report for more information on our credit loss methodology.
 
 
December 31, 2019
(Dollars in thousands)
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
Held-to-maturity securities, at amortized cost:
 
 
 
 
 
 
 
 
U.S. agency debentures (1)
 
$
518,728

 
$
6,640

 
$
(668
)
 
$
524,700

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
6,992,009

 
142,209

 
(2,066
)
 
7,132,152

Agency-issued collateralized mortgage obligations—fixed rate
 
1,608,032

 
592

 
(8,502
)
 
1,600,122

Agency-issued collateralized mortgage obligations—variable rate
 
178,611

 
94

 
(259
)
 
178,446

Agency-issued commercial mortgage-backed securities
 
2,759,615

 
56,914

 
(4,508
)
 
2,812,021

Municipal bonds and notes
 
1,785,951

 
83,314

 
(1,434
)
 
1,867,831

Total held-to-maturity securities
 
$
13,842,946

 
$
289,763

 
$
(17,437
)
 
$
14,115,272

 
 
(1)
Consists of pools of Small Business Investment Company debentures issued and guaranteed by the U.S. Small Business Administration, an independent agency of the United States.
Allowance for Credit Losses for HTM Securities
The following table summarizes the activity relating to our allowance for credit losses for HTM securities for the three months ended March 31, 2020:
Three months ended March 31, 2020
 
Beginning Balance December 31, 2019
 
Day One Impact of adopting ASC 326
 
Provision for Credit Losses
 
Ending Balance March 31, 2020
(Dollars in thousands)
 
 
 
 
Municipal bonds and notes
 
$

 
$
174

 
$
56

 
$
230

Total allowance for credit losses
 
$

 
$
174

 
$
56

 
$
230



22


Credit Quality Indicators
On a quarterly basis, management monitors the credit quality for HTM securities through the use of standard credit ratings. The following table summarizes our amortized cost of HTM securities aggregated by credit quality indicator at March 31, 2020:
(Dollars in thousands)
 
March 31, 2020
Municipal bonds and notes:
 
 
Aaa
 
$
1,458,546

Aa1
 
477,068

Aa2
 
223,357

Aa3
 
1,370

Total
 
$
2,160,341




23


The following table summarizes the remaining contractual principal maturities on fixed income investment securities classified as held-to-maturity as of March 31, 2020. For U.S. agency debentures, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as held-to-maturity typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments.
 
 
March 31, 2020
 
 
Total
 
One Year
or Less
 
After One Year to
Five Years
 
After Five Years to
Ten Years
 
After
Ten Years
(Dollars in thousands)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
U.S. agency debentures
 
$
453,353

 
$
468,152

 
$
2,622

 
$
2,673

 
$
142,990

 
$
146,270

 
$
307,741

 
$
319,209

 
$

 
$

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
6,662,878

 
6,973,684

 
11,853

 
11,983

 
50,777

 
51,678

 
685,374

 
702,253

 
5,914,874

 
6,207,770

Agency-issued collateralized mortgage obligationsfixed rate
 
1,482,205

 
1,512,524

 

 

 

 

 
661,217

 
674,788

 
820,988

 
837,736

Agency-issued collateralized mortgage obligationsvariable rate
 
170,774

 
169,122

 

 

 

 

 

 

 
170,774

 
169,122

Agency-issued commercial mortgage-backed securities
 
2,644,968

 
2,743,262

 

 

 

 

 
102,565

 
118,381

 
2,542,403

 
2,624,881

Municipal bonds and notes
 
2,160,341

 
2,264,410

 
30,719

 
30,757

 
134,007

 
136,572

 
441,995

 
462,836

 
1,553,620

 
1,634,245

Total
 
$
13,574,519

 
$
14,131,154

 
$
45,194

 
$
45,413

 
$
327,774

 
$
334,520

 
$
2,198,892

 
$
2,277,467

 
$
11,002,659

 
$
11,473,754




24


Non-marketable and Other Equity Securities
The major components of our non-marketable and other equity securities portfolio at March 31, 2020 and December 31, 2019 are as follows:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Non-marketable and other equity securities:
 
 
 
 
Non-marketable securities (fair value accounting):
 
 
 
 
Consolidated venture capital and private equity fund investments (1)
 
$
85,336

 
$
87,180

Unconsolidated venture capital and private equity fund investments (2)
 
171,930

 
178,217

Other investments without a readily determinable fair value (3)
 
52,666

 
55,255

Other equity securities in public companies (fair value accounting) (4)
 
26,899

 
59,200

Non-marketable securities (equity method accounting) (5):
 
 
 
 
Venture capital and private equity fund investments
 
206,495

 
215,367

Debt funds
 
6,910

 
7,271

Other investments
 
149,557

 
152,863

Investments in qualified affordable housing projects, net (6)
 
500,802

 
458,476

Total non-marketable and other equity securities
 
$
1,200,595

 
$
1,213,829

 
(1)
The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and our ownership percentage of each fund at March 31, 2020 and December 31, 2019 (fair value accounting):
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Amount
 
Ownership %
 
Amount
 
Ownership %
Strategic Investors Fund, LP
 
$
5,337

 
12.6
%
 
$
5,729

 
12.6
%
Capital Preferred Return Fund, LP
 
44,696

 
20.0

 
45,341

 
20.0

Growth Partners, LP
 
35,169

 
33.0

 
35,976

 
33.0

CP I, LP
 
134

 
10.7

 
134

 
10.7

Total consolidated venture capital and private equity fund investments
 
$
85,336

 
 
 
$
87,180

 
 


(2)
The carrying value represents investments in 196 and 205 funds (primarily venture capital funds) at March 31, 2020 and December 31, 2019, respectively, where our ownership interest is typically less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships operating activities and financial policies. We carry our unconsolidated venture capital and private equity fund investments at fair value based on the fund investments' net asset values per share as obtained from the general partners of the investments. For each fund investment, we adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example December 31st for our March 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
(3)
These investments include direct equity investments in private companies. The carrying value is based on the price at which the investment was acquired plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted.

25


The following table shows the changes to the carrying amount of other investments without a readily determinable fair value for the three months ended March 31, 2020:
(Dollars in thousands)
 
Three months ended March 31, 2020
 
Cumulative Adjustments
Measurement alternative:
 
 
 
 
Carrying value at March 31, 2020
 
$
52,666

 
 
Carrying value adjustments:
 
 
 
 
Impairment
 
$

 
$
(460
)
Upward changes for observable prices
 
12

 
1,948

Downward changes for observable prices
 
(3,012
)
 
(7,629
)
(4)
Investments classified as other equity securities (fair value accounting) represent shares held in public companies as a result of exercising public equity warrant assets and direct equity investments in public companies held by our consolidated funds. Changes in equity securities measured at fair value are recognized through net income.
(5)
The following table shows the carrying value and our ownership percentage of each investment at March 31, 2020 and December 31, 2019 (equity method accounting):
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Amount
 
Ownership %
 
Amount
 
Ownership %
Venture capital and private equity fund investments:
 
 
 
 
 
 
 
 
Strategic Investors Fund II, LP
 
$
3,277

 
8.6
%
 
$
3,612

 
8.6
%
Strategic Investors Fund III, LP
 
14,487

 
5.9

 
15,668

 
5.9

Strategic Investors Fund IV, LP
 
25,037

 
5.0

 
27,064

 
5.0

Strategic Investors Fund V funds
 
44,815

 
Various

 
46,830

 
Various

CP II, LP (i)
 
5,103

 
5.1

 
5,907

 
5.1

Other venture capital and private equity fund investments
 
113,776

 
Various

 
116,286

 
Various

 Total venture capital and private equity fund investments
 
$
206,495

 
 
 
$
215,367

 
 
Debt funds:
 
 
 
 
 
 
 
 
Gold Hill Capital 2008, LP (ii)
 
$
5,255

 
15.5
%
 
$
5,525

 
15.5
%
Other debt funds
 
1,655

 
Various

 
1,746

 
Various

Total debt funds
 
$
6,910

 
 
 
$
7,271

 
 
Other investments:
 
 
 
 
 
 
 
 
SPD Silicon Valley Bank Co., Ltd.
 
$
73,453

 
50.0
%
 
$
74,190

 
50.0
%
Other investments
 
76,104

 
Various

 
78,673

 
Various

Total other investments
 
$
149,557

 
 
 
$
152,863

 
 

 
(i)
Our ownership includes direct ownership interest of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP.
(ii)
Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent.

(6)
The following table presents the balances of our investments in qualified affordable housing projects and related unfunded commitments included as a component of “Other liabilities” on our consolidated balance sheets at March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Investments in qualified affordable housing projects, net
 
$
500,802

 
$
458,476

Other liabilities
 
348,272

 
302,031



26


The following table presents other information relating to our investments in qualified affordable housing projects for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Tax credits and other tax benefits recognized
 
$
11,759

 
$
9,257

Amortization expense included in provision for income taxes (i)
 
11,471

 
7,636

 
 
(i)
All investments are amortized using the proportional amortization method and amortization expense is included in the provision for income taxes.

27


The following table presents the net gains and losses on non-marketable and other equity securities for the three months ended March 31, 2020 and 2019 as recorded in the line item “Gains on investment securities, net," a component of noninterest income:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Net gains (losses) on non-marketable and other equity securities:
 
 
 
 
Non-marketable securities (fair value accounting):
 
 
 
 
Consolidated venture capital and private equity fund investments
 
$
3,113

 
$
3,289

Unconsolidated venture capital and private equity fund investments
 
1,252

 
8,006

Other investments without a readily determinable fair value
 
(2,943
)
 
5,005

Other equity securities in public companies (fair value accounting)
 
(7,504
)
 
11,803

Non-marketable securities (equity method accounting):
 
 
 
 
Venture capital and private equity fund investments
 
(8,046
)
 
2,789

Debt funds
 
(362
)
 

Other investments
 
(620
)
 
1,766

Total net (losses) gains on non-marketable and other equity securities
 
$
(15,110
)
 
$
32,658

Less: realized net (losses) gains on sales of non-marketable and other equity securities
 
(49
)
 
9,835

Net (losses) gains on non-marketable and other equity securities still held
 
$
(15,061
)
 
$
22,823



7.
Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments
We serve a variety of commercial clients in the technology, life science/healthcare, private equity/venture capital and premium wine industries. Our technology clients generally tend to be in the industries of hardware (such as semiconductors, communications, data, storage, and electronics), software/internet (such as infrastructure software, applications, software services, digital content and advertising technology) and energy and resource innovation (“ERI”). Our life science/healthcare clients primarily tend to be in the industries of biotechnology, medical devices, healthcare information technology and healthcare services. Loans to our technology, life science/healthcare and ERI clients are reported under the Investor Dependent, Cash Flow Dependent and Balance Sheet Dependent risk-based segments below. Loans made to private equity/venture capital firm clients typically enable them to fund investments prior to their receipt of funds from capital calls. Loans to the premium wine industry focus on vineyards and wineries that produce grapes and wines of high quality. In addition to commercial loans, we make consumer loans through SVB Private Bank and provide real estate secured loans to eligible employees through our EHOP.
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.
CECL Adoption
On January 1, 2020, we adopted the new credit loss guidance, CECL, and all related amendments. Our loan portfolio was pooled into six portfolio segments that share similar risk characteristics and represent the level at which we developed our systematic methodology to determine our allowance for credit losses. Further, our portfolio segments were disaggregated and grouped into ten classes of financing receivable that represent the level at which we monitor and assess credit risk, which we refer to as "risk-based segments". As such, our funded loans and credit quality disclosures below are presented at the risk-based segment level of disaggregation. The comparative information below has been reclassified to conform to current period presentations. However, the financial results continue to be reported under the accounting standards in effect for those periods. Certain prior period credit quality disclosures related to impaired loans and our individually and collectively evaluated loan portfolio have been superseded with the current guidance and have not been included below, please refer to Note 10 - “Loans, Allowance for Loan Losses and Allowance for Unfunded Credit Commitments" under Part II, Item 8 of our 2019 Form 10-K for additional prior period information.
Refer to Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the adoption of CECL.

28


The composition of loans at amortized cost basis broken out by risk-based segment at March 31, 2020 and December 31, 2019 is presented in the following table:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Private equity/venture capital
 
$
18,868,875

 
$
17,696,794

Investor dependent:
 
 
 
 
Early stage
 
1,806,011

 
1,624,221

Mid stage
 
1,399,209

 
1,047,398

Later stage
 
2,031,490

 
1,663,576

Total investor dependent
 
5,236,710

 
4,335,195

Cash flow dependent:
 
 
 
 
Sponsor led buyout
 
2,121,007

 
2,185,497

Other
 
2,756,295

 
2,238,741

Total cash flow dependent
 
4,877,302

 
4,424,238

Private bank (4)
 
3,669,295

 
3,492,269

Balance sheet dependent
 
1,850,941

 
1,286,153

Premium wine (4)
 
1,056,927

 
1,062,264

Other (4)
 
408,035

 
867,723

Total loans (1) (2) (3)
 
$
35,968,085

 
$
33,164,636

Allowance for credit losses
 
(548,963
)
 
(304,924
)
Net loans
 
$
35,419,122

 
$
32,859,712

 
(1)
Total loans at amortized cost is net of unearned income of $169 million and $163 million at March 31, 2020 and December 31, 2019, respectively.
(2)
Included within our total loan portfolio are credit card loans of $339 million and $395 million at March 31, 2020 and December 31, 2019, respectively.
(3)
Included within our total loan portfolio are construction loans of $174 million and $183 million at March 31, 2020 and December 31, 2019, respectively.
(4)     Our total loans secured by real estate at amortized cost at March 31, 2020 and December 31, 2019 were comprised of the following:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Real estate secured loans:
 
 
 
 
Private bank:
 
 
 
 
Loans for personal residence
 
$
2,644,842

 
$
2,829,880

Loans to eligible employees
 
416,287

 
401,396

Home equity lines of credit
 
61,749

 
55,461

Other
 
26,591

 
38,880

Total private bank loans secured by real estate
 
$
3,149,469

 
$
3,325,617

Premium wine
 
762,460

 
820,730

Total real estate secured loans
 
$
3,911,929

 
$
4,146,347


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 “Criticized.” All of our nonaccrual loans are risk-rated 8 or 9 and are classified under the nonperforming category. Loans

29


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 credit losses for loans.
The following table summarizes the credit quality indicators, broken out by risk-based segment, as of March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
Pass
 
Criticized
 
Nonperforming (Nonaccrual)
 
Total
March 31, 2020:
 
 
 
 
 
 
 
 
Private equity/venture capital
 
$
18,868,764

 
$
111

 
$

 
$
18,868,875

Investor dependent:
 
 
 
 
 
 
 
 
Early stage
 
1,588,307

 
199,290

 
18,414

 
1,806,011

Mid stage
 
1,224,481

 
162,548

 
12,180

 
1,399,209

Later stage
 
1,786,063

 
230,984

 
14,443

 
2,031,490

Total investor dependent
 
4,598,851

 
592,822

 
45,037

 
5,236,710

Cash flow dependent:
 
 
 
 
 
 
 
 
Sponsor led buyout
 
1,952,061

 
168,946

 

 
2,121,007

Other
 
2,590,162

 
166,120

 
13

 
2,756,295

Total cash flow dependent
 
4,542,223

 
335,066

 
13

 
4,877,302

Private bank
 
3,639,776

 
24,662

 
4,857

 
3,669,295

Balance sheet dependent
 
1,725,273

 
125,668

 

 
1,850,941

Premium wine
 
999,373

 
56,854

 
700

 
1,056,927

Other
 
407,943

 
92

 

 
408,035

Total loans (1)
 
$
34,782,203

 
$
1,135,275

 
$
50,607

 
$
35,968,085

December 31, 2019:
 
 
 
 
 
 
 
 
Private equity/venture capital
 
$
17,708,550

 
$
4,247

 
$

 
$
17,712,797

Investor dependent
 
 
 
 
 
 
 
 
Early stage
 
1,436,022

 
206,310

 
11,093

 
1,653,425

Mid stage
 
924,002

 
125,451

 
17,330

 
1,066,783

Later stage
 
1,490,561

 
201,819

 
6,296

 
1,698,676

Total investor dependent
 
3,850,585

 
533,580

 
34,719

 
4,418,884

Cash flow dependent
 
 
 
 
 
 
 
 
Sponsor led buyout
 
2,039,847

 
118,588

 
44,585

 
2,203,020

Other
 
2,141,766

 
93,400

 
17,681

 
2,252,847

Total cash flow dependent
 
4,181,613

 
211,988

 
62,266

 
4,455,867

Private bank
 
3,472,138

 
11,601

 
5,480

 
3,489,219

Balance sheet dependent
 
1,231,961

 
65,343

 

 
1,297,304

Premium wine
 
1,026,973

 
36,335

 
204

 
1,063,512

Other
 
890,059

 
62

 

 
890,121

Total loans (1)
 
$
32,361,879

 
$
863,156

 
$
102,669

 
$
33,327,704

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.


30


The following table summarizes the credit quality indicators, broken out by risk-based segments and vintage year, as of March 31, 2020:
 
 
Term Loans by Origination Year
 
 
 
 
 
 
(Dollars in thousands)
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Revolving Loans
 
Revolving Loans Converted to Term Loans
 
Total
Private equity/venture capital:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
167,852

 
$
249,214

 
$
92,652

 
$
41,912

 
$
3,990

 
$
18,241

 
$
18,294,903

 
$

 
$
18,868,764

Criticized
 
35

 

 

 

 

 

 
76

 

 
111

Nonperforming
 

 

 

 

 

 

 

 

 

Total private equity/venture capital
 
$
167,887

 
$
249,214

 
$
92,652

 
$
41,912

 
$
3,990

 
$
18,241

 
$
18,294,979

 
$

 
$
18,868,875

Investor dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Early stage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
348,538

 
$
764,930

 
$
260,849

 
$
86,592

 
$
12,760

 
$
3,460

 
$
111,178

 
$

 
$
1,588,307

Criticized
 
8,754

 
83,587

 
56,641

 
21,632

 
5,396

 
5,868

 
17,412

 

 
199,290

Nonperforming
 

 
4,995

 
8,875

 
3,337

 

 

 
1,207

 

 
18,414

Total early stage
 
$
357,292

 
$
853,512

 
$
326,365

 
$
111,561

 
$
18,156

 
$
9,328

 
$
129,797

 
$

 
$
1,806,011

Mid stage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
304,548

 
$
375,482

 
$
267,047

 
$
77,566

 
$
10,772

 
$
3,278

 
$
185,788

 
$

 
$
1,224,481

Criticized
 
9,107

 
54,142

 
45,109

 
14,991

 
11,232

 
5,024

 
22,943

 

 
162,548

Nonperforming
 

 

 
5,586

 
6,342

 

 

 
252

 

 
12,180

Total mid stage
 
$
313,655

 
$
429,624

 
$
317,742

 
$
98,899

 
$
22,004

 
$
8,302

 
$
208,983

 
$

 
$
1,399,209

Later stage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
220,075

 
$
696,219

 
$
259,592

 
$
104,208

 
$
76

 
$
13,203

 
$
492,690

 
$

 
$
1,786,063

Criticized
 
20,335

 
64,324

 
67,783

 
24,105

 

 
1,901

 
52,536

 

 
230,984

Nonperforming
 

 
1,521

 
5,820

 
4,153

 

 

 
2,949

 

 
14,443

Total later stage
 
$
240,410

 
$
762,064

 
$
333,195

 
$
132,466

 
$
76

 
$
15,104

 
$
548,175

 
$

 
$
2,031,490

Total investor dependent
 
$
911,357

 
$
2,045,200

 
$
977,302

 
$
342,926

 
$
40,236

 
$
32,734

 
$
886,955

 
$

 
$
5,236,710

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
204,305

 
$
756,752

 
$
436,654

 
$
276,232

 
$
68,412

 
$
19,703

 
$
190,003

 
$

 
$
1,952,061

Criticized
 

 
29,696

 
85,125

 
32,173

 
11,979

 

 
9,973

 

 
168,946

Nonperforming
 

 

 

 

 

 

 

 

 

Total sponsor led buyout
 
$
204,305

 
$
786,448

 
$
521,779

 
$
308,405

 
$
80,391

 
$
19,703

 
$
199,976

 
$

 
$
2,121,007

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
232,375

 
$
710,823

 
$
235,585

 
$
122,748

 
$
43,198

 
$
542

 
$
1,244,891

 
$

 
$
2,590,162

Criticized
 
4

 
16,649

 
40,183

 
5,226

 
63

 

 
103,995

 

 
166,120

Nonperforming
 

 

 
2

 

 

 

 
11

 

 
13

Total other
 
$
232,379

 
$
727,472

 
$
275,770

 
$
127,974

 
$
43,261

 
$
542

 
$
1,348,897

 
$

 
$
2,756,295

Total cash flow dependent
 
$
436,684

 
$
1,513,920

 
$
797,549

 
$
436,379

 
$
123,652

 
$
20,245

 
$
1,548,873

 
$

 
$
4,877,302

Private bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
200,593

 
$
1,106,485

 
$
477,055

 
$
472,672

 
$
439,552

 
$
603,906

 
$
276,109

 
$
63,404

 
$
3,639,776

Criticized
 

 
7,381

 

 
2,416

 
2,502

 
11,756

 
607

 

 
24,662

Nonperforming
 

 

 

 
1,588

 

 
1,181

 
2,088

 

 
4,857

Total private bank
 
$
200,593

 
$
1,113,866

 
$
477,055

 
$
476,676

 
$
442,054

 
$
616,843

 
$
278,804

 
$
63,404

 
$
3,669,295



31


Balance sheet dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
136,803

 
$
215,264

 
$
228,831

 
$
48,144

 
$
13,280

 
$

 
$
1,082,951

 
$

 
$
1,725,273

Criticized
 

 
14,458

 
3,107

 
15,970

 

 

 
92,133

 

 
125,668

Nonperforming
 

 

 

 

 

 

 

 

 

Total balance sheet dependent
 
$
136,803

 
$
229,722

 
$
231,938

 
$
64,114

 
$
13,280

 
$

 
$
1,175,084

 
$

 
$
1,850,941

Premium wine:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
51,487

 
$
238,792

 
$
95,464

 
$
93,055

 
$
84,186

 
$
226,031

 
$
210,358

 
$

 
$
999,373

Criticized
 

 
8,437

 
14,371

 
361

 
5,005

 
6,055

 
22,625

 

 
56,854

Nonperforming
 

 

 

 

 
687

 

 
13

 

 
700

Total Premium wine
 
$
51,487

 
$
247,229

 
$
109,835

 
$
93,416

 
$
89,878

 
$
232,086

 
$
232,996

 
$

 
$
1,056,927

Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Risk rating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
15,595

 
$
211,972

 
$
60,016

 
$
30,963

 
$
60,151

 
$
29,246

 
$

 
$

 
$
407,943

Criticized
 
13

 

 

 

 

 

 
79

 

 
92

Nonperforming
 

 

 

 

 

 

 

 

 

Total other
 
$
15,608

 
$
211,972

 
$
60,016

 
$
30,963

 
$
60,151

 
$
29,246

 
$
79

 
$

 
$
408,035

Total loans
 
$
1,920,419

 
$
5,611,123

 
$
2,746,347

 
$
1,486,386

 
$
773,241

 
$
949,395

 
$
22,417,770

 
$
63,404

 
$
35,968,085


At March 31, 2020, the economic forecasts used in the estimate of our allowance for credit losses for loans was significantly impacted by the economic uncertainty and volatility caused by the COVID-19 pandemic. We utilize Moody's Analytics to source the economic forecasts for the reserve model. The forecasts utilized were those released between March 27, 2020 through March 31, 2020, which Moody's has communicated were designed to reflect the onset of the pandemic and the resulting economic decline. We utilize a probability weighted approach across several forecasts, the average of which represents a significant economic shock for the second and third quarters of 2020 followed by a slow, sustained improvement.

The following tables summarize the activity relating to our allowance for credit losses for loans for the three months ended March 31, 2020 and 2019, broken out by risk-based segment:
Three months ended March 31, 2020
 
Beginning Balance December 31, 2019
 
Impact of adopting ASC 326
 
Charge-offs
 
Recoveries
 
Provision for (Reduction of) Credit Losses
 
Foreign Currency Translation Adjustments
 
Ending Balance March 31, 2020
(Dollars in thousands)
 
 
 
 
 
 
 
Private equity/venture capital
 
$
107,285

 
$
(69,888
)
 
$

 
$

 
$
19,557

 
$
(180
)
 
$
56,774

Investor dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Early stage
 
26,245

 
39,911

 
(10,183
)
 
1,573

 
70,214

 
(571
)
 
127,189

Mid stage
 
15,936

 
6,963

 
(9,332
)
 
3,337

 
35,145

 
(87
)
 
51,962

Later stage
 
40,189

 
24,750

 
(13,984
)
 

 
46,038

 
(443
)
 
96,550

Total investor dependent
 
82,370

 
71,624

 
(33,499
)
 
4,910

 
151,397

 
(1,101
)
 
275,701

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
42,939

 
3,151

 
(2,624
)
 
2,845

 
(4,088
)
 
(132
)
 
42,091

Other
 
25,159

 
(3,056
)
 

 

 
17,438

 
(125
)
 
39,416

Total cash flow dependent
 
68,098

 
95

 
(2,624
)
 
2,845

 
13,350

 
(257
)
 
81,507

Private bank
 
21,551

 
12,615

 
(581
)
 

 
54,490

 
(280
)
 
87,795

Balance sheet dependent
 
12,722

 
(1,364
)
 

 

 
11,951

 
(74
)
 
23,235

Premium wine
 
5,296

 
3,650

 
(192
)
 

 
3,663

 
(40
)
 
12,377

Other
 
7,602

 
8,732

 

 

 
(5,507
)
 
747

 
11,574

Total allowance for credit losses
 
$
304,924

 
$
25,464

 
$
(36,896
)
 
$
7,755

 
$
248,901

 
$
(1,185
)
 
$
548,963


32


Three months ended March 31, 2019
 
Beginning Balance December 31, 2018
 
Charge-offs
 
Recoveries
 
Provision for (Reduction of) Credit Losses
 
Foreign Currency Translation Adjustments
 
Ending Balance March 31, 2019
(Dollars in thousands)
 
 
 
 
 
 
Private equity/venture capital
 
$
93,781

 
$

 
$

 
$
1,483

 
$
47

 
$
95,311

Investor dependent:
 
 
 
 
 
 
 
 
 
 
 
 
Early stage
 
25,885

 
(1,668
)
 
568

 
1,886

 
59

 
26,730

Mid stage
 
20,999

 
(6,516
)
 
3

 
22,957

 
720

 
38,163

Later stage
 
25,217

 

 
644

 
4,171

 
131

 
30,163

Total investor dependent
 
72,101

 
(8,184
)
 
1,215

 
29,014

 
910

 
95,056

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
44,274

 

 

 
(3,239
)
 
(102
)
 
40,933

Other
 
21,754

 
(716
)
 

 
(508
)
 
(16
)
 
20,514

Total cash flow dependent
 
66,028

 
(716
)
 

 
(3,747
)
 
(118
)
 
61,447

Private Bank
 
20,583

 
(59
)
 
210

 
(746
)
 
(24
)
 
19,964

Balance sheet dependent
 
21,707

 

 

 
(73
)
 
(2
)
 
21,632

Premium wine
 
3,646

 

 

 
294

 
9

 
3,949

Other
 
3,057

 
(41
)
 

 
(404
)
 
180

 
2,792

Total allowance for credit losses
 
$
280,903

 
$
(9,000
)
 
$
1,425

 
$
25,821

 
$
1,002

 
$
300,151





33


The following table summarizes the aging of our loans broken out by risk-based segments as of March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
30 - 59
  Days Past  
Due
 
60 - 89
  Days Past  
Due
 
Equal to or Greater
Than 90
  Days Past  
Due
 
  Total Past  
Due
 
Current  
 
Total
 
  Loans Past Due  
90 Days or
More Still
Accruing
Interest
March 31, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity/venture capital
 
$
165,904

 
$
23

 
$

 
$
165,927

 
$
18,702,948

 
$
18,868,875

 
$

Investor dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Early stage
 
8,750

 
1,231

 
3,487

 
13,468

 
1,792,543

 
1,806,011

 
1,499

Mid stage
 
5,556

 
192

 
1,667

 
7,415

 
1,391,794

 
1,399,209

 
1,667

Later stage
 
9,910

 
5,500

 

 
15,410

 
2,016,080

 
2,031,490

 

Total investor dependent
 
24,216

 
6,923

 
5,154

 
36,293

 
5,200,417

 
5,236,710

 
3,166

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
165

 

 

 
165

 
2,120,842

 
2,121,007

 

Other
 
1,186

 
722

 

 
1,908

 
2,754,387

 
2,756,295

 

Total cash flow dependent
 
1,351

 
722

 

 
2,073

 
4,875,229

 
4,877,302

 

Private bank
 
6,730

 

 
4,522

 
11,252

 
3,658,043

 
3,669,295

 
1,752

Balance sheet dependent
 
3,261

 
3,087

 

 
6,348

 
1,844,593

 
1,850,941

 

Premium wine
 
10,438

 
21,001

 

 
31,439

 
1,025,488

 
1,056,927

 

Other
 
677

 

 

 
677

 
407,358

 
408,035

 

Total loans (1)
 
$
212,577

 
$
31,756

 
$
9,676

 
$
254,009

 
$
35,714,076

 
$
35,968,085

 
$
4,918

December 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity/venture capital
 
$
97,739

 
$
383

 
$
3,150

 
$
101,272

 
$
17,611,525

 
17,712,797

 
$
3,150

Investor dependent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Early stage
 
1,307

 
22,062

 
723

 
24,092

 
1,629,333

 
1,653,425

 

Mid stage
 
10,025

 
6,999

 

 
17,024

 
1,049,759

 
1,066,783

 

Later stage
 
8,113

 
500

 
10,569

 
19,182

 
1,679,494

 
1,698,676

 

Total investor dependent
 
19,445

 
29,561

 
11,292

 
60,298

 
4,358,586

 
4,418,884

 

Cash flow dependent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 

 

 

 

 
2,203,020

 
2,203,020

 

Other
 
2,426

 
3,061

 
2

 
5,489

 
2,247,358

 
2,252,847

 

Total cash flow dependent
 
2,426

 
3,061

 
2

 
5,489

 
4,450,378

 
4,455,867

 

Private bank
 
6,582

 
2,049

 
1,544

 
10,175

 
3,479,044

 
3,489,219

 
365

Balance sheet dependent
 
2,731

 

 

 
2,731

 
1,294,573

 
1,297,304

 

Premium wine
 
8,435

 
3,170

 

 
11,605

 
1,051,907

 
1,063,512

 

Other
 
17

 

 

 
17

 
890,104

 
890,121

 

Total loans (1)
 
$
137,375

 
$
38,224

 
$
15,988

 
$
191,587

 
$
33,136,117

 
$
33,327,704

 
$
3,515

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.


34


Nonaccrual Loans
The following tables summarize our nonaccrual loan activity by risk-based segment for the three months ended March 31, 2020 and 2019:
Three months ended March 31, 2020
 
Beginning Balance December 31, 2019
 
Additions
 
Paydowns and Other Reductions
 
Charge-offs
 
Ending Balance
March 31,
2020
(Dollars in thousands)
 
 
 
 
 
Private equity/venture capital
 
$

 
$

 
$

 
$

 
$

Investor dependent:
 
 
 
 
 
 
 
 
 
 
Early stage
 
11,093

 
12,343

 
(2,764
)
 
(2,258
)
 
18,414

Mid stage
 
17,330

 
12,091

 
(388
)
 
(16,853
)
 
12,180

Later stage
 
6,296

 
11,224

 
128

 
(3,205
)
 
14,443

Total investor dependent
 
34,719

 
35,658

 
(3,024
)
 
(22,316
)
 
45,037

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
44,585

 

 
(41,961
)
 
(2,624
)
 

Other
 
17,681

 

 
(17,650
)
 
(18
)
 
13

Total cash flow dependent
 
62,266

 

 
(59,611
)
 
(2,642
)
 
13

Private bank
 
5,480

 

 
(42
)
 
(581
)
 
4,857

Balance sheet dependent
 

 

 

 

 

Premium wine
 
204

 
688

 

 
(192
)
 
700

Other
 

 

 

 

 

Total nonaccrual loans (1)
 
$
102,669

 
$
36,346

 
$
(62,677
)
 
$
(25,731
)
 
$
50,607

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

Three months ended March 31, 2019
 
Beginning Balance December 31, 2018
 
Additions
 
Paydowns and Other Reductions
 
Charge-offs
 
Ending Balance March 31, 2019
(Dollars in thousands)
 
 
 
 
 
Private equity/venture capital
 
$
3,700

 
$
2,247

 
$

 
$

 
$
5,947

Investor dependent:
 
 
 
 
 
 
 
 
 
 
Early stage
 
7,616

 
4,433

 
(3,212
)
 
(140
)
 
8,697

Mid stage
 
4,751

 
32,099

 
(521
)
 
(4,230
)
 
32,099

Later stage
 
11,385

 
12,063

 
(308
)
 

 
23,140

Total investor dependent
 
23,752

 
48,595

 
(4,041
)
 
(4,370
)
 
63,936

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
39,534

 

 
(1,297
)
 

 
38,237

Other
 
17,156

 

 

 
(466
)
 
16,690

Total cash flow dependent
 
56,690

 

 
(1,297
)
 
(466
)
 
54,927

Private bank
 
3,919

 
15

 
(66
)
 
(59
)
 
3,809

Balance sheet dependent
 
5,004

 

 
(268
)
 

 
4,736

Premium wine
 
285

 

 
(17
)
 

 
268

Other
 
792

 

 
(792
)
 

 

Total nonaccrual loans (1)
 
$
94,142

 
$
50,857

 
$
(6,481
)
 
$
(4,895
)
 
$
133,623

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

35


The following table summarizes our nonaccrual loans with no allowance for credit loss at March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Nonaccrual Loans
 
Nonaccrual Loans with no Allowance for Credit Loss
 
Nonaccrual Loans
 
Nonaccrual Loans with no Allowance for Credit Loss
Private equity/venture capital
 
$

 
$

 
$

 
$

Investor dependent:
 
 
 
 
 
 
 
 
Early stage
 
18,414

 
1,562

 
11,093

 
460

Mid stage
 
12,180

 
261

 
17,330

 
274

Later stage
 
14,443

 
1,807

 
6,296

 

Total investor dependent
 
45,037

 
3,630

 
34,719

 
734

Cash flow dependent:
 
 
 
 
 
 
 
 
Sponsor led buyout
 

 

 
44,585

 

Other
 
13

 

 
17,681

 
2,782

Total cash flow dependent
 
13

 

 
62,266

 
2,782

Private bank
 
4,857

 
3,269

 
5,480

 
3,714

Balance sheet dependent
 

 

 

 

Premium wine
 
700

 

 
204

 

Other
 

 

 

 

Total nonaccrual loans (1)
 
$
50,607

 
$
6,899

 
$
102,669

 
$
7,230

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

Troubled Debt Restructurings
As of March 31, 2020, we had 15 TDRs with a total carrying value of $42.2 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were $0.6 million of unfunded commitments available for funding to the clients associated with these TDRs as of March 31, 2020.

36


The following table summarizes our loans modified in TDRs, broken out by risk-based segment, at March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Loans modified in TDRs:
 
 
 
 
Private equity/venture capital
 
$

 
$

Investor dependent
 
 
 
 
Early stage
 
7,350

 
9,471

Mid stage
 
5,955

 
5,189

Later stage
 
8,272

 
23,318

Total investor dependent
 
21,577

 
37,978

Cash flow dependent
 
 
 
 
Sponsor led buyout
 
10,350

 
55,443

Other
 

 

Total cash flow dependent
 
10,350

 
55,443

Private bank
 
1,351

 
2,104

Balance sheet dependent
 

 

Premium wine
 
8,934

 
13,457

Other
 

 

Total loans modified in TDRs (1)
 
$
42,212

 
$
108,982

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
The following table summarizes the recorded investment in loans modified in TDRs, broken out by risk-based segment, for modifications made during the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Loans modified in TDRs during the period:
 
 
 
 
Private equity/venture capital
 
$

 
$

Investor dependent
 
 
 
 
Early stage
 

 
677

Mid stage
 
5,955

 

Later stage
 
2,769

 

Total investor dependent
 
8,724

 
677

Cash flow dependent
 
 
 
 
Sponsor led buyout
 

 

Other
 

 
5,000

Total cash flow dependent
 

 
5,000

Private bank
 

 

Balance sheet dependent
 

 

Premium wine
 

 

Other
 

 

Total loans modified in TDRs during the period (1) (2)
 
$
8,724

 
$
5,677

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
(2)
There were $12.5 million and $2.2 million of partial charge-offs for the three months ended March 31, 2020 and March 31, 2019, respectively.

37


During the three months ended March 31, 2020 and 2019, new TDRs of $8.3 million and $5.7 million, respectively, were modified through payment deferrals granted to our clients. During the three months ended March 31, 2020, new TDRs of $0.4 million were modified through forgiveness of principle.
The following table summarizes the recorded investment in loans modified in TDRs within the previous 12 months that subsequently defaulted during the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
TDRs modified within the previous 12 months that defaulted during the period:
 
 
 
 
Private equity/venture capital
 
$

 
$

Investor dependent
 
 
 
 
Early stage
 

 

Mid stage
 

 

Later stage
 

 

Total investor dependent
 

 

Cash flow dependent
 
 
 
 
Sponsor led buyout
 

 

Other
 

 
5,000

Total cash flow dependent
 

 
5,000

Private bank
 

 

Balance sheet dependent
 

 

Premium wine
 
8,247

 

Other
 

 

Total TDRs modified within the previous 12 months that defaulted in the period (1)
 
$
8,247

 
$
5,000

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

Charge-offs and defaults on previously restructured loans are evaluated to determine the impact to the allowance for credit losses for loans, if any. The evaluation of these defaults may impact the assumptions used in calculating the reserve on other TDRs and nonaccrual loans as well as management’s overall outlook of macroeconomic factors that affect the reserve on the loan portfolio as a whole. After evaluating the charge-offs and defaults experienced on our TDRs we determined that no change to our reserving methodology for TDRs was necessary to determine the allowance for credit losses for loans as of March 31, 2020.
Allowance for Credit Losses: Unfunded Credit Commitments

We maintain a separate allowance for credit losses for unfunded credit commitments that is determined using a methodology that is inherently similar to the methodology used for calculating the allowance for credit losses for loans. At March 31, 2020, the reduction of our allowance for credit losses for unfunded credit commitments was primarily attributable to a decrease in the expected future commitments for milestone tranches, which are tied to company performance or additional funding rounds, based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic mentioned above.

38


The following table summarizes the activity relating to our allowance for credit losses for unfunded credit commitments for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Allowance for credit losses: unfunded credit commitments, beginning balance
 
$
67,656

 
$
55,183

Impact of adopting ASC 326
 
22,826

 

(Reduction of) provision for credit losses
 
(5,477
)
 
2,730

Foreign currency translation adjustments
 
(315
)
 
57

Allowance for credit losses: unfunded credit commitments, ending balance (1)
 
$
84,690

 
$
57,970

 
(1)
The “allowance for credit losses: unfunded credit commitments” is included as a component of “other liabilities” on our unaudited interim consolidated balance sheets. See Note 15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional disclosures related to our commitments to extend credit.
8.
Leases
We have operating leases for our corporate offices, data centers and certain equipment utilized at those properties. We are obligated under a number of noncancelable operating leases for premises and equipment that expire at various dates, through 2030, and in most instances, include options to renew or extend at market rates and terms. Such leases may provide for periodic adjustments of rent during the term of the lease based on changes in various economic indicators.
At the inception of the lease, the lease is evaluated to determine whether the lease will be accounted for as an operating or a finance lease. There were no significant assumptions or judgments required upon applying the new lease standard. Operating lease right-of-use assets and operating lease liabilities are included in our consolidated balance sheets. We have no leases that meet the definition of a finance lease under ASC 842 and our lessor accounting treatment for subleases is not material.
Total recorded balances for the lease assets and liabilities are as follows:
(Dollars in thousands)
 
March 31, 2020

December 31, 2019
Assets:
 
 
 
 
Right-of-use assets - operating leases
 
$
206,392

 
$
197,365

Liabilities:
 
 
 
 
Lease liabilities - operating leases
 
227,271

 
218,847


The components of our lease cost and supplemental cash flow information related to leases for the three months ended March 31, 2020 and 2019 were as follows:
 (Dollars in thousands)
 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
Operating lease cost
 
$
11,364

 
$
9,518

Short-term lease cost
 
339

 
263

Variable lease cost
 
595

 
846

Less: sublease income
 
(1,132
)
 
(1,108
)
Total lease cost, net
 
$
11,166

 
$
9,519

Supplemental cash flows information:
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Cash paid for operating leases
 
$
12,221

 
10,354

Noncash items during the period:
 
 
 
 
Lease obligations in exchange for obtaining Right-of-use assets
 
 
 
 
Operating leases
 
$
21,613

 


39


The table below presents additional information related to the Company's leases as of March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
December 31, 2019
Weighted-average remaining term (in years) - operating leases
 
6.27

 
6.29

Weighted-average discount rate - operating leases (1)
 
2.83
%
 
2.92
%
 
(1)
The incremental borrowing rate used to calculate the lease liability was determined based on the facts and circumstances of the economic environment and the Company’s credit standing as of the effective date of ASC 842. Additionally, the total lease term and total lease payments were also considered in determining the rate. Based on these considerations the Company identified credit terms available under its existing credit lines which represent a collateralized borrowing rate that has varying credit terms that could be matched to total lease terms and total lease payments in ultimately determining the implied borrowing rate in each lease contract.

The following table presents our undiscounted future cash payments for our operating lease liabilities as of March 31, 2020:
Years ended December 31,
(Dollars in thousands)
 
Operating Leases
2020 (excluding the three months ended March 31, 2020)
 
$
34,310

2021
 
44,228

2022
 
39,196

2023
 
38,429

2024
 
32,712

2025 and thereafter
 
60,124

Total future lease payments (1)
 
$
248,999

Less: imputed interest
 
(21,728
)
Total lease liabilities
 
$
227,271

 
(1)
As of March 31, 2020, we have additional leases that have not yet commenced. We estimate that we will record additional lease liabilities of $18.8 million upon commencement. These leases will commence in 2020 with lease terms of five years.
9.
Goodwill and Other Intangible Assets

Goodwill
Goodwill at both March 31, 2020 and December 31, 2019 was $137.8 million, which was a result of revenue generating synergies expected from our acquisition of SVB Leerink in 2019. Due to the economic uncertainty caused by COVID-19, we conducted an evaluation and determined that it was more likely than not that the fair value of SVB Leerink was not less than its carrying amount; therefore, no impairment was recognized on goodwill as of March 31, 2020. All reported goodwill amounts have been allocated to the SVB Leerink reporting segment and are expected to be deductible for tax purposes. Refer to Note 14 — “Segment Reporting” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information.
Other Intangible Assets
The components of net other intangible assets related to the acquisition of SVB Leerink were as follows:
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Carrying Amount
Other intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
42,000

 
$
4,773

 
$
37,227

 
$
42,000

 
$
3,818

 
$
38,182

Other
 
18,900

 
8,055

 
10,845

 
18,900

 
7,665

 
11,235

Total other intangible assets
 
$
60,900

 
$
12,828

 
$
48,072

 
$
60,900

 
$
11,483

 
$
49,417



40



For the three months ended March 31, 2020, we recorded amortization expense of $1.3 million. Assuming no future impairments of other intangible assets or additional acquisitions or dispositions, the following table presents the Company's future expected amortization expense for other intangible assets that will continue to be amortized as of March 31, 2020:
Years ended December 31,
(Dollars in thousands)
 
Other
Intangible Assets
2020 (excluding the three months ended March 31, 2020)
 
$
4,037

2021
 
4,732

2022
 
4,732

2023
 
4,732

2024
 
4,732

2025 and thereafter
 
25,107

Total future amortization expense
 
$
48,072


10.
Short-Term Borrowings and Long-Term Debt
The following table represents outstanding short-term borrowings and long-term debt at March 31, 2020 and December 31, 2019:
 
 
 
 
 
 
Carrying Value
(Dollars in thousands)
 
Maturity
 
Principal value at March 31, 2020
 
March 31,
2020
 
December 31,
2019
Short-term borrowings:
 
 
 
 
 
 
 
 
Short-term FHLB advances
 
(1)
 
$
2,700,000

 
$
2,700,000

 
$

Federal funds purchased
 
April 1, 2020
 
375,000

 
375,000

 

Other short-term borrowings
 
(2)
 
63,162

 
63,162

 
17,430

Total short-term borrowings
 
 
 
 
 
$
3,138,162

 
$
17,430

Long-term debt:
 
 
 
 
 
 
 
 
3.50% Senior Notes
 
January 29, 2025
 
$
350,000

 
$
348,076

 
$
347,987

Total long-term debt
 
 
 
 
 
$
348,076

 
$
347,987

 
 
(1)
Represents advances from the FHLB at March 31, 2020 with maturity dates through May 7, 2020.
(2)
Represents cash collateral received from certain counterparties in relation to market value exposures of derivative contracts in our favor.
Interest expense related to short-term borrowings and long-term debt was $5.9 million for the three months ended March 31, 2020 and $10.2 million for the three months ended March 31, 2019. The weighted average interest rate associated with our short-term borrowings was 0.36 percent as of March 31, 2020 and 1.55 percent as of as of December 31, 2019.
Short-term Borrowings
We have certain facilities in place to enable us to access short-term borrowings on a secured and unsecured basis. Our secured facilities include collateral pledged to the FHLB of San Francisco and the discount window at the FRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of March 31, 2020, collateral pledged to the FHLB of San Francisco was comprised primarily of fixed income investment securities and loans and had a carrying value of $4.8 billion, of which $1.4 billion was available to support additional borrowings. As of March 31, 2020, collateral pledged to the discount window at the FRB was comprised of fixed income investment securities and had a carrying value of $1.0 billion, all of which was unused and available to support additional borrowings. Our total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.6 billion at March 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $3.3 billion at March 31, 2020.
11.
Derivative Financial Instruments
We primarily use derivative financial instruments to manage interest rate risk, currency exchange rate risk and to assist customers with their risk management objectives, which may include currency exchange rate risks and interest rate risks. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.
Interest Rate Risk
Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging ("ASC 815"), and record them in other assets and other liabilities. For qualifying cash flow hedges, changes in the fair value of the derivative are recorded in accumulated other comprehensive income and recognized in earnings as the hedged item affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "Loans" as part of interest income, a component of consolidated net income.
We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in accumulated other comprehensive income are reclassified into earnings in the line item "Loans" as part of interest income, a component of consolidated net income. As of March 31, 2020, all derivatives previously classified as hedges with notional balances totaling $5.0 billion and a net asset fair value of $227.5 million were terminated. As of March 31, 2020, the total unrealized gains on terminated cash flow hedges remaining in AOCI is $226.9 million, $163.9 million net of tax. The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gains will be reclassified into earnings is approximately five years. The transactions were initiated on March 26, 2020 and were mostly settled as of March 31, 2020, as such, we recorded cash flows received from the settled transactions of $180.5 million and a related receivable of $47.0 million for the remaining unsettled transactions.
Currency Exchange Risk
We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are recorded in the line item “other” as part of noninterest income, a component of consolidated net income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded in the line item “other” as part of noninterest income, a component of consolidated net income.

41


Other Derivative Instruments
Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2 — “Summary of Significant Accounting Policies" under Part II, Item 8 of our 2019 Form 10-K.
Counterparty Credit Risk
We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.
The total notional or contractual amounts and fair value of our derivative financial instruments at March 31, 2020 and December 31, 2019 were as follows:
 
 
March 31, 2020
 
December 31, 2019
 
 
Notional or
Contractual
Amount
 
Fair Value
 
Notional or
Contractual
Amount
 
Fair Value
(Dollars in thousands)
 

Derivative Assets (1)

Derivative Liabilities (1)
 
 
Derivative Assets (1)

Derivative Liabilities (1)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 Interest rate risks:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$

 
$
1,915,000

 
$
22,676

 
$

Interest rate swaps
 

 

 

 
3,085,000

 

 
25,623

Derivatives not designated as hedging instruments:
 





 

 
 


 Currency exchange risks:
 





 

 
 


Foreign exchange forwards
 
330,045


5,928



 

 



Foreign exchange forwards
 
158,592




2,751

 
300,250

 


2,154

 Other derivative instruments:
 


 

 
 

 
 

 
Equity warrant assets
 
235,074


152,710



 
225,893

 
165,473



Client foreign exchange forwards
 
6,914,487


226,621



 
4,661,517

 
114,546



Client foreign exchange forwards
 
5,720,213




186,417

 
4,326,059

 


94,745

Client foreign currency options
 
237,349


6,723



 
154,985

 
1,308



Client foreign currency options
 
237,349




6,723

 
154,985

 


1,308

Client interest rate derivatives
 
747,228


80,543



 
1,275,190

 
28,811



Client interest rate derivatives (2)
 
829,528




31,533

 
1,372,914

 


14,154

Total derivatives not designated as hedging instruments
 
 
 
472,525


227,424

 
 
 
310,138


112,361

Total derivatives
 
 
 
$
472,525

 
$
227,424

 
 
 
$
332,814

 
$
137,984

 
 
(1)
Derivative assets and liabilities are included in "accrued interest receivable and other assets" and "other liabilities", respectively, on our consolidated balance sheets.
(2)
The amount reported reflects reductions of approximately $55.7 million and $17.4 million of derivative liabilities at March 31, 2020 and December 31, 2019, respectively, reflecting variation margin treated as settlement of the related derivative fair values for legal and accounting purposes as required by central clearing houses.

42


A summary of our derivative activity and the related impact on our consolidated statements of income for the three months ended March 31, 2020 and 2019 is as follows:
 
 
 
 
Three months ended March 31,
(Dollars in thousands)
 
Statement of income location   
 
2020
 
2019
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 Interest rate risks:
 
 
 
 
 
 
Amounts reclassified from accumulated other comprehensive income into income
 
Interest income—loans
 
$
2,089

 
$
(3
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 Currency exchange risks:
 
 
 
 
 
 
(Losses) gains on revaluations of internal foreign currency instruments, net
 
Other noninterest income
 
$
(8,375
)
 
$
1,050

Gains (losses) on internal foreign exchange forward contracts, net
 
Other noninterest income
 
8,668

 
(469
)
Net gains associated with internal currency risk
 
 
 
$
293

 
$
581

 Other derivative instruments:
 
 
 
 
 
 
Losses on revaluations of client foreign currency instruments, net
 
Other noninterest income
 
$
(8,284
)
 
$
(13,571
)
Gains on client foreign exchange forward contracts, net
 
Other noninterest income
 
7,747

 
12,654

Net losses associated with client currency risk
 
 
 
$
(537
)
 
$
(917
)
Net gains on equity warrant assets
 
Gains on equity warrant assets, net
 
$
13,395

 
$
21,305

Net losses on other derivatives
 
Other noninterest income
 
$
(4,345
)
 
$
(365
)

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 March 31, 2020 and December 31, 2019:
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements
 
Net Amount
(Dollars in thousands)
 
 
 
 
Financial Instruments
 
Cash Collateral Received (1)
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$

 
$

 
$

 
$

Foreign exchange forwards
 
232,549

 

 
232,549

 
(76,009
)
 
(59,693
)
 
96,847

   Foreign currency options
 
6,723

 

 
6,723

 
(2,016
)
 
(3,469
)
 
1,238

   Client interest rate derivatives
 
80,543

 

 
80,543

 
(80,543
)
 

 

Total derivative assets
 
319,815

 

 
319,815

 
(158,568
)
 
(63,162
)
 
98,085

Reverse repurchase, securities borrowing, and similar arrangements
 
401,758

 

 
401,758

 
(401,758
)
 

 

Total
 
$
721,573

 
$

 
$
721,573

 
$
(560,326
)
 
$
(63,162
)
 
$
98,085

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swaps
 
$
22,676

 
$

 
$
22,676

 
$
(22,598
)
 
$

 
$
78

Foreign exchange forwards
 
$
114,546

 
$

 
$
114,546

 
$
(36,855
)
 
$
(17,095
)
 
$
60,596

   Foreign currency options
 
1,308

 

 
1,308

 
(848
)
 
(335
)
 
125

   Client interest rate derivatives
 
28,811

 

 
28,811

 
(28,811
)
 

 

Total derivative assets
 
167,341

 

 
167,341

 
(89,112
)
 
(17,430
)
 
60,799

Reverse repurchase, securities borrowing, and similar arrangements
 
289,340

 

 
289,340

 
(289,340
)
 

 

Total
 
$
456,681

 
$

 
$
456,681

 
$
(378,452
)
 
$
(17,430
)
 
$
60,799


 
 
(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.

43


The following table summarizes our liabilities subject to enforceable master netting arrangements as of March 31, 2020 and December 31, 2019:
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement of Financial Position but Subject to Master Netting Arrangements
 
Net Amount
(Dollars in thousands)
 
 
 
 
Financial Instruments
 
Cash Collateral Pledged (1)
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$

 
$

 
$

 
$

 
$

   Foreign exchange forwards
 
189,168

 

 
189,168

 
(68,027
)
 
(7,442
)
 
113,699

   Foreign currency options
 
6,723

 

 
6,723

 
(2,009
)
 

 
4,714

   Client interest rate derivatives
 
31,533

 

 
31,533

 

 
(31,085
)
 
448

Total derivative liabilities
 
227,424

 

 
227,424

 
(70,036
)
 
(38,527
)
 
118,861

Repurchase, securities lending, and similar arrangements
 

 

 

 

 

 

Total
 
$
227,424

 
$

 
$
227,424

 
$
(70,036
)
 
$
(38,527
)
 
$
118,861

December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
   Interest rate swaps
 
25,623

 

 
25,623

 
(22,676
)
 
(2,947
)
 

   Foreign exchange forwards
 
96,899

 

 
96,899

 
(33,314
)
 
(22,030
)
 
41,555

   Foreign currency options
 
1,308

 

 
1,308

 
(531
)
 

 
777

   Client interest rate derivatives
 
14,154

 

 
14,154

 

 
(13,936
)
 
218

Total derivative liabilities
 
137,984

 

 
137,984

 
(56,521
)
 
(38,913
)
 
42,550

Repurchase, securities lending, and similar arrangements
 

 

 

 

 

 

Total
 
$
137,984

 
$

 
$
137,984

 
$
(56,521
)
 
$
(38,913
)
 
$
42,550


 
 
(1)
Cash collateral pledged to our counterparties in relation to market value exposures of derivative contracts in a liability position and repurchase agreements are recorded as a component of “cash and cash equivalents" on our consolidated balance sheets.
12.
Noninterest Income
All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income. Included below is a summary of noninterest income for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Noninterest income:
 
 
 
 
Gains on investment securities, net
 
$
46,055

 
$
29,028

Gains on equity warrant assets, net
 
13,395

 
21,305

Client investment fees
 
43,393

 
44,482

Foreign exchange fees
 
47,505

 
38,048

Credit card fees
 
28,304

 
27,483

Deposit service charges
 
24,589

 
20,939

Lending related fees
 
13,125

 
13,937

Letters of credit and standby letters of credit fees
 
11,542

 
9,354

Investment banking revenue
 
46,867

 
49,795

Commissions
 
16,022

 
14,108

Other
 
11,137

 
11,897

Total noninterest income
 
$
301,934

 
$
280,376



44


Gains on investment securities, net
Net gains on investment securities include both gains and losses from our non-marketable and other equity securities, which include public equity securities held as a result of exercised equity warrant assets, gains and losses from sales of our AFS debt securities portfolio, when applicable, and carried interest.
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, our China Joint Venture, debt funds, private and public portfolio companies, which include public equity securities held as a result of exercised equity warrant assets and qualified affordable housing projects. We experience variability in the performance of our non-marketable and other equity securities from period to period, which results in net gains or losses on investment securities (both realized and unrealized). This variability is due to a number of factors, including unrealized changes in the values of our investments, changes in the amount of realized gains from distributions, changes in liquidity events and general economic and market conditions. Unrealized gains from non-marketable and other equity securities for any single period are typically driven by valuation changes.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of certain sales restrictions to which these equity securities may be subject to (i.e., lock-up agreements), changes in prevailing market prices, market conditions, the actual sales or distributions of securities, and the timing of such actual sales or distributions, which, to the extent such securities are managed by our managed funds, are subject to our funds' separate discretionary sales/distributions and governance processes.
Carried interest is comprised of preferential allocations of profits recognizable when the return on assets of our individual managed fund of funds and direct venture funds exceeds certain performance targets and is payable to us, as the general partners of the managed funds. The carried interest we earn is often shared with employees, who are also members of the general partner entities. We record carried interest on a quarterly basis by measuring fund performance to date versus the performance target.  For our unconsolidated managed funds, carried interest is recorded as gains on investment securities, net. For our consolidated managed funds, it is recorded as a component of net income attributable to noncontrolling interests. Carried interest allocated to others is recorded as a component of net income attributable to noncontrolling interests. Any carried interest paid to us (or our employees) may be subject to reversal to the extent fund performance declines to a level where inception to date carried interest is lower than actual payments made by the funds. The limited partnership agreements for our funds provide that carried interest is generally not paid to the general partners until the funds have provided a full return of contributed capital to the limited partners. Accrued, but unpaid carried interest may be subject to reversal to the extent that the fund performance declines to a level where inception-to-date carried interest is less than prior amounts recognized. Carried interest income is accounted for under an ownership model based on ASC 323 — Equity Method of Accounting and ASC 810 — Consolidation.
Our available-for-sale securities portfolio is a fixed income investment portfolio that is managed with the objective of earning an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. Though infrequent, sales of debt securities in our AFS securities portfolio may result in net gains or losses and are conducted pursuant to the guidelines of our investment policy related to the management of our liquidity position and interest rate risk.
Gains on investment securities are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our investment-related activities. A summary of gains and losses on investment securities for the three months ended March 31, 2020 and 2019 is as follows:
  
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
(Losses) gains on non-marketable and other equity securities, net
 
$
(15,110
)
 
$
32,658

Gains (losses) on sales of available-for-sale securities, net
 
61,165

 
(3,630
)
Total gains on investment securities, net
 
$
46,055

 
$
29,028



45


Gains on equity warrant assets, net
In connection with negotiating credit facilities and certain other services, we often obtain rights to acquire stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science/healthcare industries. Any changes in fair value from the grant date fair value of equity warrant assets will be recognized as increases or decreases to other assets on our balance sheet and as net gains or losses on equity warrant assets, in noninterest income, a component of consolidated net income. Gains on equity warrant assets are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities. A summary of net gains on equity warrant assets for the three months ended March 31, 2020 and 2019 is as follows:
  
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Equity warrant assets:
 
 
 
 
Gains on exercises, net
 
$
19,193

 
$
5,482

Terminations
 
(326
)
 
(415
)
Changes in fair value, net
 
(5,472
)
 
16,238

Total net gains on equity warrant assets
 
$
13,395

 
$
21,305


Client investment fees
Client investment fees include fees earned from discretionary investment management services for substantially all clients, managing clients’ portfolios based on their investment policies, strategies and objectives and investment advisory fees. Revenue is recognized on a monthly basis upon completion of our performance obligation and consideration is typically received in the subsequent month. Included in our sweep money market fees are Rule 12(b)-1 fees, revenue sharing and customer transactional-based fees. Rule 12(b)-1 fees and revenue sharing are recognized as earned based on client funds that are invested in the period, typically monthly. Transactional based fees are earned and recognized on fixed income securities when the transaction is executed on the clients' behalf. Amounts paid to third-party service providers are predominantly expensed, such that client investment fees are recorded gross of payments made to third parties. A summary of client investment fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Client investment fees by type:
 
 
 
 
Sweep money market fees
 
$
23,049

 
$
26,544

Asset management fees (1)
 
9,137

 
6,671

Repurchase agreement fees
 
11,207

 
11,267

Total client investment fees (2)
 
$
43,393

 
$
44,482

 
 
(1)
Represents fees earned from investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)
Represents fees earned on client investment funds which are maintained at third-party financial institutions and are not recorded on our balance sheet.
Foreign exchange fees
Foreign exchange fees represent the income differential between purchases and sales of foreign currency on behalf of our clients, primarily from spot contracts. Foreign exchange spot contract fees are recognized upon the completion of the single performance obligation, the execution of a spot trade in exchange for a fee. In line with customary business practice, the legal right transfers to the client upon execution of a foreign exchange contract on the trade date, and as such, we currently recognize our fees based on the trade date and the transactions are typically settled within two business days.

46


Forward contract and option premium fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our derivative-related activities. A summary of foreign exchange fee income by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Foreign exchange fees by instrument type:
 
 
 
 
Spot contract commissions
 
$
40,934

 
$
35,029

Forward contract commissions
 
6,339

 
2,995

Option premium fees
 
232

 
24

Total foreign exchange fees
 
$
47,505

 
$
38,048


Credit card fees
Credit card fees include interchange income from credit and debit cards and fees earned from processing transactions for merchants. Interchange income is earned after satisfying our performance obligation of providing nightly settlement services to a payment network. Costs related to rewards programs are recorded when the rewards are earned by the customer and presented as a reduction to interchange fee income. Rewards programs continue to be accounted for under ASC 310 - Receivables. Our performance obligations for merchant service fees are to transmit data and funds between the merchant and the payment network. Credit card interchange and merchant service fees are earned daily upon completion of transaction settlement services.
Annual card service fees are recognized on a straight-line basis over a 12-month period and continue to be accounted for under ASC 310 - Receivables.
A summary of credit card fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Credit card fees by instrument type:
 
 
 
 
Card interchange fees, net
 
$
21,775

 
$
21,393

Merchant service fees
 
5,027

 
4,534

Card service fees
 
1,502

 
1,556

Total credit card fees
 
$
28,304

 
$
27,483


Deposit service charges
Deposit service charges include fees earned from performing cash management activities and other deposit account services. Deposit services include, but are not limited to, the following: receivables services, which include merchant services, remote capture, lockbox, electronic deposit capture, and fraud control services. Payment and cash management products and services include wire transfer and automated clearing house payment services to enable clients to transfer funds more quickly, as well as business bill pay, business credit and debit cards, account analysis, and disbursement services. Deposit service charges are recognized over the period in which the related performance obligation is provided, generally on a monthly basis, and are presented in the "Disaggregation of revenue from contracts with customers" table below.

47


Lending related fees
Unused commitment fees, minimum finance fees and unused line fees are recognized as earned on a monthly basis. Fees that qualify for syndication treatment are recognized at the completion of the syndicated loan deal for which the fees were received. Lending related fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our lending-related activities. A summary of lending related fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
Lending related fees by instrument type:
 
 
 
 
Unused commitment fees
 
$
8,406

 
$
9,670

Other
 
4,719

 
4,267

Total lending related fees
 
$
13,125

 
$
13,937


Letters of credit and standby letters of credit fees
Commercial and standby letters of credit represent conditional commitments issued by us on behalf of a client to guarantee the performance of the client to a third party when certain specified future events have occurred. Fees generated from letters of credit and standby letters of credit are deferred as a component of other liabilities and recognized in noninterest income over the commitment period using the straight-line method, based on the likelihood that the commitment being drawn down will be remote. Letters of credit and standby letters of credit fees are recognized outside of the scope of ASC 606 as it explicitly excludes noninterest income earned from our lending related activities.
Investment banking revenue
The Company earns investment banking revenue from clients for providing services related to securities underwriting, private placements and advisory services on strategic matters such as mergers and acquisitions. Underwriting fees are attributable to public and private offerings of equity and debt securities and are recognized at the point in time when the offering has been deemed to be completed by the lead manager of the underwriting group. Once the offering is completed, the performance obligation has been satisfied and the Company recognizes the applicable management fee as well the underwriting fee, net of consideration payable to customers. The Company recognizes private placement fees at the point in time when the private placement is completed, which is generally when the client accepts capital from the fund raise. Advisory fees from mergers and acquisitions engagements are generally recognized at the point in time when the related transaction is completed. Expenses are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at a point in time. All other deal-related expenses are expensed as incurred. The Company has determined that it acts as principal in the majority of these transactions and therefore presents expenses gross within other operating expenses.
A summary of investment banking revenue by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
  
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Investment banking revenue:
 
 
 
 
Underwriting fees
 
$
31,290

 
$
35,772

Advisory fees
 
15,487

 
12,273

Private placements and other
 
90

 
1,750

Total investment banking revenue
 
$
46,867

 
$
49,795


Commissions
Commissions include commissions received from customers for the execution of agency-based brokerage transactions in listed and over-the-counter equities. The execution of each trade order represents a distinct performance obligation and the transaction price is fixed at the point in time or trade order execution. Trade execution is satisfied at the point in time that the customer has control of the asset and as such, fees are recorded on a trade date basis. Commissions are presented in the "Disaggregation of revenue from contracts with customers" table below.

48


Other
Other noninterest income primarily includes income from fund management fees and service revenue. Fund management fees are comprised of fees charged directly to our managed funds of funds and direct venture funds. Fund management fees are based upon the contractual terms of the limited partnership agreements and are generally recognized as earned over the specified contract period, which is generally equal to the life of the individual fund. Fund management fees are calculated as a percentage of committed capital and collected in advance and are received quarterly. Fund management fees for certain of our limited partnership agreements are calculated as a percentage of distributions made by the funds and revenue is recorded only at the time of a distribution event. As distribution events are not predetermined for these certain funds, management fees are considered variable and constrained under ASC 606.
Other service revenue primarily consists of dividend income on FHLB/FRB stock, correspondent bank rebate income, incentive fees related to carried interest and other fee income. We recognize revenue when our performance obligations are met and record revenues on a daily/monthly, quarterly, semi-annual or annual basis. For event driven revenue sources, we recognize revenue when: (i) persuasive evidence of an arrangement exists, (ii) we have performed the service, provided we have no other remaining obligations to the customer, (iii) the fee is fixed or determinable and (iv) collectability is probable.
A summary of other noninterest income by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Other noninterest income by instrument type:
 
 
 
 
Fund management fees
 
$
7,908

 
$
8,041

Net losses on revaluation of foreign currency instruments, net of foreign exchange forward contracts (1)
 
(244
)
 
(336
)
Other service revenue
 
3,473

 
4,192

Total other noninterest income
 
$
11,137

 
$
11,897

 
(1)
Represents the net revaluation of client and internal foreign currency denominated financial instruments. We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure related to client and internal foreign currency denominated financial instruments.
Disaggregation of revenue from contracts with customers
The following tables present our revenues from contracts with customers disaggregated by revenue source and segment for the three months ended March 31, 2020 and 2019:
Three months ended March 31, 2020
(Dollars in thousands)
 
Global
Commercial
Bank (2)
 
SVB Private  
Bank
 
SVB Capital (2)  
 
SVB
Leerink (2)
 
Other Items
 
Total      
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Client investment fees
 
$
42,736

 
$
657

 
$

 
$

 
$

 
$
43,393

Spot contract commissions
 
40,675

 
161

 

 

 
98

 
40,934

Card interchange fees, gross
 
35,724

 
7

 

 

 
566

 
36,297

Merchant service fees
 
5,027

 

 

 

 

 
5,027

Deposit service charges
 
24,238

 
27

 

 

 
324

 
24,589

Investment banking revenue
 

 

 

 
46,867

 

 
46,867

Commissions
 

 

 

 
16,022

 

 
16,022

Fund management fees
 

 

 
6,478

 
1,430

 

 
7,908

Correspondent bank rebates
 
1,403

 

 

 

 

 
1,403

Total revenue from contracts with customers
 
$
149,803

 
$
852

 
$
6,478

 
$
64,319

 
$
988

 
$
222,440

Revenues outside the scope of ASC 606 (1)
 
17,031

 
48

 
(1,560
)
 
(1,642
)
 
65,617

 
79,494

Total noninterest income
 
$
166,834

 
$
900

 
$
4,918

 
$
62,677

 
$
66,605

 
$
301,934

 
(1)
Amounts are accounted for under separate guidance than ASC 606.

49


(2)
Global Commercial Bank’s, SVB Capital’s and SVB Leerink's components of noninterest income are shown net of noncontrolling interests. Noncontrolling interest is included within “Other Items."
Three months ended March 31, 2019
(Dollars in thousands)
 
Global
Commercial
Bank (2)
 
SVB Private  
Bank
 
SVB Capital (2)  
 
SVB
Leerink (2)
 
Other Items
 
Total      
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
 
 
 
 
Client investment fees (3)
 
$
44,102

 
$
380

 
$

 
$

 
$

 
$
44,482

Spot contract commissions
 
34,806

 
122

 

 

 
101

 
35,029

Card interchange fees, gross
 
38,715

 

 

 

 
147

 
38,862

Merchant service fees
 
4,534

 

 

 

 

 
4,534

Deposit service charges
 
20,793

 
35

 

 

 
111

 
20,939

Investment banking revenue
 

 

 

 
49,795

 

 
49,795

Commissions
 

 

 

 
14,108

 

 
14,108

Fund management fees
 

 

 
6,659

 
1,382

 

 
8,041

Correspondent bank rebates
 
1,467

 

 

 

 

 
1,467

Total revenue from contracts with customers
 
$
144,417

 
$
537

 
$
6,659

 
$
65,285

 
$
359

 
$
217,257

Revenues outside the scope of ASC 606 (1)
 
8,444

 
(27
)
 
18,186

 
2,832

 
33,684

 
63,119

Total noninterest income
 
$
152,861

 
$
510

 
$
24,845

 
$
68,117

 
$
34,043

 
$
280,376

 
(1)
Amounts are accounted for under separate guidance than ASC 606.
(2)
Global Commercial Bank’s and SVB Capital’s components of noninterest income are shown net of noncontrolling interests. Noncontrolling interest is included within “Other Items."
(3)
For the three months ended March 31, 2019, the amount of client investment fees previously reported as "Other Items" has been correctly allocated to the reportable segment "Global Commercial Bank" to properly reflect the source of such revenue. The correction of this immaterial error had no impact on the "Total" amount of client investment fees.

The timing of revenue recognition may differ from the timing of cash settlements or invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, and unearned revenue when revenue is recognized subsequent to receipt of consideration. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. During the three months ended March 31, 2020 and 2019, changes in our contract assets, contract liabilities and receivables were not material. Additionally, revenues recognized during the three months ended March 31, 2020 and 2019 that were included in the corresponding contract liability balance at the beginning of the periods were not material.
13.
Other Noninterest Expense
A summary of other noninterest expense for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Lending and other client related processing costs
 
$
9,158

 
$
5,177

Correspondent bank fees
 
3,986

 
3,744

Investment banking activities
 
3,030

 
4,185

Trade order execution costs
 
2,745

 
2,516

Data processing services
 
3,454

 
2,899

Telephone
 
2,227

 
2,741

Dues and publications
 
1,130

 
1,524

Postage and supplies
 
856

 
770

Other
 
14,117

 
9,980

Total other noninterest expense
 
$
40,703

 
$
33,536



50


14.
Segment Reporting
We have four reportable segments for management reporting purposes: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Leerink. The results of our operating segments are based on our internal management reporting process.
Our Global Commercial Bank and SVB Private Bank segments' primary source of revenue is from net interest income, which is primarily the difference between interest earned on loans, net of funds transfer pricing (“FTP”), and interest paid on deposits, net of FTP. Accordingly, these segments are reported using net interest income, net of FTP. FTP is an internal measurement framework designed to assess the financial impact of a financial institution’s sources and uses of funds. It is the mechanism by which a funding credit is given for deposits raised, and a funding charge is made for funded loans. FTP is calculated at an instrument level based on account characteristics.
We also evaluate performance based on provision for credit losses, noninterest income and noninterest expense, which are presented as components of segment operating profit or loss. In calculating each operating segment’s noninterest expense, we consider the direct costs incurred by the operating segment as well as certain allocated direct costs. As part of this review, we allocate certain corporate overhead costs to a corporate account. We do not allocate income tax expense or the provision for unfunded credit commitments (included in provision for credit losses) to our segments. Additionally, our management reporting model is predicated on average asset balances; therefore, period-end asset balances are not presented for segment reporting purposes. Changes in an individual client’s primary relationship designation have resulted, and in the future may result, in the inclusion of certain clients in different segments in different periods.
Unlike financial reporting, which benefits from the comprehensive structure provided by GAAP, our internal management reporting process is highly subjective, as there is no comprehensive, authoritative guidance for management reporting. Our management reporting process measures the performance of our operating segments based on our internal operating structure, which is subject to change from time to time, and is not necessarily comparable with similar information for other financial services companies.
For reporting purposes, SVB Financial Group has four 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 and its subsidiaries to commercial clients in the technology, life science/healthcare and private equity/venture capital industries. The Bank provides solutions to the financial needs of commercial clients through credit, treasury management, foreign exchange, trade finance, and other services. We broadly serve clients within the U.S., as well as non-U.S. clients in key international innovation markets. In addition, the Bank and its subsidiaries offer a variety of investment services and solutions to its clients that enable them to effectively manage their assets. 
Our Global Funds Banking (formerly Private Equity) Division provides banking products and services primarily to our private equity and venture capital clients.
SVB Wine provides banking products and services to our premium wine industry clients, including vineyard development loans. 
Debt Fund Investments is comprised of our investments in certain debt funds in which we are a strategic investor.
SVB Private Bank is the private banking division of the Bank, which provides a range of personal financial solutions for consumers. Our clients are primarily private equity/venture capital professionals and executive leaders of the innovation companies they support. We offer a customized suite of private banking services, including mortgages, home equity lines of credit, restricted stock purchase loans, capital call lines of credit and other secured and unsecured lending products, as well as cash and wealth management services.  In addition, we provide real estate secured loans to eligible employees through our Employee Home Ownership Program.
SVB Capital is the funds management business of SVB Financial Group, which focuses primarily on venture capital investments. SVB Capital manages funds (primarily venture capital funds) on behalf of third-party limited partners and, on a more limited basis, SVB Financial Group. The SVB Capital family of funds is comprised of direct venture funds that invest in companies and funds of funds that invest in other venture capital funds. SVB Capital generates income for the Company primarily from investment returns (including carried interest allocations) and management fees.
SVB Leerink is an investment bank specializing in the equity and convertible capital markets, mergers and acquisitions, equity research and sales and trading for growth and innovation-minded healthcare and life science companies and operates as a wholly-owned subsidiary of SVB Financial. SVB Leerink provides investment banking services across all subsectors of healthcare including: biotechnology, pharmaceuticals, medical devices, diagnostic and life science tools, healthcare services and digital health. SVB Leerink focuses on two primary lines of business:

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(i) investment banking focused on providing companies with capital-raising services, financial advice on mergers and acquisitions, sales and trading services and equity research, and (ii) sponsorship of private investment funds.
The summary financial results of our operating segments are presented along with a reconciliation to our consolidated interim results.
Our segment information for the three months ended March 31, 2020 and 2019 is as follows:
(Dollars in thousands)
 
Global
Commercial
Bank (1)
 
SVB Private  
Bank
 
SVB Capital (1)  
 
SVB
Leerink (1)
 
Other Items (2)      
 
Total      
Three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
463,835

 
$
15,164

 
$
21

 
$
201

 
$
44,916

 
$
524,137

(Provision for) reduction of credit losses
 
(194,411
)
 
(54,490
)
 

 

 
5,421

 
(243,480
)
Noninterest income
 
166,834

 
900

 
4,918

 
62,677

 
66,605

 
301,934

Noninterest expense (3)
 
(224,855
)
 
(10,090
)
 
(8,585
)
 
(62,037
)
 
(94,018
)
 
(399,585
)
Income (loss) before income tax expense (4)
 
$
211,403

 
$
(48,516
)
 
$
(3,646
)
 
$
841

 
$
22,924

 
$
183,006

Total average loans, amortized cost
 
$
29,137,484

 
$
3,857,478

 
$

 
$

 
$
665,766

 
$
33,660,728

Total average assets (5) (6)
 
61,813,129

 
3,892,400

 
447,201

 
483,648

 
5,770,790

 
72,407,168

Total average deposits
 
59,217,433

 
1,922,663

 

 

 
668,135

 
61,808,231

Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
445,876

 
$
11,981

 
$
6

 
$
442

 
$
54,581

 
$
512,886

(Provision for) reduction of credit losses
 
(26,805
)
 
984

 

 

 
(2,730
)
 
(28,551
)
Noninterest income (7)
 
152,861

 
510

 
24,845

 
68,117

 
34,043

 
280,376

Noninterest expense (3)
 
(198,683
)
 
(7,414
)
 
(5,782
)
 
(60,540
)
 
(93,245
)
 
(365,664
)
Income (loss) before income tax expense (4)
 
$
373,249

 
$
6,061

 
$
19,069

 
$
8,019

 
$
(7,351
)
 
$
399,047

Total average loans, amortized cost
 
$
24,798,197

 
$
3,085,883

 
$

 
$

 
$
503,992

 
$
28,388,072

Total average assets (5) (6) (8)
 
50,132,098

 
3,109,275

 
378,732

 
300,332

 
3,608,000

 
57,528,437

Total average deposits
 
47,596,868

 
1,491,234

 

 

 
626,107

 
49,714,209

 
 
(1)
Global Commercial Bank’s, SVB Capital’s and SVB Leerink's components of net interest income, noninterest income, noninterest expense and total average assets are shown net of noncontrolling interests for all periods presented. Noncontrolling interest is included within “Other Items."
(2)
The “Other Items” column reflects the adjustments necessary to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP. Net interest income consists primarily of interest earned from our fixed income investment portfolio, net of FTP. Noninterest income consists primarily of gains or losses on equity warrant assets, gains or losses on the sale of AFS securities and gains or losses on equity securities from exercised warrant assets. Noninterest expense consists primarily of expenses associated with corporate support functions such as finance, human resources, marketing, legal and other expenses.
(3)
The Global Commercial Bank segment includes direct depreciation and amortization of $5.5 million and $4.9 million for the three months ended March 31, 2020 and 2019, respectively.
(4)
The internal reporting model used by management to assess segment performance does not calculate income tax expense by segment. Our effective tax rate is a reasonable approximation of the segment rates.
(5)
Total average assets equal the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for each segment to reconcile the results to the consolidated financial statements prepared in conformity with GAAP.
(6)
Included in the total average assets for SVB Leerink is goodwill of $137.8 million for both the three months ended March 31, 2020 and 2019.
(7)
For the three months ended March 31, 2019, amounts of client investment fees included in the line item "Noninterest Income" previously reported as "Other Items" have been correctly allocated to our reportable segment "Global Commercial Bank" to properly reflect the source of such revenue. The correction of this immaterial error had no impact on the "Total" amount of noninterest income.
(8)
For the three months ended March 31, 2019, amounts for average assets previously reported as "Other Items" have been correctly allocated to the reportable segments "Global Commercial Bank" and “Private Bank” to properly reflect the greater of total average assets or the sum of total average liabilities and total average stockholders’ equity for “Global Commercial Bank” and “Private Bank.” The correction of this immaterial error had no impact on the "Total" amount of average assets.

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15.
Off-Balance Sheet Arrangements, Guarantees and Other Commitments
In the normal course of business, we use financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial and standby letters of credit and commitments to invest in venture capital and private equity fund investments. These instruments involve, to varying degrees, elements of credit risk. Credit risk is defined as the possibility of sustaining a loss because other parties to the financial instrument fail to perform in accordance with the terms of the contract.
Commitments to Extend Credit
The following table summarizes information related to our commitments to extend credit at March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Loan commitments available for funding: (1)
 
 
 
 
Fixed interest rate commitments
 
$
433,254

 
$
2,434,042

Variable interest rate commitments
 
21,325,138

 
19,309,317

Total loan commitments available for funding
 
21,758,392

 
21,743,359

Commercial and standby letters of credit (2)
 
2,909,918

 
2,778,561

Total unfunded credit commitments
 
$
24,668,310

 
$
24,521,920

Commitments unavailable for funding (3)
 
$
2,312,967

 
$
3,051,075

Allowance for unfunded credit commitments (4)
 
84,690

 
67,656

 
 
(1)
Represents commitments which are available for funding, due to clients meeting all collateral, compliance and financial covenants required under loan commitment agreements.
(2)
See below for additional information on our commercial and standby letters of credit.
(3)
Represents commitments which are currently unavailable for funding due to clients failing to meet all collateral, compliance and financial covenants under loan commitment agreements.
(4)
Our allowance for credit losses for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit.
Commercial and Standby Letters of Credit
The table below summarizes our commercial and standby letters of credit at March 31, 2020. The maximum potential amount of future payments represents the amount that could be remitted under letters of credit if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from the collateral held or pledged.
(Dollars in thousands)
 
Expires In One
Year or Less
 
Expires After
One Year
 
Total Amount
Outstanding
 
Maximum Amount
of Future Payments
Financial standby letters of credit
 
$
2,701,150

 
$
76,538

 
$
2,777,688

 
$
2,777,688

Performance standby letters of credit
 
105,359

 
17,406

 
122,765

 
122,765

Commercial letters of credit
 
9,369

 
96

 
9,465

 
9,465

Total
 
$
2,815,878

 
$
94,040

 
$
2,909,918

 
$
2,909,918


Deferred fees related to financial and performance standby letters of credit were $16.0 million at March 31, 2020 and $17.2 million at December 31, 2019. At March 31, 2020, collateral in the form of cash of $1.7 billion was available to us to reimburse losses, if any, under financial and performance standby letters of credit.

53


Commitments to Invest in Venture Capital and Private Equity Funds
We make commitments to invest in venture capital and private equity funds, which generally make investments in privately-held companies. Commitments to invest in these funds are generally made for a 10-year period from the inception of the fund. Although the limited partnership agreements governing these investments typically do not restrict the general partners from calling 100% of committed capital in one year, it is customary for these funds to call most of the capital commitments over 5 to 7 years, and in certain cases, the funds may not call 100% of committed capital. The actual timing of future cash requirements to fund these commitments is generally dependent upon the investment cycle, overall market conditions, and the nature and type of industry in which the privately held companies operate. The following table details our total capital commitments, unfunded capital commitments, and our ownership percentage in each fund at March 31, 2020:
(Dollars in thousands)
 
SVBFG Capital Commitments    
 
SVBFG Unfunded    
Commitments
 
SVBFG Ownership  
of each Fund (3)
CP I, LP
 
$
6,000

 
$
270

 
10.7
%
CP II, LP (1)
 
1,200

 
162

 
5.1

Capital Preferred Return Fund, LP
 
12,688

 

 
20.0

Growth Partners, LP
 
24,670

 
1,340

 
33.0

Strategic Investors Fund, LP
 
15,300

 
688

 
12.6

Strategic Investors Fund II, LP
 
15,000

 
1,050

 
8.6

Strategic Investors Fund III, LP
 
15,000

 
1,275

 
5.9

Strategic Investors Fund IV, LP
 
12,239

 
2,325

 
5.0

Strategic Investors Fund V funds
 
515

 
131

 
Various

Other venture capital and private equity fund investments (equity method accounting)
 
21,787

 
5,732

 
Various

Debt funds (equity method accounting)
 
58,493

 

 
Various

Other fund investments (2)
 
282,508

 
6,049

 
Various

Total
 
$
465,400

 
$
19,022

 
 
 
 
(1)
Our ownership includes direct ownership of 1.3 percent and indirect ownership interest of 3.8 percent through our investment in Strategic Investors Fund II, LP.
(2)
Represents commitments to 202 funds (primarily venture capital funds) where our ownership interest is generally less than five percent of the voting interests of each such fund.
(3)
We are subject to the Volcker Rule, which restricts or limits us from sponsoring or having ownership interests in “covered” funds including venture capital and private equity funds. See “Business - Supervision and Regulation” under Part 1, Item 1 of our 2019 Form 10-K.

The following table details the amounts of remaining unfunded commitments to venture capital and private equity funds by our consolidated managed funds of funds (including our interest and the noncontrolling interests) at March 31, 2020:
(Dollars in thousands)
 
Unfunded Commitments    
Strategic Investors Fund, LP
 
$
376

Capital Preferred Return Fund, LP
 
1,532

Growth Partners, LP
 
2,447

Total
 
$
4,355


16.
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 and California tax returns as major tax filings. Our U.S. federal tax returns for 2016 and subsequent tax years remain open to full examination. Our California tax returns for 2016 and subsequent tax years remain open to full examination.

At March 31, 2020, our unrecognized tax benefit was $14.3 million, the recognition of which would reduce our income tax expense by $11.1 million. We do not expect that our unrecognized tax benefit will materially change in the next 12 months.


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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 months ended March 31, 2020.
17.
Fair Value of Financial Instruments
Fair Value Measurements
Our available-for-sale securities, derivative instruments and certain non-marketable and other equity securities are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our interim consolidated financial statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable and on the significance of those inputs in the fair value measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data and views of market participants. The three levels for measuring fair value are based on the reliability of inputs and are as follows:
Level 1
Fair value measurements based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. Assets utilizing Level 1 inputs include U.S. Treasury securities, foreign government debt securities, exchange-traded equity securities and certain marketable securities accounted for under fair value accounting.
Level 2
Fair value measurements based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Valuations for the available-for-sale securities are provided by independent pricing service providers who have experience in valuing these securities and by comparison to and/or average of quoted market prices obtained from independent brokers. We perform a monthly analysis on the values received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and ongoing review of third-party pricing methodologies, review of pricing trends and monitoring of trading volumes. Additional corroboration, such as obtaining a non-binding price from a broker, may be obtained depending on the frequency of trades of the security and the level of liquidity or depth of the market. We ensure prices received from independent brokers represent a reasonable estimate of the fair value through the use of observable market inputs including comparable trades, yield curve, spreads and, when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. Below is a summary of the significant inputs used for each class of Level 2 assets and liabilities:
U.S. agency debentures: Fair value measurements of U.S. agency debentures are based on the characteristics specific to bonds held, such as issuer name, issuance date, coupon rate, maturity date and any applicable issuer call option features. Valuations are based on market spreads relative to similar term benchmark market interest rates, generally U.S. Treasury securities.
Agency-issued mortgage-backed securities: Agency-issued mortgage-backed securities are pools of individual conventional mortgage loans underwritten to U.S. agency standards with similar coupon rates, tenor, and other attributes such as geographic location, loan size and origination vintage. Fair value measurements of these securities are based on observable price adjustments relative to benchmark market interest rates taking into consideration estimated loan prepayment speeds.
Agency-issued collateralized mortgage obligations: Agency-issued collateralized mortgage obligations are structured into classes or tranches with defined cash flow characteristics and are collateralized by U.S. agency-issued mortgage pass-through securities. Fair value measurements of these securities incorporate similar characteristics of mortgage pass-through securities such as coupon rate, tenor, geographic location, loan size and origination vintage, in addition to incorporating the effect of estimated prepayment speeds on the cash flow structure of the class or tranche. These measurements incorporate observable market spreads over an estimated average life after considering the inputs listed above.
Agency-issued commercial mortgage-backed securities: Fair value measurements of these securities are based on spreads to benchmark market interest rates (usually U.S. Treasury rates or rates observable in the swaps market), prepayment speeds, loan default rate assumptions and loan loss severity assumptions on underlying loans.

55


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.
Interest rate derivative and interest rate swap assets and liabilities: Fair value measurements of interest rate derivatives and interest rate swaps are priced considering the coupon rate of the fixed leg of the contract and the variable coupon rate on the floating leg of the contract. Valuation is based on both spot and forward rates on the swap yield curve and the credit worthiness of the contract counterparty.
Other equity securities: Fair value measurements of equity securities of public companies are priced based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Certain sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sale restrictions which typically range from three to six months.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions.
Level 3
The fair value measurement is derived from valuation techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions we believe market participants would use in pricing the asset. The valuation techniques are consistent with the market approach, income approach and/or the cost approach used to measure fair value. Below is a summary of the valuation techniques used for each class of Level 3 assets:
Venture capital and private equity fund investments not measured at net asset value: Fair value measurements are based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. The significant unobservable inputs used in the fair value measurement include the information about each portfolio company, including actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Significant changes to any one of these inputs in isolation could result in a significant change in the fair value measurement; however, we generally consider all factors available through ongoing communication with the portfolio companies and venture capital fund managers to determine whether there are changes to the portfolio company or the environment that indicate a change in the fair value measurement.
Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions. Modeled asset values are further adjusted by applying a discount of up to 20 percent for certain warrants that have certain sales restrictions or other features that indicate a discount to fair value is warranted. As sale restrictions are lifted, discounts are adjusted downward to zero once all restrictions expire or are removed.
Equity warrant assets (private portfolio): Fair value measurements of equity warrant assets of private portfolio companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public market indices whose members operate in similar industries as companies in our private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Overall model asset values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. There is a direct correlation between changes in the volatility and remaining life assumptions in isolation and the fair value measurement while there is an inverse correlation between changes in the liquidity discount assumption and the fair value measurement.


56


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 March 31, 2020:
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at March 31, 2020
Assets:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,043,840

 
$

 
$

 
$
4,043,840

U.S. agency debentures
 

 
101,687

 

 
101,687

Foreign government debt securities
 
22,152

 

 

 
22,152

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

 
4,943,512

 

 
4,943,512

Agency-issued collateralized mortgage obligationsfixed rate
 

 
1,465,675

 

 
1,465,675

Agency-issued commercial mortgage-backed securities
 

 
2,071,198

 

 
2,071,198

Total available-for-sale securities
 
4,065,992

 
8,582,072

 

 
12,648,064

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

 

 

 
257,132

Venture capital and private equity fund investments not measured at net asset value (1)
 

 

 
134

 
134

Other equity securities in public companies
 
14,886

 
12,013

 

 
26,899

Total non-marketable and other equity securities (fair value accounting)
 
14,886

 
12,013

 
134

 
284,165

Other assets:
 
 
 
 
 
 
 
 
Foreign exchange forward and option contracts
 

 
239,272

 

 
239,272

Equity warrant assets
 

 
2,852

 
149,858

 
152,710

Client interest rate derivatives
 

 
80,543

 

 
80,543

Total assets
 
$
4,080,878

 
$
8,916,752

 
$
149,992

 
$
13,404,754

Liabilities:
 
 
 
 
 
 
 
 
Foreign exchange forward and option contracts
 
$

 
$
195,891

 
$

 
$
195,891

Client interest rate derivatives
 

 
31,533

 

 
31,533

Total liabilities
 
$

 
$
227,424

 
$

 
$
227,424

 
 
(1)
Included in Level 3 assets is $120 thousand 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, 2019:
(Dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Balance at December 31, 2019
Assets:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
6,894,010

 
$

 
$

 
$
6,894,010

U.S. agency debentures
 

 
99,547

 

 
99,547

Foreign government debt securities
 
9,038

 

 

 
9,038

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

 
4,148,791

 

 
4,148,791

Agency-issued collateralized mortgage obligations—fixed rate
 

 
1,538,343

 

 
1,538,343

Agency-issued commercial mortgage-backed securities
 

 
1,325,190

 

 
1,325,190

Total available-for-sale securities
 
6,903,048

 
7,111,871

 

 
14,014,919

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

 

 

 
265,263

Venture capital and private equity fund investments not measured at net asset value (1)
 

 

 
134

 
134

Other equity securities in public companies
 
17,290

 
41,910

 

 
59,200

Total non-marketable and other equity securities (fair value accounting)
 
17,290

 
41,910

 
134

 
324,597

Other assets:
 
 
 
 
 
 
 
 
Foreign exchange forward and option contracts
 

 
115,854

 

 
115,854

Equity warrant assets
 

 
4,435

 
161,038

 
165,473

Interest rate swaps
 

 
22,676

 

 
22,676

Client interest rate derivatives
 

 
28,811

 

 
28,811

Total assets
 
$
6,920,338

 
$
7,325,557

 
$
161,172

 
$
14,672,330

Liabilities:
 
 
 
 
 
 
 
 
Foreign exchange forward and option contracts
 
$

 
$
98,207

 
$

 
$
98,207

Interest rate swaps
 

 
25,623

 

 
25,623

Client interest rate derivatives
 

 
14,154

 

 
14,154

Total liabilities
 
$

 
$
137,984

 
$

 
$
137,984

 
 
(1)
Included in Level 3 assets is $120 thousand attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

58


The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2020 and 2019:
(Dollars in thousands)
 
Beginning Balance
 
Total Net Gains (Losses) Included in
Net Income
 
Purchases
 
Sales/Exits
 
Issuances  
 
Distributions and Other Settlements
 
Transfers Out of Level 3
 
Ending Balance
Three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-marketable and other equity securities (fair value accounting):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments not measured at net asset value (1)
 
$
134

 
$
5

 
$

 
$
(5
)
 
$

 
$

 
$

 
$
134

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
161,038

 
14,601

 

 
(30,034
)
 
4,519

 

 
(266
)
 
149,858

Total assets
 
$
161,172

 
$
14,606

 
$

 
$
(30,039
)
 
$
4,519

 
$

 
$
(266
)
 
$
149,992

Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-marketable and other equity securities (fair value accounting):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments not measured at net asset value (1)
 
$
1,079

 
$
(47
)
 
$

 
$

 
$

 
$
3

 
$

 
$
1,035

Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity warrant assets (2)
 
145,199

 
19,165

 
575

 
(12,304
)
 
4,543

 

 
(429
)
 
156,749

Total assets
 
$
146,278

 
$
19,118

 
$
575

 
$
(12,304
)
 
$
4,543

 
$
3

 
$
(429
)
 
$
157,784

 
 
(1)
Realized and unrealized gains (losses) are recorded in the line item “Gains on investment securities, net," a component of noninterest income.
(2)
Realized and unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net," a component of noninterest income.



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The following table presents the amount of net unrealized gains and losses included in earnings (which is inclusive of noncontrolling interest) attributable to Level 3 assets still held at March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Non-marketable and other equity securities (fair value accounting):
 
 
 
 
Venture capital and private equity fund investments not measured at net asset value (1)
 
$

 
$
(47
)
Other assets:
 
 
 
 
Equity warrant assets (2)
 
(4,145
)
 
14,772

Total unrealized (losses) gains, net
 
$
(4,145
)
 
$
14,725

Unrealized losses attributable to noncontrolling interests (1)
 
$

 
$
(39
)

 
 
(1)
Unrealized gains (losses) are recorded in the line item “Gains on investment securities, net," a component of noninterest income.
(2)
Unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net," a component of noninterest income.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of current sales restrictions to which these securities are subject, the actual sales of securities and the timing of such actual sales.
The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at March 31, 2020 and December 31, 2019. We have not included in this table our venture capital and private equity fund investments (fair value accounting) as we use net asset value per share (as obtained from the general partners of the investments) as a practical expedient to determine fair value.
(Dollars in thousands)
 
Fair value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input Range
 
Weighted 
Average
March 31, 2020:
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments (fair value accounting)
 
$
134

 
Private company equity pricing
 
(1)
 
(1)
 
(1
)
Equity warrant assets (public portfolio)
 
318

 
Black-Scholes option pricing model
 
Volatility
 
55.9%
 
55.9
%
 
 
 
 
Risk-Free interest rate
 
0.7
 
0.7

 
 
 
 
Sales restrictions discount (2)
 
10.0 - 20.0
 
14.6

Equity warrant assets (private portfolio)
 
149,540

 
Black-Scholes option pricing model
 
Volatility
 
25.6% - 55.9%
 
41.1

 
 
 
 
Risk-Free interest rate
 
0.1 - 0.7
 
0.3

 
 
 
 
Marketability discount (3)
 
25.0
 
25.0

 
 
 
 
Remaining life assumption (4)
 
45.0
 
45.0

December 31, 2019:
 
 
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments (fair value accounting)
 
$
134

 
Private company equity pricing
 
(1)
 
(1)
 
(1
)
Equity warrant assets (public portfolio)
 
346

 
Black-Scholes option pricing model
 
Volatility
 
39.2% - 54.8%
 
50.7
%
 
 
 
 
Risk-Free interest rate
 
1.9
 
1.9

 
 
 
 
Sales restrictions discount (2)
 
10.0 - 20.0
 
13.6

Equity warrant assets (private portfolio)
 
160,692

 
Black-Scholes option pricing model
 
Volatility
 
23.6% - 54.8%
 
38.2

 
 
 
 
Risk-Free interest rate
 
0.5 - 1.9
 
1.6

 
 
 
 
Marketability discount (3)
 
17.5
 
17.5

 
 
 
 
Remaining life assumption (4)
 
45.0
 
45.0

 
 
 
(1)
In determining the fair value of our venture capital and private equity fund investment portfolio (not measured at net asset value), we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Additionally, we have ongoing communication with the portfolio companies and venture capital fund managers, to determine whether there is a material change in fair value. We use company provided valuation reports, if available, to support our valuation

60


assumptions. These factors are specific to each portfolio company and a weighted average or range of values of the unobservable inputs is not meaningful.
(2)
We adjust quoted market prices of public companies, which are subject to certain sales restrictions. Sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sales restrictions, which typically range from three to six months.
(3)
Our marketability discount is applied to all private company warrants to account for a general lack of liquidity due to the private nature of the associated underlying company. The quantitative measure used is based upon various option-pricing models. On a quarterly basis, a sensitivity analysis is performed on our marketability discount.
(4)
We adjust the contractual remaining term of private company warrants based on our estimate of the actual remaining life, which we determine by utilizing historical data on terminations and exercises. At March 31, 2020, 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 months ended March 31, 2020 and 2019, we did not have any transfers between Level 3 and Level 1. All transfers from Level 3 to Level 2 for the three months ended March 31, 2020 and 2019 were due to the transfer of equity warrant assets from our private portfolio to our public portfolio (see our Level 3 reconciliation above).

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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. The following fair value hierarchy table presents the estimated fair values of our financial instruments that are not carried at fair value at March 31, 2020 and December 31, 2019:
 
 
 
 
Estimated Fair Value
(Dollars in thousands)
 
Carrying Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2020:
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
9,561,448

 
$
9,561,448

 
$
9,561,448

 
$

 
$

Held-to-maturity securities
 
13,574,289

 
14,131,154

 

 
14,131,154

 

Non-marketable securities not measured at net asset value
 
190,959

 
190,959

 

 

 
190,959

Non-marketable securities measured at net asset value
 
224,669

 
224,669

 

 

 

Net commercial loans
 
31,837,622

 
32,128,958

 

 

 
32,128,958

Net consumer loans
 
3,581,500

 
3,614,597

 

 

 
3,614,597

FHLB and Federal Reserve Bank stock
 
116,323

 
116,323

 

 

 
116,323

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
3,138,162

 
3,138,162

 

 
3,138,162

 

Non-maturity deposits (1)
 
61,738,032

 
61,738,032

 
61,738,032

 

 

Time deposits
 
173,925

 
173,855

 

 
173,855

 

3.50% Senior Notes
 
348,076

 
363,878

 

 
363,878

 

Off-balance sheet financial assets:
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit
 

 
27,162

 

 

 
27,162

December 31, 2019:
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
6,781,783

 
$
6,781,783

 
$
6,781,783

 
$

 
$

Held-to-maturity securities
 
13,842,946

 
14,115,272

 

 
14,115,272

 

Non-marketable securities not measured at net asset value
 
195,405

 
195,405

 

 

 
195,405

Non-marketable securities measured at net asset value
 
235,351

 
235,351

 

 

 

Net commercial loans
 
29,104,532

 
29,615,176

 

 

 
29,615,176

Net consumer loans
 
3,755,180

 
3,820,804

 

 

 
3,820,804

FHLB and Federal Reserve Bank stock
 
60,258

 
60,258

 

 

 
60,258

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
17,430

 
17,430

 

 
17,430

 

Non-maturity deposits (1)
 
61,569,714

 
61,569,714

 
61,569,714

 

 

Time deposits
 
188,093

 
187,980

 

 
187,980

 

3.50% Senior Notes
 
347,987

 
366,856

 

 
366,856

 

Off-balance sheet financial assets:
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit
 

 
27,197

 

 

 
27,197

 
 
(1)
Includes noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits.

Investments in Entities that Calculate Net Asset Value Per Share
FASB guidance over certain fund investments requires that we disclose the fair value of funds, significant investment strategies of the investees, redemption features of the investees, restrictions on the ability to sell investments, estimate of the period of time over which the underlying assets are expected to be liquidated by the investee, and unfunded commitments related to the investments.
Our investments in debt funds and venture capital and private equity fund investments generally cannot be redeemed. Alternatively, we expect distributions, if any, to be received primarily through IPO and M&A activity of the underlying assets of the fund. Subject to applicable requirements under the Volcker Rule, we do not have any plans to sell any of these fund

62


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 December 31st, for our March 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
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 March 31, 2020:
(Dollars in thousands)
 
Carrying Amount      
 
Fair Value        
 
Unfunded Commitments      
Non-marketable securities (fair value accounting):
 
 
 
 
 
 
Venture capital and private equity fund investments (1)
 
$
257,132

 
$
257,132

 
$
9,518

Non-marketable securities (equity method accounting):
 
 
 
 
 
 
Venture capital and private equity fund investments (2)
 
206,495

 
206,495

 
10,675

Debt funds (2)
 
6,910

 
6,910

 

Other investments (2)
 
11,265

 
11,265

 
886

Total
 
$
481,802

 
$
481,802

 
$
21,079

 
 
(1)
Venture capital and private equity fund investments within non-marketable securities (fair value accounting) include investments made by our managed funds of funds and one of our direct venture funds (consolidated VIEs) and investments in venture capital and private equity fund investments (unconsolidated VIEs). Collectively, these investments in venture capital and private equity funds are primarily in U.S. and global technology and life science/healthcare companies. Included in the fair value and unfunded commitments of fund investments under fair value accounting are $63.2 million and $3.2 million, respectively, attributable to noncontrolling interests. It is estimated that we will receive distributions from the fund investments over the next 10 to 13 years, depending on the age of the funds and any potential extensions of terms of the funds.
(2)
Venture capital and private equity fund investments, debt funds, and other fund investments within non-marketable securities (equity method accounting) include funds that invest in or lend money to primarily U.S. and global technology and life science/healthcare companies. It is estimated that we will receive distributions from the funds over the next 5 to 8 years, depending on the age of the funds and any potential extensions of the terms of the funds.
18.
Legal Matters
Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us and/or our affiliates, and we may from time to time be involved in other legal or regulatory proceedings. In accordance with applicable accounting guidance, we establish accruals for all such matters, including expected settlements, when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.
To the extent we believe any potential loss relating to such matters may have a material impact on our liquidity, consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we aim to disclose information relating to such potential loss. We also aim to disclose information relating to any material potential loss that is probable but not reasonably estimable. In such cases, where reasonably practicable, we aim to provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.
Based upon information available to us, our review of lawsuits and claims filed or pending against us to date and consultation with our outside legal counsel, we have not recognized a material accrual liability for any such matters, nor do we currently expect that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as a whole, in the future.
19.
Related Parties

63


We have no material related party transactions requiring disclosure. In the ordinary course of business, the Bank may extend credit to related parties, including executive officers, directors, principal shareholders and their related interests. Additionally, we provide real estate secured loans to eligible employees through our EHOP. For additional details, see Note 17 — “Employee Compensation and Benefit Plans" under Part II, Item 8 of our 2019 Form 10-K.
20.
Subsequent Events
Paycheck Protection Program
In April 2020, we started accepting applications under the Paycheck Protection Program ("PPP") administered by the Small Business Association (“SBA”) under the CARES Act and began to originate loans to qualified small businesses.  Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage, rent, and utility payments. To the extent not forgiven, loans are subject to certain terms including, among others, the following: maximum two-year term; interest rate of 1.0%; six-month deferral of loan payments; and no requirement for any collateral or personal guarantees. PPP borrowers are not required to pay any fees to the government or the lender and the loans may be prepaid by the borrower at any time.
As of May 5, 2020, we have over 4,400 outstanding loans recorded in the amount of approximately $2.0 billion of PPP loans as approved by the SBA and expect to continue funding additional loans as they become approved under the program. This funded amount reflects repayments received as of such date. We expect additional repayments from PPP borrowers, particularly on or prior to May 14, 2020 (subject to any extension permitted by the SBA), in connection with their reliance on certain regulatory “safe harbors” relating to their necessity certification pursuant to SBA guidance.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including in particular “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part I, Item 2 of this report, contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, management has in the past and might in the future make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements are statements that are not historical facts. Broadly speaking, forward-looking statements include, but are not limited to, the following:
Financial projections, including with respect to our net interest income, noninterest income, earnings per share, noninterest expenses (including professional services, compliance, compensation and other costs), cash flows, balance sheet positions, capital expenditures, liquidity and capitalization or other financial items;
Descriptions of our strategic initiatives, plans or objectives for future operations, including pending sales or acquisitions;
Forecasts of private equity/venture capital funding and investment levels;
Forecasts of future interest rates, economic performance, and income from investments;
Forecasts of expected levels of provisions for credit losses, nonperforming loans, loan growth and client funds;
The potential effects of the COVID-19 pandemic; and
Descriptions of assumptions underlying or relating to any of the foregoing.
You can identify these and other forward-looking statements by the use of words such as “becoming,” “may,” “will,” “should,” "could," "would," “predict,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “assume,” “seek,” “expect,” “plan,” “intend,” the negative of such words, or comparable terminology. Forward-looking statements are neither historical facts nor assurances of future performance. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we have based these expectations on our current beliefs as well as our assumptions, and such expectations may prove to be incorrect. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our management’s forward-looking statements. Important factors that could cause our actual results and financial condition to differ from the expectations stated in the forward-looking statements include, among others:
Market and economic conditions, including the interest rate environment, and the associated impact on us;
The credit profile and credit quality of our loan portfolio and volatility of our levels of nonperforming assets and charge-offs;
The COVID-19 pandemic and its effects on the economic and business environments in which we operate;
The adequacy of our allowance for credit losses and the need to make provisions for credit losses for any period;
The borrowing needs of our clients;

64


The sufficiency of our capital and liquidity positions;
The levels of loans, deposits and client investment fund balances;
The performance of our portfolio investments; the general condition of the public and private equity and mergers and acquisitions markets and their impact on our investments, including equity warrant assets, venture capital and private equity funds and direct equity investments;
Our overall investment plans and strategies; the realization, timing, valuation and performance of our equity or other investments;
The levels of public offerings, mergers and acquisitions and venture capital investment activity of our clients that may impact the borrowing needs of our clients;
The occurrence of fraudulent activity, including breaches of our information security or cyber security-related incidents;
Business disruptions and interruptions due to natural disasters and other external events;
The impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties;
Expansion of our business internationally, and the impact of international market and economic events on us;
The impact of governmental policy, legal requirements and regulations, including the Economic Growth, Regulatory Relief and Consumer Protection Act and the Dodd-Frank Act, promulgated by the Federal Reserve and other regulatory requirements;
The impact of lawsuits and claims, as well as legal or regulatory proceedings;
The impact of changes in accounting standards and tax laws;
The levels of equity capital available to our client or portfolio companies;
The effectiveness of our risk management framework and quantitative models;
Our ability to maintain or increase our market share, including through successfully implementing our business strategy and undertaking new business initiatives, including through the integration of SVB Leerink; and
Other factors as discussed in “Risk Factors” under Part I, Item 1A in our 2019 Form 10-K and under Part II, Item 1A of this report.

We urge investors to consider all of these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report on Form 10-Q. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this filing are made only as of the date of this filing. We assume no obligation and do not intend to revise or update any forward-looking statements contained in this Quarterly Report on Form 10-Q, except as required by law.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and accompanying notes as presented in Part I, Item 1 of this report and in conjunction with our 2019 Form 10-K.
Reclassifications
Certain prior period amounts primarily related to the adoption of ASU 2016-13, CECL, have been reclassified to conform to current period presentations.
Management’s Overview of First Quarter 2020 Performance
Our first quarter performance reflected strong balance sheet growth and business momentum particularly during the first two months of the quarter. This momentum, however, was offset by rapid economic deterioration in March 2020 due to the effects of the COVID-19 pandemic. Despite the impact of COVID-19, including a meaningful increase in our provision for credit losses and a decrease in our market-driven revenues (including gains from equity warrant assets and non-marketable securities, and investment banking revenues), the first quarter resulted in strong growth in loans and total client funds, stable net interest income and solid core fee income. As discussed further below, we are focused on supporting our employees, clients and communities during this crisis. As the broader economic picture remains uncertain, we believe our solid financial foundation of strong capital, ample liquidity and a high-quality balance sheet makes us well-positioned to continue to support and lend to our clients and manage the impact of a weaker economy while investing in our long-term growth.
Recent Developments - COVID-19
The current global health crisis created by the COVID-19 pandemic has resulted in unprecedented challenges and volatility in economic, market and business conditions. It has caused significant economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. We cannot predict at this time the scope and duration of the pandemic, as COVID-19 has not yet been contained, including in the United States and other international locations in which we operate. Moreover, the impact of COVID-19 on economic, market and

65


business conditions is likely to be exacerbated if uncontained for a prolonged period of time, and even if it is contained, there may be a seasonal or other resurgence of the epidemic. While there have been various governmental and other responses to control the spread of COVID-19 and to mitigate the adverse impact of COVID-19, such as stay at home orders, economic relief for individuals and businesses, and monetary policy measures, it remains uncertain whether these actions will be successful.
The global spread of COVID-19 accelerated in March 2020 at which time it was declared a pandemic by the World Health Organization. Since then, we have been focused on our business and human response to the crisis --- managing and operating our business as seamlessly as possible, and supporting our clients, employees and communities as we weather through the crisis together.
During this volatile time, we remain focused on our capital and liquidity. We are “well-capitalized,” remaining above all applicable regulatory capital requirements. We have a liquid and high-quality balance sheet, with approximately half of our assets as of March 31, 2020 held in cash and marketable securities, primarily agency-backed mortgage securities and U.S. Treasuries. We also have access to funding sources, as necessary. Moreover, we have temporarily suspended our stock repurchase program and will reassess this decision once the economic environment is more stable. In addition, we have also elected to use a regulatory capital relief option related to the impact of COVID-19 on our CECL adoption.
Prior to the effective adoption date of CECL, federal banking regulatory agencies had provided relief for the initial capital decrease at adoption by allowing the impact to be phased-in over three years on a straight-line basis. Subsequent to the adoption of CECL, federal banking regulatory agencies provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by COVID-19 as well as the significant resources required to implement CECL. At the time of the adoption of CECL, we were not expecting to utilize the initial relief provided by the federal banking regulatory agencies as the initial capital decrease at adoption did not have a material impact to our capital ratios; however, the impact to our capital from subsequent increases in our allowance for credit losses related to COVID-19 economic factors is expected to increase. As a result, we have elected to use the regulatory capital phase-in under the 2020 CECL Interim Final Rule ("IFR") allowing for deferral of the full effect of the impact from the adoption of CECL on our capital levels over two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total).
The uncertainties of the duration and severity of the effect of COVID-19 on economic, market and business conditions has made it more difficult to forecast our operating results and the macroeconomic conditions to which our business is subject. Some notable negative effects emerged late in the first quarter, as discussed in this Management Discussion and Analysis section, but any longer-term effects or trends remain subject to significant uncertainty. Moreover, we are subject to heightened business, operational (including fraud), market, credit and other risks related to the COVID-19 pandemic, which may have an adverse effect on our business, financial condition and results of operations. (See “Risk Factors” under Part II, Item 1A of this report)
We continue to serve our clients during this difficult time, while managing our credit risk. We have offered special debt relief assistance to support certain clients who are experiencing financial hardships related to the COVID-19 pandemic, including offering certain venture-backed companies, Private Bank, Wine and other clients the opportunity to temporarily defer their scheduled loan principal payments. We continue to engage with our clients to understand client needs, and we may implement additional assistance or other relief to support clients across various sectors and life stages. Additionally, we are participating as a lender under the Paycheck Protection Program (“PPP”) under the CARES Act and may participate in other government relief programs in the U.S. or internationally. These government programs are complex and our participation in any of these programs may lead to governmental, regulatory and other scrutiny, litigation, negative publicity and reputation damage for us and our customers who participate. Overall, these relief measures, whether our own programs or our participation in government programs, are new programs for us and we may not be successful in implementing or administering the programs as intended. Further, the extent to which these programs are successful in assisting our clients is uncertain. If these relief measures are not effective, there may be an adverse effect on our revenue and results of operations, including increased provisions in our allowance for credit losses, higher rates of default and increased credit losses in future periods.
We are also prioritizing the safety and well-being of our employees. In March 2020, we activated our business continuity and pandemic plans globally, moving to a work-from-home plan, prohibiting all business travel and postponing or moving online all SVB-hosted events, and enabling remote access to our systems. We have implemented various programs to provide work, life and health-related support for our employees, ranging from expanded time-off, counseling and medical benefits for employees directly impacted by COVID-19, to providing reimbursements and practical support for working from home. In addition, we are also developing a plan for employees to eventually return to work in our offices, which will be subject to a variety of complex considerations.
Moreover, consistent with our tradition of supporting and giving back to our communities, we have also committed $5.5 million to local, regional and global COVID-19 relief activities in various U.S. and international locations where we have offices. This includes corporate contributions to global, national and regional charities, direct community-based giving, and a 3:1 match

66


for employees’ donations to relevant causes. In April 2020, we also announced our intention to donate net PPP loan origination fees received from the Small Business Administration to COVID-19 relief efforts.
Until the pandemic subsides, we expect continued draws on lines of credit; reduced revenues from our businesses; increased credit losses in our lending portfolios, in particular early-stage companies and premium wineries; and reduced activity in our noninterest income-producing lines of business. Additionally, we expect the global slowdown in IPO and M&A activity to result in decreased investment banking revenues and decreased utilization of capital call lines of credit. Even after the pandemic subsides, it is possible that the U.S. and other major economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.
A summary of our performance for the three months ended March 31, 2020 (compared to the three months ended March 31, 2019, where applicable) is as follows:
BALANCE SHEET
 
EARNINGS
Assets. $72.4 billion in average total assets (up 25.9%). $75.0 billion in period-end total assets (up 24.7%).
Loans. $33.7 billion in average total loan balances (up 18.6%). $36.0 billion in period-end total loan balances (up 24.7%).
Total Client Funds. (on-balance sheet deposits and off-balance sheet client investment funds). $165.4 billion in average total client fund balances (up 20.6%). $168.9 billion in period-end total client fund balances (up 20.2%).
AFS/HTM Fixed Income Investments. $27.1 billion in average fixed income investment securities (up 22.8%). $26.2 billion in period-end fixed income investment securities (up 20.2%).


 
 EPS. Earnings per diluted share of $2.55 (down 53.1%).
Net Income. Consolidated net income available to common stockholders of $132.3 million (down 54.2%).
- Net interest income of $524.1 million (up 2.2%).
- Net interest margin of 3.12% (down 69 bps).
- Noninterest income of $301.9 million (up 7.7%), non-GAAP core fee income+ of $168.5 million (up 9.2%) and non-GAAP core fee income plus investment
banking revenue and commissions++ of $231.3 million (up 6.1%).
- Noninterest expense of $399.6 million (up 9.3%).

ROE. Return on average equity (annualized) (“ROE”) performance of 8.17%.
Operating Efficiency Ratio. Operating efficiency ratio of 48.37% with a non-GAAP core operating efficiency ratio of 47.71%+++.

 
 
 
CAPITAL
 
CREDIT QUALITY
Capital++++. Continued strong capital, with all capital ratios considered “well-capitalized” under banking regulations. SVB Financial and Bank capital ratios, respectively, were:
- CET 1 risk-based capital ratio of 12.35% and 10.90%.
- Tier 1 risk-based capital ratio of 13.35% and 10.90%.
- Total risk-based capital ratio of 14.45% and 12.04%.
- Tier 1 leverage ratio of 9.00% and 7.21%.

 
Credit Quality. Stable credit in an evolving credit environment.
- Allowance for credit losses for loans of 1.53% as a percentage of period-end total loans.
- Provision for loans of 2.78% as a percentage of period-end total loans (annualized).
- Net loan charge-offs of 0.35% as a percentage of average total loans (annualized).



+ Consists of fee income for deposit services, letters of credit and standby letters of credit, credit cards, client investments, foreign exchange and lending-related activities. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under “Results of Operations—Noninterest Income”)
++ Consists of non-GAAP core fee income plus investment banking revenue and commissions. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under “Results of Operations—Noninterest Income”).
+++ This ratio excludes certain financial line items where performance is typically subject to market or other conditions beyond our control and excludes SVB Leerink revenue and expenses. It is calculated by dividing noninterest expense after adjusting for noninterest expense attributable to SVB Leerink by total revenue after adjusting for noninterest income attributable to SVB Leerink, net gains or losses on investment securities and equity warrant assets, investment banking revenue and commissions. Additionally, noninterest expense and total revenue are adjusted for income or losses and expenses attributable to noncontrolling interests and adjustments to net interest income for a taxable equivalent basis. This is a non-GAAP financial measure. (See the non-GAAP reconciliation under "Results of Operations-Noninterest Expense").
++++ Federal banking regulatory agencies have provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by COVID-19 as well as the significant resources required to implement current expected credit loss("CECL"). The interim final rule provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the estimated amount of the capital impact for two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total). For additional details, see "Capital Resources" within "Consolidated Financial Condition" under Part 1, Item 2 of this report.



67


A summary of our performance for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands, except per share data, employees and ratios)
 
2020

2019
 
% Change  
Income Statement:
 
 
 
 
 
 
 
Diluted earnings per share
 
$
2.55

 
$
5.44

 
(53.1
)
Net income available to common stockholders
 
132,253

 
288,732

 
(54.2
)
  
Net interest income
 
524,137

 
512,886

 
2.2

  
Net interest margin
 
3.12
%
 
3.81
%
 
(69
)
bps 
Provision for credit losses
 
$
243,480

 
$
28,551

 
NM

%
Noninterest income
 
301,934

 
280,376

 
7.7

 
Noninterest expense
 
399,585

 
365,664

 
9.3

 
Non-GAAP core fee income (1)
 
168,458

 
154,243

 
9.2

 
Non-GAAP core fee income, plus investment banking revenue and commissions (1)
 
231,347

 
218,146

 
6.1

 
Non-GAAP noninterest income, net of noncontrolling interests (1)
 
303,788

 
277,128

 
9.6

  
Non-GAAP noninterest expense, net of noncontrolling interests (2)
 
399,445

 
365,285

 
9.4

  
Balance Sheet:
 

 
 
 
 
 
Average available-for-sale securities
 
$
13,565,908

 
$
6,870,168

 
97.5

%
Average held-to-maturity securities
 
13,576,061

 
15,223,958

 
(10.8
)
 
Average loans, amortized cost
 
33,660,728

 
28,388,072

 
18.6


Average noninterest-bearing demand deposits
 
41,335,984

 
38,222,687

 
8.1

  
Average interest-bearing deposits
 
20,472,247

 
11,491,522

 
78.2

  
Average total deposits
 
61,808,231

 
49,714,209

 
24.3

  
Earnings Ratios:
 

 
 
 
 
 
Return on average assets (annualized) (3)
 
0.73
%
 
2.04
%
 
(64.2
)
Return on average SVBFG stockholders’ equity (annualized) (4)
 
8.17

 
22.16

 
(63.1
)
  
Asset Quality Ratios:
 

 
 
 
 
 
Allowance for credit losses for loans as a % of total period-end loans (5)
 
1.53
%
 
1.03
%
 
50

bps 
Allowance for credit losses for performing loans as a % of total performing loans (5)
 
1.43

 
0.83

 
60

  
Gross loan charge-offs as a % of average total loans (annualized) (5)
 
0.44

 
0.13

 
31

  
Net loan charge-offs as a % of average total loans (annualized) (5)
 
0.35

 
0.11

 
24

  
Capital Ratios:
 

 
 
 
 
 
SVBFG CET 1 risk-based capital ratio
 
12.35
%
 
12.89
%
 
(54
)
bps
SVBFG tier 1 risk-based capital ratio
 
13.35

 
13.04

 
31

 
SVBFG total risk-based capital ratio
 
14.45

 
13.94

 
51

 
SVBFG tier 1 leverage ratio
 
9.00

 
9.10

 
(10
)
  
SVBFG tangible common equity to tangible assets (6)
 
8.70

 
8.59

 
11

  
SVBFG tangible common equity to risk-weighted assets (6)
 
13.40

 
12.86

 
54

  
Bank CET 1 risk-based capital ratio
 
10.90

 
12.35

 
(145
)
 
Bank tier 1 risk-based capital ratio
 
10.90

 
12.35

 
(145
)
  
Bank total risk-based capital ratio
 
12.04

 
13.29

 
(125
)
  
Bank tier 1 leverage ratio
 
7.21

 
8.38

 
(117
)
  
Bank tangible common equity to tangible assets (6)
 
7.63

 
7.99

 
(36
)
  
Bank tangible common equity to risk-weighted assets (6)
 
11.99

 
12.32

 
(33
)
  
Other Ratios:
 

 
 
 
 
 
Operating efficiency ratio (7)
 
48.37
%
 
46.10
%
 
4.9

Non-GAAP core operating efficiency ratio (2)
 
47.71

 
44.71

 
6.7

 
Total costs of deposits (annualized) (8)
 
0.24

 
0.23

 
4.3

 
Book value per common share (9)
 
$
130.02

 
$
102.11

 
27.3

  
Other Statistics:
 

 
 
 
 
 
Average full-time equivalent employees
 
3,672

 
3,228

 
13.8

Period-end full-time equivalent employees
 
3,710

 
3,250

 
14.2

  
 
 
NM-Not meaningful

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(1)
See “Results of Operations–Noninterest Income” for a description and reconciliation of non-GAAP core fee income and non-GAAP core fee income plus investment banking revenue and commissions.
(2)
See “Results of Operations–Noninterest Expense” for a description and reconciliation of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio.
(3)
Ratio represents annualized consolidated net income available to common stockholders divided by quarterly average assets.
(4)
Ratio represents annualized consolidated net income available to common stockholders divided by quarterly average SVBFG stockholders’ equity.
(5)
For the quarter ended March 31, 2020, the ratios are calculated using the amortized cost basis for total loans as a result of the adoption of CECL. Prior period ratios were calculated using total gross loans in accordance with previous methodology.
(6)
See “Capital Resources–Capital Ratios” for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.
(7)
The operating efficiency ratio is calculated by dividing total noninterest expense by total net interest income plus noninterest income.
(8)
Ratio represents annualized total cost of deposits and is calculated by dividing interest expense from deposits by average total deposits.
(9)
Book value per common share is calculated by dividing total SVBFG common stockholders’ equity by total outstanding common shares at period-end.

For more information with respect to our capital ratios, please refer to “Capital Ratios” under “Consolidated Financial Condition-Capital Ratios” below.
Critical Accounting Policies and Estimates
The accompanying management’s discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates and assumptions on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.
Except as set forth below, there have been no significant changes during the three months ended March 31, 2020 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 2019 Form 10-K.
We disclose our method and approach for the allowance for credit losses for loans, unfunded credit commitments and HTM securities critical accounting policy in Note 1 - “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements” under Part I, Item 1 of this report.
Allowance for Credit Losses
We consider this accounting policy to be critical as estimation of expected credit losses involves material management estimates and is susceptible to significant changes in the near-term. Determining the allowance for credit losses for loans, unfunded credit commitments and HTM securities requires us to make forecasts that are highly uncertain and require a high degree of judgment. A committee comprised of senior management evaluates the adequacy of the allowance for credit losses for loans, which includes review of loan portfolio segmentation, quantitative models, internal and external data inputs, economic forecasts, credit risk ratings and qualitative adjustments.
Expected Credit Losses Estimate for Loans
The methodology for estimating the amount of ECL reported in the allowance for credit losses has two main components: (1) ECL assessed on a collective basis for pools of loans that share similar risk characteristics which includes a qualitative adjustment based on our assessment of the risks that may lead to a future loan loss experience different from our historical loan loss experience and (2) ECL assessed for individual loans that do not share similar risk characteristics with other loans.
We derive an estimated ECL assumption from a non-discounted cash flow approach based on our portfolio segments discussed above. This approach incorporates: (1) probability of default ("PD"), (2) loss given default ("LGD") and (3) exposure at default ("EAD"), over the estimated life of the exposure. PD and LGD assumptions are developed based on quantitative models and inherent risk of credit loss, both of which involve significant judgement. Renewals and extensions within our control are not considered in the estimated contractual term of a loan. However, we include potential extensions if management has a reasonable expectation that we will execute a TDR with the borrower. The quantitative models are based on historical credit loss experience, adjusted for probability-weighted economic scenarios. These scenarios are used to support a reasonable and supportable forecast period of three years for all portfolio segments. To the extent the remaining contractual lives of loans in the portfolio extend beyond this three-year period, we revert to historical averages gradually over the remaining contractual lives, adjusted for prepayments. The macroeconomic scenarios are reviewed on a quarterly basis.    
We also apply a qualitative factor adjustment to the results obtained through our quantitative ECL models to consider relevant qualitative factors that relate to the environment in which the entity operates and are specific to the borrower. These adjustments are based upon our assessment of the risks that may lead to a future loan loss experience different from our historical loan loss experience. These risks are aggregated to become our qualitative allocation. Based on our qualitative assessment and

69


prediction or estimate of changing risks in the lending environment, the qualitative allocation may vary significantly from period to period. Refer to Note 1 - “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements” under Part I, Item I of this report for a summary of the factors we consider for its qualitative adjustments as part of our estimate of the changing risks in the lending environment.
We monitor our loan pools to ensure all assets therein continue to share similar risk characteristics with other financial assets inside the pool. Changes in credit risk, borrower circumstances, or the recognition of write-offs may indicate that a loan's risk profile has changed, and the asset should be removed from its current pool. For a loan that does not share risk characteristics with other loans, expected credit loss is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows and the amortized cost basis of the loan. When a loan is collateral-dependent and the repayment is expected to be provided substantially through the operation or sale of the collateral, the ECL is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral will be determined by the most recent appraisal, as adjusted to reflect a reasonable marketing period for the sale of the asset(s) and an estimate of reasonable selling expenses. Collateral-dependent loans will have independent appraisals completed and accepted at least annually.
Expected Credit Losses Estimate for Unfunded Credit Commitments
We maintain a separate allowance for credit losses for unfunded credit commitments which is included in other liabilities and the related ECL in our provision for credit losses. We estimate the amount of expected losses by using historical trends to calculate a probability of an unfunded credit commitment being funded and derive historical lifetime expected loss factors for each portfolio segment similar to our funded loan ECL. The collectively assessed ECL for unfunded credit commitments also includes the same qualitative allocations applied for our funded loan ECL. For unfunded credit commitments related to loans that do not share similar risk characteristics with other loans, where applicable, a separate estimate of ECL will be included in our total allowance for credit losses on unfunded credit commitments. Loan commitments that are determined to be unconditionally cancellable by the Bank do not require an allowance for credit losses.
Expected Credit Losses Estimate for Held-to-Maturity Investments
We measure ECL on held-to-maturity securities on a collective basis by major security type and standard credit rating. Our held-to-maturity securities portfolio, with the exception of our municipal bond portfolio, are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ECL. The estimate of ECL on our municipal bond portfolio considers historical credit loss information and severity of loss in the event of default and leverages external data adjusted for current conditions. A reasonable and supportable forecast period of one year is applied to our municipal bond portfolio, with immediate reversion to long-term average historical loss rates when remaining contractual lives of securities exceed one year.
Recent Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which is part of the FASB’s initiative to reduce cost and complexity related to accounting for income taxes.  The ASU eliminates certain exceptions to the general principles of ASC 740, Income Taxes, and simplifies income tax accounting in several areas.  The amendments are effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2020, with early adoption permitted. The ASU allows entities to adopt this provision on a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact this ASU will have on our financial position, results of operations, cash flows and disclosures.
In March 2020, the FASB issued a new Accounting Standard Update (ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting). This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. For instance, entities can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination; (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met; and (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. This guidance became effective on March 12, 2020 and an entity may elect to prospectively apply each category of exemption independently, either in the interim period that includes March 12, 2020, or in a subsequent period through December 31, 2022. We have implemented a process to assess the population of contracts that will be impacted by this ASU and to evaluate

70


expedients we will use and when we might apply them. We are currently evaluating the impact this guidance will have on our financial position, results of operations, cash flows and disclosures.
Results of Operations
Net Interest Income and Margin (Fully Taxable Equivalent Basis)
Net interest income is defined as the difference between: (i) interest earned on loans, fixed income investments in our available-for-sale and held-to-maturity securities portfolios and short-term investment securities and (ii) interest paid on funding sources. Net interest margin is defined as annualized net interest income, on a fully taxable equivalent basis, as a percentage of average interest-earning assets. Net interest income and net interest margin are presented on a fully taxable equivalent basis to consistently reflect income from taxable loans and securities and tax-exempt securities based on the federal statutory tax rate of 21.0 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.
 
 
2020 Compared to 2019
 
 
Three months ended March 31, increase (decrease) due to change in
(Dollars in thousands)
 
Volume
 
Rate
 
Total
Interest income:
 
 
 
 
 
 
Federal Reserve deposits, federal funds sold, securities purchased under agreements to resell and other short-term investment securities
 
$
6,876

 
$
(8,468
)
 
$
(1,592
)
Fixed income investment portfolio (taxable)
 
25,287

 
2,381

 
27,668

Fixed income investment portfolio (non-taxable)
 
2,801

 
(412
)
 
2,389

Loans, amortized cost
 
60,839

 
(72,414
)
 
(11,575
)
Increase (decrease) in interest income, net
 
95,803

 
(78,913
)
 
16,890

Interest expense:
 
 
 
 
 
 
Interest bearing checking and savings accounts
 

 
(6
)
 
(6
)
Money market deposits
 
16,082

 
(4,900
)
 
11,182

Money market deposits in foreign offices
 
10

 
(2
)
 
8

Time deposits
 
296

 
103

 
399

Sweep deposits in foreign offices
 
426

 
(2,518
)
 
(2,092
)
Total increase (decrease) in deposits expense
 
16,814

 
(7,323
)
 
9,491

Short-term borrowings
 
1,725

 
(1,214
)
 
511

3.50% Senior Notes
 
3

 

 
3

5.375% Senior Notes
 
(4,868
)
 

 
(4,868
)
Total decrease in borrowings expense
 
(3,140
)
 
(1,214
)
 
(4,354
)
Increase (decrease) in interest expense, net
 
13,674

 
(8,537
)
 
5,137

Increase (decrease) in net interest income
 
$
82,129

 
$
(70,376
)
 
$
11,753

Net Interest Income (Fully Taxable Equivalent Basis)
Three months ended March 31, 2020 and 2019
Net interest income increased by $11.8 million to $527.5 million for the three months ended March 31, 2020, compared to $515.8 million for the comparable 2019 period. Overall, our net interest income increased primarily from interest from our fixed income investment securities reflective of higher average fixed income securities. This increase was partially offset by a decrease in interest income from loans, reflective of lower gross loan yields partially offset by an increase in average loan balances

71


as well as an increase in interest paid on our interest-bearing deposits due to the increase in average interest-bearing deposits partially offset by market interest rate decreases.
The main factors affecting interest income and interest expense for the three months ended March 31, 2020, compared to the comparable 2019 period are discussed below:
Interest income for the three months ended March 31, 2020 increased by $16.9 million due primarily to:
A $30.1 million increase in interest income from our fixed income investment securities. The increase was due primarily to the increase of $5.0 billion in average fixed income investment securities, partially offset by
An $11.6 million decrease in interest income on loans to $382.6 million for the three months ended March 31, 2020, compared to $394.1 million for the comparable 2019 period. The decrease was reflective of a decrease in the overall loan yields of 106 basis points to 4.57 percent from 5.63 percent partially offset by an increase in average loan balances of $5.3 billion. Gross loan yields, excluding loan interest recoveries and loan fees, decreased 97 basis points to 4.13 percent from 5.10 percent, reflective primarily of the impact of the decreases in Federal Funds rates in the latter half of 2019 as well as March 2020, partially offset by an increase reflective of gains on the termination and net settlement of our interest rate swap cash flow hedges. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the termination and net settlement of our interest rate swap cash flow hedges.
Interest expense for the three months ended March 31, 2020 increased by $5.1 million due primarily to:
A $9.5 million increase in interest expense on deposits due primarily to an increase in interest paid on our interest-bearing money market deposits due to the growth in average interest-bearing deposits of $9.0 billion partially offset by decreases in market rates, partially offset by
A $4.4 million decrease in interest expense on borrowings expense due primarily to the extinguishment of our 5.375% Senior Notes in December 2019.
Net Interest Margin (Fully Taxable Equivalent Basis)
Three months ended March 31, 2020 and 2019
Our net interest margin decreased by 69 basis points to 3.12 percent for the three months ended March 31, 2020, compared to 3.81 percent for the comparable 2019 period. The lower margin for the three months ended March 31, 2020 was due primarily to a decrease in yields on loans reflective of the three 25 basis point Federal Funds rate decreases in the latter half of 2019 as well as the aggregate 150 basis point decrease in March 2020. The decrease in our net interest margin was partially offset by increases from balance sheet growth as well as increases from our interest rate swap cash flow hedges and effective loan floors. Average loans represented 49.4 percent of average interest earnings assets for the three months ended March 31, 2020, compared to 51.7 percent for the comparable 2019 period.
Average Balances, Yields and Rates Paid (Fully Taxable Equivalent Basis)
The average yield earned on interest-earning assets is the amount of annualized fully taxable equivalent interest income expressed as a percentage of average interest-earning assets. The average rate paid on funding sources is the amount of annualized interest expense expressed as a percentage of average funding sources. The following tables set forth average assets, liabilities, noncontrolling interests, preferred stock, and SVBFG stockholders’ equity, interest income, interest expense, annualized yields and rates, and the composition of our annualized net interest margin for the three months ended March 31, 2020 and 2019:

72


Average Balances, Rates and Yields for the Three Months Ended March 31, 2020 and 2019
 
 
Three months ended March 31,
 
 
2020
 
2019
(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)
 
$
7,308,705

 
$
17,624

 
0.97
%
 
$
4,460,378

 
$
19,216

 
1.75
%
Investment securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
13,565,908

 
77,024

 
2.28

 
6,870,168

 
35,422

 
2.09

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
11,675,421

 
77,361

 
2.66

 
13,651,311

 
91,295

 
2.71

Non-taxable (3)
 
1,900,640

 
16,233

 
3.44

 
1,572,647

 
13,844

 
3.57

Total loans, amortized cost (4) (5)
 
33,660,728

 
382,569

 
4.57

 
28,388,072

 
394,144

 
5.63

Total interest-earning assets
 
68,111,402

 
570,811

 
3.37

 
54,942,576

 
553,921

 
4.09

Cash and due from banks
 
797,462

 
 
 
 
 
527,109

 
 
 
 
Allowance for credit losses for loans
 
(327,812
)
 
 
 
 
 
(288,927
)
 
 
 
 
Other assets (6)
 
3,826,116

 
 
 
 
 
2,347,679

 
 
 
 
Total assets
 
$
72,407,168

 
 
 
 
 
$
57,528,437

 
 
 
 
Funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing checking and savings accounts
 
$
546,428

 
$
108

 
0.08
%
 
$
545,238

 
$
114

 
0.08
%
Money market deposits
 
17,613,578

 
33,013

 
0.75

 
9,073,622

 
21,831

 
0.98

Money market deposits in foreign offices
 
266,045

 
24

 
0.04

 
148,342

 
16

 
0.04

Time deposits
 
163,343

 
429

 
1.06

 
50,691

 
30

 
0.24

Sweep deposits in foreign offices
 
1,882,853

 
3,824

 
0.82

 
1,673,629

 
5,916

 
1.43

Total interest-bearing deposits
 
20,472,247

 
37,398

 
0.73

 
11,491,522

 
27,907

 
0.98

Short-term borrowings
 
969,896

 
2,716

 
1.13

 
353,389

 
2,205

 
2.53

3.50% Senior Notes
 
348,018

 
3,151

 
3.64

 
347,669

 
3,148

 
3.67

5.375% Senior Notes
 

 

 

 
348,882

 
4,868

 
5.66

Total interest-bearing liabilities
 
21,790,161

 
43,265

 
0.80

 
12,541,462

 
38,128

 
1.23

Portion of noninterest-bearing funding sources
 
46,321,241

 
 
 
 
 
42,401,114

 
 
 
 
Total funding sources
 
68,111,402

 
43,265

 
0.25

 
54,942,576

 
38,128

 
0.28

Noninterest-bearing funding sources:
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
41,335,984

 
 
 
 
 
38,222,687

 
 
 
 
Other liabilities
 
2,277,031

 
 
 
 
 
1,330,037

 
 
 
 
Preferred stock
 
340,169

 
 
 
 
 

 
 
 
 
SVBFG common stockholders’ equity
 
6,512,946

 
 
 
 
 
5,283,808

 
 
 
 
Noncontrolling interests
 
150,877

 
 
 
 
 
150,443

 
 
 
 
Portion used to fund interest-earning assets
 
(46,321,241
)
 
 
 
 
 
(42,401,114
)
 
 
 
 
Total liabilities, noncontrolling interest, and SVBFG stockholders’ equity
 
$
72,407,168

 
 
 
 
 
$
57,528,437

 
 
 
 
Net interest income and margin
 
 
 
$
527,546

 
3.12
%
 
 
 
$
515,793

 
3.81
%
Total deposits
 
$
61,808,231

 
 
 
 
 
$
49,714,209

 
 
 
 
Reconciliation to reported net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments for taxable equivalent basis
 
 
 
(3,409
)
 
 
 
 
 
(2,907
)
 
 
Net interest income, as reported
 
 
 
$
524,137

 
 
 
 
 
$
512,886

 
 
 
 
(1)
Includes average interest-earning deposits in other financial institutions of $0.9 billion and $0.8 billion for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 and 2019, balances also include $5.5 billion and $2.8 billion, respectively, deposited at the FRB, earning interest at the Federal Funds target rate.
(2)
Yields on interest-earning investment securities do not give effect to changes in fair value that are reflected in other comprehensive income.
(3)
Interest income on non-taxable investment securities is presented on a fully taxable equivalent basis using the federal statutory tax rate of 21.0 percent for all periods presented.
(4)
Nonaccrual loans are reflected in the average balances of loans.
(5)
Interest income includes loan fees of $36.7 million for both the three months ended March 31, 2020 and 2019.
(6)
Average investment securities of $1.6 billion and $913 million for the three months ended March 31, 2020 and 2019, respectively, were classified as other assets as they were noninterest-earning assets. These investments primarily consisted of non-marketable and other equity securities.

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Provision for Credit Losses
The provision for credit losses is the combination of (i) the provision for loans, (ii) the provision for unfunded credit commitments and (iii) the provision for HTM securities. Our provision for credit losses equals our best estimate of probable credit losses that are inherent in the portfolios at the balance sheet date.
The following table summarizes our allowance for credit losses for loans, unfunded credit commitments and HTM securities for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands, except ratios)
 
2020
 
2019
Allowance for credit losses for loans, beginning balance
 
$
304,924

 
$
280,903

Day one impact of adopting ASC 326
 
25,464

 

Provision for loans
 
248,901

 
25,821

Gross loan charge-offs
 
(36,896
)
 
(9,000
)
Loan recoveries
 
7,755

 
1,425

Foreign currency translation adjustments
 
(1,185
)
 
1,002

Allowance for credit losses for loans, ending balance
 
$
548,963

 
$
300,151

Allowance for credit losses for unfunded credit commitments, beginning balance
 
67,656

 
55,183

Day one impact of adopting ASC 326
 
22,826

 

(Reduction of) provision for unfunded credit commitments
 
(5,477
)
 
2,730

Foreign currency translation adjustments
 
(315
)
 
57

Allowance for credit losses for unfunded credit commitments, ending balance (1)
 
$
84,690

 
$
57,970

Allowance for credit losses for HTM securities, beginning balance
 

 

Day one impact of adopting ASC 326
 
174

 

Provision for HTM securities
 
56

 

Allowance for credit losses for HTM securities, ending balance (2)
 
$
230

 
$

Ratios and other information:
 
 
 
 
Provision for loans as a percentage of period-end total loans (annualized) (3)
 
2.78
%
 
0.36
%
Allowance for credit losses for loans as a percentage of period-end total loans (3)
 
1.53

 
1.03

Provision for credit losses
 
$
243,480

 
$
28,551

Period-end total loans (3)
 
35,968,085

 
29,020,519

Average total loans (3)
 
33,660,728

 
28,555,655

 
(1)
The “allowance for credit losses for unfunded credit commitments” is included as a component of “Other liabilities” on our consolidated balance sheets.
(2)
The "allowance for credit losses for HTM securities" is included as a component of HTM securities and presented net in our consolidated financial statements.
(3)
For the three months ended March 31, 2020, loan amounts are disclosed, and ratios are calculated, using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed, and ratios are calculated, using the gross basis.

Three months ended March 31, 2020 and 2019
Our provision for credit losses was $243.5 million for the three months ended March 31, 2020, consisting of a provision for loans of $248.9 million, a reduction of our expected credit losses for unfunded credit commitments of $5.5 million and a $0.1 million provision for our HTM securities. Our provision for credit losses was $28.6 million for the three months ended March 31, 2019, consisting of a provision for loans of $25.8 million and a provision for unfunded credit commitments of $2.7 million.
The provision for credit losses for loans of $248.9 million was driven primarily by $190.7 million in additional reserves for our performing loans based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic, as well as changes in loan composition within our portfolio segments, $40.9 million in additional reserves for period-end loan growth, $13.1 million for charge-offs not specifically reserved for at December 31, 2019 and $10.7 million in net new nonaccrual loans, partially offset by $7.8 million of recoveries.

74


A reduction of our expected credit losses for unfunded credit commitments of $5.5 million was driven primarily by a decrease in the expected future commitments for milestone tranches, which are tied to company performance or additional funding rounds, based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic.
The provision for loans of $25.8 million for the three months ended March 31, 2019 reflects primarily an increase of $27.4 million in net new specific reserves for nonaccrual loans, $4.1 million in additional reserves for period-end loan growth and $4.9 million for charge-offs not specifically reserved for, partially offset by a decrease of $8.2 million for our performing loans reserve.
The provision for unfunded credit commitments of $2.7 million was driven primarily by growth in unfunded credit commitments of $1.4 billion for three months ended March 31, 2019.
Gross loan charge-offs were $36.9 million for the first quarter of 2020, of which $13.1 million was not specifically reserved for at December 31, 2019. Gross loan charge-offs were primarily driven by a $33.4 million charge-off for our investor dependent clients with one $10.7 million charge-off related to a later-stage life sciences/healthcare client. The remaining charge-offs came primarily from our Sponsor Led Buyout risk-based segment.
Gross loan charge-offs were $9.0 million for the three months ended March 31, 2019, of which $4.9 million was not specifically reserved for at December 31, 2018. Gross loan charge-offs were primarily due to $8.3 million from our software/internet loan portfolio driven by three mid-stage clients and one early-stage client.
See “Consolidated Financial Condition—Credit Quality and Allowance for Credit Losses for Loans and for Unfunded Credit Commitments” below and Note 7 — “Loans and Allowance for Credit Losses: Loans and Unfunded Credit Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for further details on our allowance for credit losses for loans and unfunded credit commitments.
Noninterest Income
For the three months ended March 31, 2020, noninterest income was $301.9 million compared to $280.4 million for the comparable 2019 period. For the three months ended March 31, 2020, non-GAAP noninterest income, net of noncontrolling interests was $303.8 million compared to $277.1 million for the comparable 2019 period. For the three months ended March 31, 2020, non-GAAP core fee income plus investment banking revenue and commissions was $231.3 million compared to $218.1 million for the comparable 2019 period. For the three months ended March 31, 2020, non-GAAP core fee income was $168.5 million and compared to $154.2 million for the comparable 2019 period. (See reconciliations of non-GAAP measures used below under “Use of Non-GAAP Financial Measures”.)
Use of Non-GAAP Financial Measures
To supplement our unaudited interim consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance (including, but not limited to, non-GAAP core fee income, non-GAAP core fee income plus investment banking revenue and commissions, non-GAAP noninterest income, and non-GAAP net gains on investment securities). These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.
We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by excluding items that represent income attributable to investors other than us and our subsidiaries. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, and not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.
Included in net income is income and expense attributable to noncontrolling interests. We recognize, as part of our investment funds management business through SVB Capital and SVB Leerink, the entire income or loss from funds consolidated in accordance with ASC Topic 810 as discussed in Note 1 — “Basis of Presentation” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report. We are required under GAAP to consolidate 100% of the results of these entities, even though we may own less than 100% of such entities. The relevant amounts attributable to investors other than us are reflected under “Net Income Attributable to Noncontrolling Interests” on our statements of income. Where applicable, the tables below for noninterest income and net gains on investment securities exclude noncontrolling interests.
Core fee income is a non-GAAP financial measure, which represents GAAP noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control, primarily our net gains (losses)

75


on investment securities and equity warrant assets, (ii) our investment banking revenue and commissions, and (iii) other noninterest income. Core fee income includes client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees and letters of credit and standby letters of credit fees.
Core fee income plus investment banking revenue and commissions is a non-GAAP measure, which represents GAAP noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control, primarily our net gains (losses) on investment securities and equity warrant assets, and other noninterest income. Core fee income plus investment banking revenue and commissions includes core fee income plus investment banking revenue and commissions.
The following table provides a reconciliation of GAAP noninterest income to non-GAAP noninterest income, net of noncontrolling interests, for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
GAAP noninterest income
 
$
301,934


$
280,376

 
7.7
 %
Less: (loss) income attributable to noncontrolling interests, including carried interest allocation
 
(1,854
)
 
3,248

 
(157.1
)
Non-GAAP noninterest income, net of noncontrolling interests
 
$
303,788

 
$
277,128

 
9.6

The following table provides a reconciliation of GAAP noninterest income to non-GAAP core fee income for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
GAAP noninterest income
 
$
301,934

 
$
280,376

 
7.7
 %
Less: gains on investment securities, net
 
46,055

 
29,028

 
58.7

Less: gains on equity warrant assets, net
 
13,395

 
21,305

 
(37.1
)
Less: other noninterest income
 
11,137

 
11,897

 
(6.4
)
Non-GAAP core fee income plus investment banking revenue and commissions (1)
 
$
231,347

 
$
218,146

 
6.1

Less: investment banking revenue
 
46,867

 
49,795

 
(5.9
)
Less: commissions
 
16,022

 
14,108

 
13.6

Non-GAAP core fee income (2)
 
$
168,458

 
$
154,243

 
9.2

 
(1)
Non-GAAP core fee income plus investment banking revenue and commissions represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control, and other noninterest income. Core fee income plus investment banking revenue and commissions is Non-GAAP core fee income (as defined in the subsequent footnote) with the addition of investment banking revenue and commissions.
(2)
Non-GAAP core fee income represents noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control, (ii) our investment banking revenue and commissions and (iii) other noninterest income. Non-GAAP core fee income includes client investment fees, foreign exchange fees, credit card fees, deposit service charges, lending related fees and letters of credit and standby letters of credit fees.
Gains on Investment Securities, Net
Net gains on investment securities include gains and losses from our non-marketable and other equity securities, which include public equity securities held as a result of exercised equity warrant assets, as well as gains and losses from sales of our AFS debt securities portfolio, when applicable.
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies and qualified affordable housing projects. We experience variability in the performance of our non-marketable and other equity securities from period to period, which results in net gains or losses on investment securities (both realized and unrealized). This variability is due to a number of factors, including unrealized changes in the values of our investments, changes in the amount of realized gains and losses from distributions, changes in liquidity events and general economic and market conditions. Unrealized gains or losses from non-marketable and other equity securities for any single period are typically driven by valuation changes, and are therefore subject to potential increases or decreases in future periods. Such variability may

76


lead to volatility in the gains or losses from investment securities. As such, our results for a particular period are not necessarily indicative of our expected performance in a future period.
The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of certain sales restrictions to which these equity securities may be subject to (e.g. lock-up agreements), changes in prevailing market prices, market conditions, the actual sales or distributions of securities, and the timing of such actual sales or distributions, which, to the extent such securities are managed by our managed funds, are subject to our funds' separate discretionary sales/distributions and governance processes.
Our AFS securities portfolio is a fixed income investment portfolio that is managed with the objective of earning an appropriate portfolio yield over the long-term while maintaining sufficient liquidity and credit diversification as well as addressing our asset/liability management objectives. Though infrequent, sales of debt securities in our AFS securities portfolio may result in net gains or losses and are conducted pursuant to the guidelines of our investment policy related to the management of our liquidity position and interest rate risk.
Three months ended March 31, 2020 and 2019
For the three months ended March 31, 2020, we had net gains on investment securities of $46.1 million, compared to $29.0 million for the comparable 2019 period. Non-GAAP net gains on investment securities, net of noncontrolling interests, were $47.6 million for the three months ended March 31, 2020, compared to non-GAAP net gains, net of controlling interest of $25.6 million for the comparable 2019 period.
Non-GAAP net gains on investment securities, net of noncontrolling interests, of $47.6 million for the three months ended March 31, 2020 were driven by the following:
Gains of $61.2 million from our AFS debt securities portfolio, resulting from the sale of $2.6 billion of U.S. Treasury securities during the quarter, offset by
Losses of $4.2 million from our public equity securities investments, primarily driven by unrealized losses due to decreases in the value of public equity securities held, and
Losses of $7.5 million from our SVB Capital managed funds and strategic direct investments (comprised of our managed funds of funds, managed direct venture funds, debt funds and strategic and other investments components below) primarily driven by a downward valuation adjustment of $17.1 million for illiquid investments held in the private managed funds and companies of our portfolios due to the current market volatility. The downward valuation adjustment was offset by unrealized net valuation increases from private company investments held in these portfolios.
Notwithstanding the gains from our sale of U.S. Treasury securities in our AFS debt securities portfolio, our total gains on investment securities for the remaining portfolio were negatively impacted by COVID-19 market conditions towards the end of the first quarter of 2020. We expect continued pressure on our investment securities in 2020 as we anticipate public markets to continue to fluctuate, as well as a slowdown in IPO, M&A and other private market activities, due to the COVID-19 pandemic.


77


The following tables provide a reconciliation of GAAP total gains (losses) on investment securities, net, to non-GAAP net gains (losses) on investment securities, net of noncontrolling interests, for the three months ended March 31, 2020 and 2019:
(Dollars in thousands)
 
Managed
Funds of
Funds
 
Managed
Direct
Venture
Funds
 
Public Equity Securities
 
Debt
Funds
 
Sales of AFS Securities
 
Strategic
and Other
Investments
 
SVB Leerink
 
Total
Three months ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gains (losses) on investment securities, net

$
(2,464
)
 
$
(2,272
)

$
(4,206
)

$
(362
)

$
61,165


$
(4,017
)
 
$
(1,789
)
 
$
46,055

Less: (loss) income attributable to noncontrolling interests, including carried interest allocation

(306
)
 
(1,327
)








 
98

 
(1,535
)
Non-GAAP net gains (losses) on investment securities, net of noncontrolling interests
 
$
(2,158
)
 
$
(945
)
 
$
(4,206
)
 
$
(362
)
 
$
61,165

 
$
(4,017
)
 
$
(1,887
)
 
$
47,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gains (losses) on investment securities, net
 
$
6,229

 
$
(634
)
 
$
9,636

 
$

 
$
(3,630
)
 
$
15,002

 
$
2,425

 
$
29,028

Less: income (loss) attributable to noncontrolling interests, including carried interest allocation
 
3,745

 
(309
)
 

 

 

 

 

 
$
3,436

Non-GAAP net gains (loss) on investment securities, net of noncontrolling interests
 
$
2,484

 
$
(325
)
 
$
9,636

 
$

 
$
(3,630
)
 
$
15,002

 
$
2,425

 
$
25,592


Gains on Equity Warrant Assets, Net
Three months ended March 31, 2020 and 2019
Net gains on equity warrant assets were $13.4 million for the three months ended March 31, 2020, compared to net gains of $21.3 million for the comparable 2019 period. Net gains on equity warrant assets for the three months ended March 31, 2020 consisted of:
Net gains of $19.2 million from the exercise of equity warrant assets, partially offset by
Net losses of $5.5 million from warrant valuations in our private company warrant portfolio consisting of an overall downward valuation adjustment of $8.2 million due to the current market volatility, partially offset by net valuation increases.
Our equity warrant assets were also negatively impacted by COVID-19 market conditions towards the end of the first quarter of 2020. We expect continued pressure on our equity warrant asset valuations and warrant activities in 2020 as we anticipate a slowdown in IPO, M&A and other private market activities due to the COVID-19 pandemic.

A summary of gains on equity warrant assets, net, for the three months ended March 31, 2020 and 2019 is as follows:
  
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Equity warrant assets (1):
 
 
 
 
 
 
Gains on exercises, net
 
$
19,193

 
$
5,482

 
NM

Terminations
 
(326
)
 
(415
)
 
(21.4
)%
Changes in fair value, net
 
(5,472
)
 
16,238

 
(133.7
)
Total gains on equity warrant assets, net
 
$
13,395

 
$
21,305

 
(37.1
)
 
 
NM—Not meaningful
(1)
At March 31, 2020, we held warrants in 2,342 companies, compared to 2,149 companies at March 31, 2019. The total fair value of our warrant portfolio was $152.7 million at March 31, 2020 and $162.2 million at March 31, 2019. Warrants in 19 companies each had fair values greater than $1.0 million and collectively represented $46.7 million, or 30.6 percent, of the fair value of the total warrant portfolio at March 31, 2020. Warrants in 26 companies each had fair values greater than $1.0 million and collectively represented $56.8 million, or 35.0 percent, of the fair value of the total warrant portfolio at March 31, 2019.

78


Non-GAAP Core Fee Income
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Non-GAAP core fee income (1):
 
 
 
 
 
 
Client investment fees
 
$
43,393

 
$
44,482

 
(2.4
)%
Foreign exchange fees
 
47,505

 
38,048

 
24.9

Credit card fees
 
28,304

 
27,483

 
3.0

Deposit service charges
 
24,589

 
20,939

 
17.4

Lending related fees
 
13,125

 
13,937

 
(5.8
)
Letters of credit and standby letters of credit fees
 
11,542

 
9,354

 
23.4

Total non-GAAP core fee income (1)
 
$
168,458

 
$
154,243

 
9.2

Investment banking revenue
 
46,867

 
49,795

 
(5.9
)
Commissions
 
16,022

 
14,108

 
13.6

Total non-GAAP core fee income plus investment banking revenue and commissions (2)
 
$
231,347

 
$
218,146

 
6.1

 
(1)
This non-GAAP measure represents noninterest income, but excludes (i) certain line items where performance is typically subject to market or other conditions beyond our control, (ii) our investment banking revenue and commissions and (iii) other noninterest income. See “Use of Non-GAAP Measures” above.
(2)
Non-GAAP core fee income plus investment banking revenue and commissions represents noninterest income, but excludes certain line items where performance is typically subject to market or other conditions beyond our control and other noninterest income. See “Use of Non-GAAP Measures” above.
Client Investment Fees
Client investment fees were $43.4 million for the three months ended March 31, 2020, compared to $44.5 million for the comparable 2019 period. The decrease was reflective of lower spreads due to decreases in the Federal Funds interest rates, offset by growth in average off-balance sheet client investment funds of $16.2 billion from March 31, 2019. Given our expectations of a continued low rate environment, we generally expect client investment fees in 2020 to be lower than 2019. A summary of client investment fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:

 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Client investment fees by type:
 
 
 
 
 
 
Sweep money market fees
 
$
23,049

 
$
26,544

 
(13.2
)%
Asset management fees
 
9,137

 
6,671

 
37.0

Repurchase agreement fees
 
11,207

 
11,267

 
(0.5
)
Total client investment fees
 
$
43,393

 
$
44,482

 
(2.4
)
The following table summarizes average client investment funds for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in millions)
 
2020
 
2019
 
% Change
Sweep money market funds
 
$
43,045

 
$
39,805

 
8.1
%
Client investment assets under management (1)
 
50,746

 
39,247

 
29.3

Repurchase agreements
 
9,799

 
8,362

 
17.2

Total average client investment funds (2)
 
$
103,590

 
$
87,414

 
18.5

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

79


The following table summarizes period-end client investment funds at March 31, 2020 and December 31, 2019:
(Dollars in millions)
 
March 31, 2020
 
December 31, 2019
 
% Change
Sweep money market funds
 
$
44,833

 
$
43,226

 
3.7
%
Client investment assets under management (1)
 
51,020

 
46,904

 
8.8

Repurchase agreements
 
11,099

 
9,062

 
22.5

Total period-end client investment funds (2)
 
$
106,952

 
$
99,192

 
7.8

 
 
(1)
These funds represent investments in third-party money market mutual funds and fixed-income securities managed by SVB Asset Management.
(2)
Client investment funds are maintained at third-party financial institutions and are not recorded on our balance sheet.
Foreign Exchange Fees
Foreign exchange fees were $47.5 million for the three months ended March 31, 2020, compared to $38.0 million for the comparable 2019 period. The increase in foreign exchange fees was driven primarily by increases in spot contract commissions driven by increased volume of trades for the three months ended March 31, 2020 compared to the 2019 period. The volume of trades for spot contracts increased 16.0 percent for the three months ended March 31, 2020, compared to the comparable 2019 period reflective primarily of our global expansion initiative and increased client engagement efforts. Despite a strong first quarter 2020 for foreign exchange fees, we expect foreign exchange activity to subside in 2020 given a general slowdown in business activity. A summary of foreign exchange fee income by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019

% Change
Foreign exchange fees by instrument type:
 
 
 
 
 
 
Spot contract commissions
 
$
40,934

 
$
35,029

 
16.9
%
Forward contract commissions
 
6,339

 
2,995

 
111.7

Option premium fees
 
232

 
24

 
NM

Total foreign exchange fees
 
$
47,505

 
$
38,048

 
24.9

 
 
NM—Not meaningful
Credit Card Fees
Credit card fees were $28.3 million for the three months ended March 31, 2020, compared to $27.5 million for the comparable 2019 period. The increase was primarily due to higher net interchange fees during the first two months of 2020, offset by a decrease in March 2020 from lower transactions reflective of interrupted normal business activity from the COVID-19 pandemic. Given the general slowdown in business activities due to the COVID-19 pandemic which impacts card activities, we expect credit card fees in 2020 to be lower than 2019 in anticipation of reduced transaction volume. A summary of credit card fees by instrument type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Credit card fees by instrument type:
 
 
 
 
 
 
Card interchange fees, net
 
$
21,775

 
$
21,393

 
1.8
 %
Merchant service fees
 
5,027

 
4,534

 
10.9

Card service fees
 
1,502

 
1,556

 
(3.5
)
Total credit card fees
 
$
28,304

 
$
27,483

 
3.0


80


Deposit Service Charges
Deposit service charges were $24.6 million for the three months ended March 31, 2020, compared to $20.9 million for the comparable 2019 period. The increase was reflective of higher deposit client counts as well as higher volumes of our transaction-based fee products during the three months ended March 31, 2020. We generally expect deposit service charges to be lower in 2020 than 2019 due to lower volumes of transaction-based fee products and higher earnings credit rates.
Lending Related Fees
Lending related fees were $13.1 million for the three months ended March 31, 2020, compared to $13.9 million for the comparable 2019 period. The decrease was reflective of a decrease in unused commitment fees, reflective of increased utilization of unfunded credit commitments, partially offset by an increase in loan servicing fees. A summary of lending related fees by type for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Lending related fees by instrument type:
 
 
 
 
 
 
Unused commitment fees
 
$
8,406

 
$
9,670

 
(13.1
)%
Other
 
4,719

 
4,267

 
10.6

Total lending related fees
 
$
13,125

 
$
13,937

 
(5.8
)
Letters of Credit and Standby Letters of Credit Fees
Letters of credit and standby letters of credit fees were $11.5 million for the three months ended March 31, 2020, compared to $9.4 million for the comparable 2019 period. The increase was primarily driven by an increase in deferred fee income reflective of larger letter of credit issuances. We generally expect lower fees in 2020 due to reduced international trade activities.
Investment Banking Revenue
Investment banking revenue was $46.9 million for the three months ended March 31, 2020, compared to $49.8 million for the comparable 2019 period. The decrease is primarily attributable to lower levels of exit activity in the life science/healthcare IPO market which began to decline significantly starting in March of 2020 due to the COVID-19 pandemic. We generally expect investment banking revenues to be lower in 2020 than 2019 due to a slowdown in IPO and M&A activities due to COVID-19 market conditions. A summary of investment banking revenue by type for the three months ended March 31, 2020 and 2019 is as follows:
  
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Investment banking revenue:
 
 
 
 
 
 
Underwriting fees
 
$
31,290

 
$
35,772

 
(12.5
)%
Advisory fees
 
15,487

 
12,273

 
26.2

Private placements and other
 
90

 
1,750

 
(94.9
)
Total investment banking revenue
 
$
46,867

 
$
49,795

 
(5.9
)
Commissions
Commissions for the three months ended March 31, 2020 were $16.0 million, compared to $14.1 million for the comparable 2019 period. The increase was driven by client trading activity, consistent with market volumes. Commissions include commissions received from clients for the execution of agency-based brokerage transactions in listed and over-the-counter equities. As a result of volatility in market conditions due to the effects of COVID-19, sales and trading activities and underlying commissions may be positively impacted in 2020.

81


Noninterest Expense
A summary of noninterest expense for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020

2019
 
% Change
Compensation and benefits
 
$
255,586

 
$
238,061

 
7.4
 %
Professional services
 
38,705

 
36,986

 
4.6

Premises and equipment
 
26,940

 
21,700

 
24.1

Net occupancy
 
18,346

 
16,048

 
14.3

Business development and travel
 
14,071

 
15,354

 
(8.4
)
FDIC and state assessments
 
5,234

 
3,979

 
31.5

Other
 
40,703

 
33,536

 
21.4

Total noninterest expense
 
$
399,585

 
$
365,664

 
9.3

Included in noninterest expense is expense attributable to noncontrolling interests. See below for a description and reconciliation of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio, both of which exclude noncontrolling interests.
Non-GAAP Noninterest Expense
We use and report non-GAAP noninterest expense, non-GAAP taxable equivalent revenue and non-GAAP core operating efficiency ratio, which excludes noncontrolling interests and SVB Leerink. We believe these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by: (i) excluding certain items that represent expenses attributable to investors other than us and our subsidiaries, or certain items that do not occur every reporting period; or (ii) providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or preferable to, financial measures prepared in accordance with GAAP.


82


The table below provides a summary of non-GAAP noninterest expense and non-GAAP core operating efficiency ratio for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
Non-GAAP core operating efficiency ratio (Dollars in thousands, except ratios)
 
2020

2019
 
% Change
GAAP noninterest expense
 
$
399,585

 
$
365,664

 
9.3
 %
Less: expense attributable to noncontrolling interests
 
140

 
379

 
(63.1
)
Non-GAAP noninterest expense, net of noncontrolling interests
 
399,445

 
365,285

 
9.4

Less: expense attributable to SVB Leerink
 
62,037

 
60,540

 
2.5

Non-GAAP noninterest expense, net of noncontrolling interests and SVB Leerink
 
$
337,408

 
$
304,745

 
10.7

 
 
 
 
 
 
 
GAAP net interest income
 
$
524,137

 
$
512,886

 
2.2

Adjustments for taxable equivalent basis
 
3,409

 
2,907

 
17.3

Non-GAAP taxable equivalent net interest income
 
527,546

 
515,793

 
2.3

Less: income attributable to noncontrolling interests
 
21

 
11

 
90.9

Non-GAAP taxable equivalent net interest income, net of noncontrolling interests
 
527,525

 
515,782

 
2.3

Less: net interest income attributable to SVB Leerink
 
201

 
442

 
(54.5
)
Non-GAAP taxable equivalent net interest income, net of noncontrolling interests and SVB Leerink
 
$
527,324

 
$
515,340

 
2.3

 
 
 
 
 
 
 
GAAP noninterest income
 
$
301,934

 
$
280,376

 
7.7

Less: (loss) income attributable to noncontrolling interests, including carried interest allocation
 
(1,854
)
 
3,248

 
(157.1
)
Non-GAAP noninterest income, net of noncontrolling interests
 
303,788

 
277,128

 
9.6

Less: non-GAAP net gains on investment securities, net of noncontrolling interests
 
47,590

 
25,592

 
86.0

Less: net gains on equity warrant assets
 
13,395

 
21,305

 
(37.1
)
Less: investment banking revenue
 
46,867

 
49,795

 
(5.9
)
Less: commissions
 
16,022

 
14,108

 
13.6

Non-GAAP noninterest income, net of noncontrolling interests and net of net gains on investment securities, net gains on equity warrant assets, investment banking revenue and commissions
 
$
179,914

 
$
166,328

 
8.2

 
 
 
 
 
 
 
GAAP total revenue
 
$
826,071

 
$
793,262

 
4.1

Non-GAAP taxable equivalent revenue, net of noncontrolling interests and SVB Leerink, net gains on investment securities, net gains on equity warrant assets, investment banking revenue and commissions
 
$
707,238

 
$
681,668

 
3.8

 
 
 
 
 
 
 
Operating efficiency ratio
 
48.37
%
 
46.10
%
 
4.9

Non-GAAP core operating efficiency ratio (1)
 
47.71

 
44.71

 
6.7

 
 
 
(1)
The non-GAAP core operating efficiency ratio is calculated by dividing noninterest expense after adjusting for noninterest expense attributable to SVB Leerink by total revenue after adjusting for net interest income attributable to SVB Leerink, net gains or losses on investment securities and equity warrant assets, investment banking revenue and commissions. Additionally, noninterest expense and total revenue are adjusted for income or losses and expenses attributable to noncontrolling interests and adjustments to net interest income for a taxable equivalent basis.

83


Compensation and Benefits Expense
The following table provides a summary of our compensation and benefits expense for the three months ended March 31, 2020 and 2019:
 
 
Three months ended March 31,
(Dollars in thousands, except employees)
 
2020
 
2019
 
% Change
Compensation and benefits:
 
 
 
 
 
 
Salaries and wages
 
$
115,614

 
$
101,200

 
14.2
 %
Incentive compensation plans
 
66,674

 
69,389

 
(3.9
)
Other employee incentives and benefits (1)
 
73,298

 
67,472

 
8.6

Total compensation and benefits
 
$
255,586

 
$
238,061

 
7.4

Period-end full-time equivalent employees
 
3,710

 
3,250

 
14.2

Average full-time equivalent employees
 
3,672

 
3,228

 
13.8

 
 
(1)
Other employee incentives and benefits includes employer payroll taxes, group health and life insurance, share-based compensation, 401(k), ESOP, warrant incentive and retention plans, agency fees and other employee-related expenses.
Compensation and benefits expense was $255.6 million for the three months ended March 31, 2020, compared to $238.1 million for the comparable 2019 period. The key changes in factors affecting compensation and benefits expense were as follows:
An increase of $14.4 million in salaries and wages reflective primarily due to the increase in the number of average FTE by 444 to 3,672 for the first quarter of 2020, as well as annual pay raises,
A decrease of $2.7 million in incentive compensation plans expense due to the decrease in our incentive accruals as a result of our revised 2020 full-year projected financial performance attributable to the projected financial impact of the COVID-19 pandemic, and
An increase of $5.8 million in other employee incentives and benefits primarily driven by additional 401(k) matching contributions as a result of the 2019 annual incentive compensation plan payments and an increase in employer payroll taxes reflective of our increased headcount since the first quarter of 2019.
Our variable compensation plans consist primarily of our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, Deferred Compensation Plan, 401(k) and ESOP Plan, SVB Leerink Incentive Compensation Plan and SVB Leerink Retention Award (see descriptions in our 2019 Form 10-K). Total costs incurred under these plans were $85.2 million for the three months ended March 31, 2020 compared to $87.7 million for the comparable 2019 period. These amounts are included in total compensation and benefits expense discussed above.
In light of the expected slowdown in business activity in 2020 due to COVID-19, we anticipate lower incentive compensation expenses in 2020, compared to 2019.
Professional Services
Professional services expense was $38.7 million for the three months ended March 31, 2020, compared to $37.0 million for the comparable 2019 period. The increase was primarily related to our continued effort towards investments in our infrastructure, initiatives, and operating projects to support our presence both domestically and globally. In light of the expected slowdown in business activity in 2020 due to COVID-19, we anticipate lower professional services expense in 2020, compared to 2019.
Premises and Equipment
Premises and equipment expense was $26.9 million for the three months ended March 31, 2020, compared to $21.7 million for the comparable 2019 period. The increase related to investments in projects, systems and technology to support our revenue growth and related initiatives as well as other operating costs since the first quarter of 2019.
Net Occupancy
Net occupancy expense was $18.3 million for the three months ended March 31, 2020, compared to $16.0 million for the comparable 2019 period. The increase was primarily due to lease renewals at higher costs, reflective of market conditions, and the expansion of certain offices to support our growth.

84


Business Development and Travel
Business development and travel expense was $14.1 million for the three months ended March 31, 2020, compared to $15.4 million for the comparable 2019 period. The decrease was primarily due to the impact of COVID-19 on the global economy and our restrictions placed on domestic and international travel beginning March 2020. In light of the economic impact of COVID-19 and the continuing travel restrictions, we expect our business development and travel expense to be lower in 2020 than 2019.
FDIC and State Assessments
FDIC and state assessments expense was $5.2 million for the three months ended March 31, 2020, compared to $4.0 million for the comparable 2019 period. The increase was due primarily to the increase in our average assets.
Other Noninterest Expense
Total other noninterest expense was $40.7 million for the three months ended March 31, 2020, compared to $33.5 million for the comparable 2019 period. The $7.2 million increase was primarily attributable to higher credit card processing and merchant service card expenses of $3.9 million as well as higher charitable donations of $2.6 million primarily to aid in COVID-19 relief efforts. A summary of other noninterest expense for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Lending and other client related processing costs
 
$
9,158

 
$
5,177

 
76.9
 %
Correspondent bank fees
 
3,986

 
3,744

 
6.5

Investment banking activities
 
3,030

 
4,185

 
(27.6
)
Trade order execution costs
 
2,745

 
2,516

 
9.1

Data processing services
 
3,454

 
2,899

 
19.1

Telephone
 
2,227

 
2,741

 
(18.8
)
Dues and publications
 
1,130

 
1,524

 
(25.9
)
Postage and supplies
 
856

 
770

 
11.2

Other
 
14,117

 
9,980

 
41.5

Total other noninterest expense
 
$
40,703

 
$
33,536

 
21.4

 
Net Income Attributable to Noncontrolling Interests
Included in net income is income and expense attributable to noncontrolling interests. The relevant amounts allocated to investors in our consolidated subsidiaries, other than us, are reflected under “net income attributable to noncontrolling interests” on our statements of income.
In the table below, noninterest income consists primarily of net investment gains and losses from our consolidated funds. Noninterest expense is primarily related to management fees paid by our managed funds to SVB Financial’s subsidiaries as the managed funds’ general partners. A summary of net income attributable to noncontrolling interests for the three months ended March 31, 2020 and 2019 is as follows:
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Net interest income (1)
 
$
(21
)
 
$
(11
)
 
90.9
 %
Noninterest losses (income) (1)
 
2,491

 
(2,270
)
 
NM

Noninterest expense (1)
 
140

 
379

 
(63.1
)
Carried interest allocation (2)
 
(637
)
 
(978
)
 
(34.9
)
Net losses (income) attributable to noncontrolling interests
 
$
1,973

 
$
(2,880
)
 
(168.5
)
 
 
NM
Not meaningful
(1)
Represents noncontrolling interests’ share in net interest income, noninterest income or loss and noninterest expense.
(2)
Represents the preferred allocation of income (or change in income) earned by us as the general partner of certain consolidated funds.

85



Three months ended March 31, 2020 and 2019
Net losses attributable to noncontrolling interests was $2.0 million for the three months ended March 31, 2020, compared to net income of $2.9 million for the comparable 2019 period. Net losses attributable to noncontrolling interests of $2.0 million for the three months ended March 31, 2020 was primarily driven by a $7.2 million downward valuation adjustment for illiquid investments held in the private managed funds and companies of our portfolios due to the current market volatility. The downward valuation adjustment was offset by unrealized net valuation increases in the private company investments held in these portfolios. See “Results of Operations—Noninterest Income—Gains on Investment Securities, Net”.
Income Taxes
Our effective income tax expense rate was 26.7 percent for the three months ended March 31, 2020, compared to 27.1 percent for the comparable 2019 period. Our effective tax rate is calculated by dividing income tax expense by the sum of income before income tax expense and the net income attributable to noncontrolling interests.
The reduction in the effective tax rate for the three months ended March 31, 2020 was due primarily to an increase in tax-exempt interest and net tax benefits from our qualified affordable housing projects portfolio, partially offset by increases to unfavorable permanent items due to our lower pre-tax net income period over period.
Operating Segment Results
We have four segments for which we report our financial information: Global Commercial Bank, SVB Private Bank, SVB Capital and SVB Leerink.
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reporting segments. Please refer to Note 14 — “Segment Reporting” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details.
The following is our reportable segment information for the three months ended March 31, 2020 and 2019:
Global Commercial Bank
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Net interest income
 
$
463,835

 
$
445,876

 
4.0
 %
Provision for credit losses
 
(194,411
)
 
(26,805
)
 
NM

Noninterest income
 
166,834

 
152,861

 
9.1

Noninterest expense
 
(224,855
)
 
(198,683
)
 
13.2

Income before income tax expense
 
$
211,403

 
$
373,249

 
(43.4
)
Total average loans, amortized cost
 
$
29,137,484

 
$
24,798,197

 
17.5

Total average assets
 
61,813,129

 
50,132,098

 
23.3

Total average deposits
 
59,217,433

 
47,596,868

 
24.4

 
 
NM—Not meaningful

Three months ended March 31, 2020 and 2019
Income before income tax expense from our Global Commercial Bank (“GCB”) decreased to $211.4 million for the three months ended March 31, 2020, compared to $373.2 million for the comparable 2019 period. The key components of GCB's performance for the three months ended March 31, 2020 compared to the comparable 2019 period are discussed below.
Net interest income from GCB increased by $18.0 million for the three months ended March 31, 2020, due primarily to an increase in loan interest income resulting mainly from higher average loan balances.

86


GCB had a provision for credit losses of $194.4 million for the three months ended March 31, 2020, compared to $26.8 million for the comparable 2019 period. The provision of $194.4 million for the three months ended March 31, 2020 was driven primarily by $140.4 million in additional reserves for our performing loans based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic, as well as changes in loan composition within our portfolio segments, $40.9 million in additional reserves for period-end loan growth, $13.1 million for charge-offs not specifically reserved for at December 31, 2019 and $10.7 million in net new nonaccrual loans, partially offset by $7.8 million of recoveries.
The provision of $26.8 million for the three months ended March 31, 2019 reflects primarily $27.4 million in net new specific reserves for nonaccrual loans, $4.1 million in additional reserves for period-end loan growth and $4.9 million for charge-offs not specifically reserved for, partially offset by a decrease in the qualitative component of our performing loan reserves of $5.3 million reflective of the continued growth of larger, higher credit quality private equity/venture capital loans as a percentage of total gross loans.
Noninterest income increased by $14.0 million for the three months ended March 31, 2020 related primarily to an overall increase in our non-GAAP core fee income (higher foreign exchange fees, deposit service charges and credit card fees). These increases were due primarily to the continued growth of our client base and work with larger global companies reflective of investments in our platform, capabilities and global reach.
Noninterest expense increased by $26.2 million for the three months ended March 31, 2020, due primarily to compensation and benefits expense, other noninterest expense and professional services expense. Compensation and benefits expense increased $17.0 million as a result of higher salaries and wages expenses and higher other employee compensation and benefits, partially offset by a decrease in incentive compensation expense. The increase in GCB salaries and wages was due primarily to an increase in the average number of FTEs at GCB, which increased by 439 to 2,692 FTEs for the three months ended March 31, 2020, compared to 2,252 FTEs for the comparable 2019 period. Other noninterest expense increased $5.3 million due primarily to an increase in credit card processing and merchant services card expenses. Professional services expense increased $3.4 million as a result of increased consulting fees associated with increased project spend to support our global digital banking, and continued global infrastructure, initiatives.
SVB Private Bank
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Net interest income
 
$
15,164

 
$
11,981

 
26.6
%
(Provision for) reduction of credit losses
 
(54,490
)
 
984

 
NM

Noninterest income
 
900

 
510

 
76.5

Noninterest expense
 
(10,090
)
 
(7,414
)
 
36.1

(Loss) income before income tax expense
 
$
(48,516
)
 
$
6,061

 
NM

Total average loans, amortized cost
 
$
3,857,478

 
$
3,085,883

 
25.0

Total average assets
 
3,892,400

 
3,109,275

 
25.2

Total average deposits
 
1,922,663

 
1,491,234

 
28.9

 
 
NM—Not meaningful

Three months ended March 31, 2020 and 2019
Net interest income from our SVB Private Bank increased by $3.2 million for the three months ended March 31, 2020, due primarily to the increase in average loans for the three months ended March 31, 2020 as compared to the 2019 comparable period.
The provision for credit losses increased by $55.5 million for the three months ended March 31, 2020, due primarily to the adoption of CECL during the first quarter of 2020 attributable primarily to a $50.3 million increase in additional reserves for our performing loans. The increase for our performing loans is reflective of the increases in reserves required for longer duration mortgage loans as well as the additional reserves for our performing loans based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic.
Noninterest expense increased by $2.7 million for the three months ended March 31, 2020, due primarily to compensation and benefits expense. Compensation and benefits expense increased primarily as a result of the increase in average FTE which increased by 40 to 130 FTEs for the three months ended March 31, 2020, compared to 91 FTEs for the comparable 2019 period.

87


SVB Capital
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Net interest income
 
$
21

 
$
6

 
NM

Noninterest income
 
4,918

 
24,845

 
(80.2
)
Noninterest expense
 
(8,585
)
 
(5,782
)
 
48.5

(Loss) income before income tax expense
 
$
(3,646
)
 
$
19,069

 
(119.1
)
Total average assets
 
$
447,201

 
$
378,732

 
18.1

 
NM—Not meaningful

 SVB Capital’s components of noninterest income primarily include net gains and losses on non-marketable and other equity securities, carried interest and fund management fees. All components of income before income tax expense discussed below are net of noncontrolling interests.
We experience variability in the performance of SVB Capital from quarter to quarter due to a number of factors, including changes in the values of our funds’ underlying investments, changes in the amount of distributions and general economic and market conditions. Such variability may lead to volatility in the gains and losses from investment securities and cause our results to differ from period to period. The performance of these securities has been, and may further be, impacted by the effects of the COVID-19 pandemic.
Three months ended March 31, 2020 and 2019
SVB Capital had noninterest income of $4.9 million for the three months ended March 31, 2020, compared to $24.8 million for the comparable 2019 period. The decrease in noninterest income was due primarily to the recording of net losses on investment securities for the three months ended March 31, 2020, compared to net gains for the comparable 2019 period. SVB Capital’s components of noninterest income primarily include the following:
Net losses on investment securities of $5.9 million for the three months ended March 31, 2020, compared to net gains of $15.9 million for the comparable 2019 period. The net losses on investment securities of $5.9 million were primarily driven by a downward valuation adjustment for illiquid investments held in the private managed funds and companies of our portfolios due to the current market volatility. The downward valuation adjustment was offset by unrealized net valuation increases from private company investments held in our strategic venture capital funds as well as in our managed funds of funds portfolio, and
Fund management and lending related fees of $10.0 million for the three months ended March 31, 2020, compared to $8.8 million for the comparable 2019 period.
SVB Capital had noninterest expense of $8.6 million for the three months ended March 31, 2020, compared to $5.8 million for the comparable 2019 period. The $2.8 million increase in noninterest expense was due primarily to an increase of $0.8 million in compensation and benefits reflective of an increase in average FTE and merit increases and $0.7 million increases in both professional services expense and business development and travel expense.
SVB Leerink
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
 
% Change
Net interest income
 
$
201

 
$
442

 
(54.5
)%
Noninterest income
 
62,677

 
68,117

 
(8.0
)
Noninterest expense
 
(62,037
)
 
(60,540
)
 
2.5

Income before income tax expense
 
$
841

 
$
8,019

 
(89.5
)
Total average assets
 
$
483,648

 
$
300,332

 
61.0


88


SVB Leerink’s components of noninterest income primarily include investment banking revenue, commissions and net gains and losses on non-marketable and other equity securities, carried interest and fund management fees. All components of income before income tax expense discussed below are net of noncontrolling interests.
Three months ended March 31, 2020 and 2019
SVB Leerink had noninterest income of $62.7 million for the three months ended March 31, 2020 compared to $68.1 million for the comparable 2019 period. The $5.4 million decrease in noninterest income was primarily driven by the following:
A $4.3 million decrease in gains on investment securities reflective of net losses on investment securities for the three months ended March 31, 2020, compared to net gains for the comparable 2019 period, driven by the COVID-19 market conditions towards the end of the first quarter of 2020, and
A $2.9 million decrease in investment banking revenues reflective of a decrease in investment banking deals due to the impact of COVID-19 on the market, partially offset by
A $1.9 million increase in commissions due primarily to an increase in exchanges and trading volumes in derivatives and convertible securities driven by market volatility due to the impact of COVID-19.
SVB Leerink had noninterest expense of $62.0 million for the three months ended March 31, 2020 compared to $60.5 million for the comparable 2019 period. The $1.5 million increase in noninterest expense was primarily driven by an increase of $3.6 million in compensation and benefit expense due to an increase in salaries and wages reflective of merit increases as well as an increase in share-based compensation, partially offset by a $2.6 million decrease in other noninterest expense driven primarily by a decrease in incentive compensation expense.
Consolidated Financial Condition
Our total assets, and total liabilities and stockholders' equity, were $75.0 billion at March 31, 2020 compared to $71.0 billion at December 31, 2019, an increase of $6.0 billion, or 5.6 percent. Refer below to a summary of the individual components driving the changes in total assets, total liabilities and stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents totaled $9.6 billion at March 31, 2020, an increase of $2.8 billion, or 41.0 percent, compared to $6.8 billion at December 31, 2019. In response to the COVID-19 crisis during the first quarter, we prudently raised our cash target level to be between $7.0 billion to $9.0 billion. As of March 31, 2020, $7.2 billion of our cash and due from banks was deposited at the Federal Reserve Bank and was earning interest at the Federal Funds target rate and interest-earning deposits in other financial institutions were $1.4 billion. As of December 31, 2019, $3.7 billion 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 $2.1 billion.


89


Investment Securities
Investment securities totaled $27.4 billion at March 31, 2020, a decrease of $1.7 billion, or 5.7 percent, compared to $29.1 billion at December 31, 2019. Our investment securities portfolio is comprised of: (i) an available-for-sale securities portfolio and a held-to-maturity securities portfolio, both of which represent interest earning fixed income investment securities; and (ii) a non-marketable and other equity securities portfolio, which represents primarily investments managed as part of our funds management business, investments in qualified affordable housing projects, as well as public equity securities held as a result of equity warrant assets exercised.
The valuations of our nonmarketable and other equity securities were negatively impacted by COVID-19 market conditions towards the end of the first quarter. We expect continued pressure on the valuation of our nonmarketable and other equity securities in 2020 as we anticipate public markets to continue to fluctuate, as well as a slowdown in IPO, M&A and other private market activities, due to the COVID-19 pandemic.

Available-for-Sale Securities
Period-end available-for-sale securities were $12.6 billion at March 31, 2020 compared to $14.0 billion at December 31, 2019, a decrease of $1.4 billion, or 9.8 percent. The $1.4 billion decrease in period-end AFS securities balances from December 31, 2019 to March 31, 2020, was due primarily driven by the sale of $2.6 billion of U.S. Treasury securities during the three months-ended March 31, 2020 as well as $0.8 billion in paydowns and maturities, offset by $1.5 billion in purchases and a $0.5 billion increase in the fair value of our remaining portfolio reflective of the 150 basis point decrease in Federal Funds interest rates during the quarter. Securities classified as available-for-sale are carried at fair value with changes in fair value recorded as unrealized gains or losses in a separate component of stockholders' equity.
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income securities, carried at fair value, classified as available-for-sale as of March 31, 2020. The weighted average yield is computed using the amortized cost of fixed income investment securities, which are reported at fair value. For U.S. Treasury securities, U.S. agency debentures and foreign government debt securities, the expected maturity is the actual contractual maturity of the notes. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as available-for-sale typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
 
 
March 31, 2020
 
 
Total
 
One Year
or Less
 
After One Year to
Five Years
 
After Five Years to
Ten Years
 
After
Ten Years
(Dollars in thousands)
 
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
 
$
4,043,840

 
2.11
 %
 
$
110,935

 
1.76
 %
 
$
1,626,096

 
2.31
%
 
$
2,306,809

 
1.98
%
 
$

 
%
U.S. agency debentures
 
101,687

 
2.28

 

 

 

 

 
101,687

 
2.28

 

 

Foreign government debt securities
 
22,152

 
(0.82
)
 
22,152

 
(0.82
)
 

 

 

 

 

 

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
4,943,512

 
2.76

 

 

 

 

 

 

 
4,943,512

 
2.76

Agency-issued collateralized mortgage obligations—fixed rate
 
1,465,675

 
2.58

 

 

 
1,094

 
3.26

 

 

 
1,464,581

 
2.58

Agency-issued commercial mortgage-backed securities
 
2,071,198

 
2.37

 

 

 

 

 
803,536

 
2.25

 
1,267,662

 
2.45

Total
 
$
12,648,064

 
2.46

 
$
133,087

 
1.33

 
$
1,627,190

 
2.31

 
$
3,212,032

 
2.06

 
$
7,675,755

 
2.67


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Held-to-Maturity Securities
Period-end held-to-maturity securities were $13.6 billion at March 31, 2020 compared to $13.8 billion at December 31, 2019, a decrease of $0.2 billion, or 1.9 percent. The $0.2 billion decrease in period-end HTM security balances from December 31, 2019 to March 31, 2020 was due primarily to pay downs and maturities of $0.6 billion, partially offset by the purchase of $0.4 billion of securities.
Securities classified as held-to-maturity are accounted for at cost with no adjustments for changes in fair value. For securities previously re-designated as held-to-maturity from available-for-sale, the net unrealized gains at the date of transfer will continue to be reported as a separate component of shareholders' equity and amortized over the life of the securities in a manner consistent with the amortization of a premium or discount.
The following table summarizes the remaining contractual principal maturities and fully taxable equivalent yields on fixed income investment securities classified as held-to-maturity as of March 31, 2020. Interest income on certain municipal bonds and notes (non-taxable investments) are presented on a fully taxable equivalent basis using the federal statutory tax rate of 21.0 percent. The weighted average yield is computed using the amortized cost of fixed income investment securities. For U.S. agency debentures, the expected maturity is the actual contractual maturity of the notes. Expected remaining maturities for certain U.S. agency debentures may occur earlier than their contractual maturities because the note issuers have the right to call outstanding amounts ahead of their contractual maturity. Expected maturities for mortgage-backed securities may differ significantly from their contractual maturities because mortgage borrowers have the right to prepay outstanding loan obligations with or without penalties. Mortgage-backed securities classified as held-to-maturity typically have original contractual maturities from 10 to 30 years whereas expected average lives of these securities tend to be significantly shorter and vary based upon structure and prepayments in lower interest rate environments. The weighted average yield on mortgage-backed securities is based on prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments.
 
 
March 31, 2020
 
 
Total
 
One Year
or Less
 
After One Year to
Five Years
 
After Five Years to
Ten Years
 
After
Ten Years
(Dollars in thousands)
 
Amortized Cost
 
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
 
$
453,353

 
2.62
%
 
$
2,622

 
4.07
%
 
$
142,990

 
2.52
%
 
$
307,741

 
2.69
%
 
$

 
%
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency-issued mortgage-backed securities
 
6,662,878

 
2.90

 
11,853

 
2.77

 
50,777

 
1.88

 
685,374

 
2.47

 
5,914,874

 
2.96

Agency-issued collateralized mortgage obligationsfixed rate
 
1,482,205

 
1.79

 

 

 

 

 
661,217

 
1.62

 
820,988

 
1.92

Agency-issued collateralized mortgage obligationsvariable rate
 
170,774

 
0.74

 

 

 

 

 

 

 
170,774

 
0.74

Agency-issued commercial mortgage-backed securities
 
2,644,968

 
3.05

 

 

 

 

 
102,565

 
3.56

 
2,542,403

 
3.03

Municipal bonds and notes
 
2,160,341

 
3.54

 
30,719

 
2.22

 
134,007

 
2.63

 
441,995

 
3.05

 
1,553,620

 
3.78

Total
 
$
13,574,519

 
2.87

 
$
45,194

 
2.47

 
$
327,774

 
2.47

 
$
2,198,892

 
2.41

 
$
11,002,659

 
2.98

Portfolio duration is a standard measure used to approximate changes in the market value of fixed income instruments due to a change in market interest rates. The measure is an estimate based on the level of current market interest rates, expectations for changes in the path of forward rates and the effect of forward rates on mortgage prepayment speed assumptions. As such, portfolio duration will fluctuate with changes in market interest rates. Changes in portfolio duration are also impacted by changes in the mix of longer versus shorter term-to-maturity securities. The estimated weighted-average duration of our fixed income investment securities portfolio was 3.1 years and 3.9 years at March 31, 2020 and December 31, 2019, respectively.

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Non-Marketable and Other Equity Securities
Our non-marketable and other equity securities portfolio primarily represents investments in venture capital and private equity funds, SPD Silicon Valley Bank Co., Ltd. (the Bank's joint venture bank in China (“SPD-SVB”)), debt funds, private and public portfolio companies, including public equity securities held as a result of equity warrant assets exercised, and qualified affordable housing projects. Included in our non-marketable and other equity securities carried under fair value accounting are amounts that are attributable to noncontrolling interests. We are required under GAAP to consolidate 100% of these investments that we are deemed to control, even though we may own less than 100% of such entities. See below for a summary of the carrying value (as reported) of non-marketable and other equity securities compared to the amounts attributable to SVBFG.
Period-end non-marketable and other equity securities were $1.2 billion at March 31, 2020 compared to $1.2 billion at December 31, 2019, a decrease of $13.2 million, or 1.1 percent. Non-marketable and other equity securities, net of noncontrolling interests were $1.1 billion at March 31, 2020 and December 31, 2019. The decrease was primarily attributable to valuation decreases in our nonmarketable investment portfolio, including decreases in our managed funds of funds investments, strategic investments and other public companies' valuations, as well as exercised equity warrant assets, offset by an increase in new investments within our qualified housing projects portfolio. The following table summarizes the carrying value (as reported) of non-marketable and other equity securities compared to the amounts attributable to SVBFG (which generally represents the carrying value times our ownership percentage) at March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Carrying value (as reported)
 
Amount attributable to SVBFG
 
Carrying value (as reported)
 
Amount attributable to SVBFG
Non-marketable and other equity securities:
 
 
 
 
 
 
 
 
Non-marketable securities (fair value accounting):
 
 
 
 
 
 
 
 
Consolidated venture capital and private equity fund investments (1)
 
$
85,336

 
$
22,025

 
$
87,180

 
$
22,482

Unconsolidated venture capital and private equity fund investments (2)
 
171,930

 
171,930

 
178,217

 
178,217

Other investments without a readily determinable fair value (3)
 
52,666

 
52,666

 
55,255

 
55,255

Other equity securities in public companies (fair value accounting (4)
 
26,899

 
26,391

 
59,200

 
59,056

Non-marketable securities (equity method accounting) (5):
 
 
 
 
 
 
 
 
Venture capital and private equity fund investments
 
206,495

 
126,035

 
215,367

 
131,403

Debt funds
 
6,910

 
6,910

 
7,271

 
7,271

Other investments
 
149,557

 
149,557

 
152,863

 
152,863

Investments in qualified affordable housing projects, net
 
500,802

 
500,802

 
458,476

 
458,476

Total non-marketable and other equity securities
 
$
1,200,595

 
$
1,056,316

 
$
1,213,829

 
$
1,065,023

 
(1)
The following table shows the amounts of venture capital and private equity fund investments held by the following consolidated funds and amounts attributable to SVBFG for each fund at March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Carrying value (as reported)
 
Amount attributable to SVBFG
 
Carrying value (as reported)
 
Amount attributable to SVBFG
Strategic Investors Fund, LP
 
$
5,337

 
$
670

 
$
5,729

 
$
720

Capital Preferred Return Fund, LP
 
44,696

 
9,633

 
45,341

 
9,772

Growth Partners, LP
 
35,169

 
11,708

 
35,976

 
11,976

CP I, LP
 
134

 
14

 
134

 
14

Total consolidated venture capital and private equity fund investments
 
$
85,336

 
$
22,025

 
$
87,180

 
$
22,482


(2)
The carrying value represents investments in 196 and 205 funds (primarily venture capital funds) at March 31, 2020 and December 31, 2019, respectively, where our ownership interest is typically less than 5% of the voting interests of each such fund and in which we do not have the ability to exercise significant influence over the partnerships' operating activities and financial policies. Our unconsolidated venture capital and private equity fund investments are carried at fair value based

92


on the fund investments' net asset values per share as obtained from the general partners of the funds. For each fund investment, we adjust the net asset value per share for differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example, December 31st, for our March 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.
(3)
Investments classified as "Other investments without a readily determinable fair value" include direct equity investments in private companies. The carrying value is based on the price at which the investment was acquired plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. We consider a range of factors when adjusting the fair value of these investments, including, but not limited to, the term and nature of the investment, local market conditions, values for comparable securities, current and projected operating performance, exit strategies, financing transactions subsequent to the acquisition of the investment and a discount for certain investments that have lock-up restrictions or other features that indicate a discount to fair value is warranted. For further details on the carrying value of these investments refer to Note 6 — “Investment Securities" of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
(4)
Investments classified as other equity securities (fair value accounting) represent shares held in public companies as a result of exercising public equity warrant assets and direct equity investments in public companies held by our consolidated funds. Changes in the fair value recognized through net income.
(5)
The following table shows the carrying value and our ownership percentage of each investment at March 31, 2020 and December 31, 2019 (equity method accounting):
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Carrying value (as reported)
 
Amount attributable to SVBFG
 
Carrying value (as reported)
 
Amount attributable to SVBFG
Venture capital and private equity fund investments:
 
 
 
 
 
 
 
 
Strategic Investors Fund II, LP
 
$
3,277

 
$
3,086

 
$
3,612

 
$
3,387

Strategic Investors Fund III, LP
 
14,487

 
11,787

 
15,668

 
12,701

Strategic Investors Fund IV, LP
 
25,037

 
21,141

 
27,064

 
22,780

Strategic Investors Fund V, LP
 
44,815

 
23,528

 
46,830

 
24,586

CP II, LP (i)
 
5,103

 
3,073

 
5,907

 
3,567

Other venture capital and private equity fund investments
 
113,776

 
63,420

 
116,286

 
64,382

Total venture capital and private equity fund investments
 
$
206,495

 
$
126,035

 
$
215,367

 
$
131,403

Debt funds:
 
 
 
 
 
 
 
 
Gold Hill Capital 2008, LP (ii)
 
$
5,255

 
$
5,255

 
$
5,525

 
$
5,525

Other debt funds
 
1,655

 
1,655

 
1,746

 
1,746

Total debt funds
 
$
6,910

 
$
6,910

 
$
7,271

 
$
7,271

Other investments:
 
 
 
 
 
 
 
 
SPD Silicon Valley Bank Co., Ltd.
 
$
73,453

 
$
73,453

 
$
74,190

 
$
74,190

Other investments
 
76,104

 
76,104

 
78,673

 
78,673

Total other investments
 
$
149,557

 
$
149,557

 
$
152,863

 
$
152,863

 
(i)
Our ownership includes direct ownership interest of 1.3 percent and indirect ownership interest of 3.8 percent through our investments in Strategic Investors Fund II, LP.
(ii)
Our ownership includes direct ownership interest of 11.5 percent in the fund and an indirect interest in the fund through our investment in Gold Hill Capital 2008, LLC of 4.0 percent.

Volcker Rule
On June 6, 2017, we received notice that the Board of Governors of the Federal Reserve System approved the Company’s application for an extension of the permitted conformance period for the Company’s investments in “illiquid” covered funds. The approval extends the deadline by which the Company must sell, divest, restructure or otherwise conform such investments to the provisions of the Volcker Rule until the earlier of (i) July 21, 2022, or (ii) the date by which each fund matures by its terms or is otherwise conformed to the Volcker Rule.

93


As implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule prohibits, subject to certain exceptions, a banking entity, such as the Company, from sponsoring or investing in covered funds, defined to include many venture capital and private equity funds.  As noted above, the Company currently maintains certain investments in covered funds that are now covered under the approved extension. As of March 31, 2020, such investments had an estimated aggregate carrying value and fair value of approximately $205 million. (For more information about the Volcker Rule, see “Business—Supervision and Regulation” under Part 1, Item 1 of our 2019 Form 10-K.)
Loans
Loans, amortized cost basis, increased by $2.8 billion to $36.0 billion at March 31, 2020, compared to $33.2 billion at December 31, 2019. Unearned income was $169 million at March 31, 2020 and $163 million at December 31, 2019. Period-end loans increased compared to December 31, 2019, driven primarily by our Private Equity/Venture Capital, Investor Dependent and Balance Sheet Dependent loan portfolios driven by increased credit line utilization. Our Investor Dependent and Balance Sheet Dependent loan portfolios are primarily made up of our technology and life sciences/healthcare clients.
The breakdown of total loans and total loans as a percentage of total loans by industry sector is as follows:
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Amount
 
Percentage 
 
Amount
 
Percentage 
Private equity/venture capital
 
$
18,868,875

 
52.5
%
 
$
17,712,797

 
53.1
%
Investor dependent:
 
 
 


 
 
 


Early stage
 
1,806,011

 
5.0

 
1,653,425

 
5.0

Mid stage
 
1,399,209

 
3.9

 
1,066,783

 
3.2

Later stage
 
2,031,490

 
5.7

 
1,698,676

 
5.1

Total investor dependent
 
5,236,710

 
14.6

 
4,418,884

 
13.3

Cash flow dependent:
 
 
 


 
 
 


Sponsor led buyout
 
2,121,007

 
5.9

 
2,203,020

 
6.6

Other
 
2,756,295

 
7.7

 
2,252,847

 
6.8

Total cash flow dependent
 
4,877,302

 
13.6

 
4,455,867

 
13.4

Private bank
 
3,669,295

 
10.2

 
3,489,219

 
10.4

Balance sheet dependent
 
1,850,941

 
5.1

 
1,297,304

 
3.9

Premium wine
 
1,056,927

 
2.9

 
1,063,512

 
3.2

Other
 
408,035

 
1.1

 
890,121

 
2.7

Total loans (1)
 
$
35,968,085

 
100.0

 
$
33,327,704

 
100.0

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

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Loan Concentration
The following table provides a summary of total loans by size and risk-based segment. The breakout below is based on total client balances (individually or in the aggregate) as of March 31, 2020 (These amounts reflect corrections to the loan concentration balances (categorized by size) previously reported in our earnings release, filed with the SEC on our Form 8-K report on April 23, 2020 (“Q1 Earnings Release”), for loans (individually or in the aggregate) to any single client: (i) equal to or greater than $20 million; and (ii) less than $20 million.  No corrections were necessary for the total loan portfolio amount or the total amounts by risk-based segment.): 
 
 
March 31, 2020
(Dollars in thousands)
 
Less than Five Million
 
Five to Ten Million
 
Ten to Twenty Million
 
 Twenty to Thirty Million
 
Thirty Million or More
 
Total
Private equity/venture capital
 
$
981,072

 
$
1,267,382

 
$
2,387,759

 
$
2,141,652

 
$
12,091,010

 
$
18,868,875

Investor dependent:
 
 
 
 
 
 
 
 
 
 
 

Early stage
 
1,295,261

 
255,585

 
160,511

 
55,721

 
38,933

 
1,806,011

Mid stage
 
638,456

 
409,596

 
266,471

 
49,686

 
35,000

 
1,399,209

Later stage
 
176,617

 
408,542

 
732,854

 
328,332

 
385,145

 
2,031,490

Total investor dependent
 
2,110,334

 
1,073,723

 
1,159,836

 
433,739

 
459,078

 
5,236,710

Cash flow dependent:
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
20,906

 
72,495

 
510,951

 
700,091

 
816,564

 
2,121,007

Other
 
154,084

 
147,981

 
339,014

 
693,555

 
1,421,661

 
2,756,295

Total cash flow dependent
 
174,990

 
220,476

 
849,965

 
1,393,646

 
2,238,225

 
4,877,302

Private bank
 
2,939,208

 
397,068

 
169,544

 
50,576

 
112,899

 
3,669,295

Balance sheet dependent
 
295,227

 
371,825

 
406,629

 
296,573

 
480,687

 
1,850,941

Premium wine
 
244,732

 
246,379

 
277,142

 
138,486

 
150,188

 
1,056,927

Other
 
60,953

 
62,374

 
95,791

 
119,109

 
69,808

 
408,035

Total loans (1)
 
$
6,806,516

 
$
3,639,227

 
$
5,346,666

 
$
4,573,781

 
$
15,601,895

 
$
35,968,085

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.
At March 31, 2020, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $20.2 billion, or 56.1 percent of our total loan portfolio. (This percentage of our total loan portfolio also reflects a correction to the percentage previously reported in our Q1 Earnings Release.) These loans represented 455 clients, and of these loans, none were on nonaccrual status as of March 31, 2020.

95


The following table provides a summary of loans by size and risk-based segment. The breakout below is based on total client balances (individually or in the aggregate) as of December 31, 2019:
 
 
December 31, 2019
(Dollars in thousands)
 
Less than Five Million
 
Five to Ten Million
 
Ten to Twenty Million
 
 Twenty to Thirty Million
 
Thirty Million or More
 
Total
Private equity/venture capital
 
$
1,016,051

 
$
1,082,201

 
$
2,559,384

 
$
2,029,547

 
$
11,025,614

 
$
17,712,797

Investor dependent
 
 
 
 
 
 
 
 
 
 
 
 
Early stage
 
1,090,852

 
260,685

 
191,661

 
76,542

 
33,685

 
1,653,425

Mid stage
 
544,167

 
316,617

 
156,418

 
49,581

 

 
1,066,783

Later stage
 
167,500

 
348,832

 
648,382

 
304,373

 
229,589

 
1,698,676

Total investor dependent
 
1,802,519

 
926,134

 
996,461

 
430,496

 
263,274

 
4,418,884

Cash flow dependent
 
 
 
 
 
 
 
 
 
 
 
 
Sponsor led buyout
 
16,034

 
97,458

 
550,753

 
723,737

 
815,038

 
2,203,020

Other
 
206,209

 
86,929

 
465,304

 
463,073

 
1,031,332

 
2,252,847

Total cash flow dependent
 
222,243

 
184,387

 
1,016,057

 
1,186,810

 
1,846,370

 
4,455,867

Private bank
 
2,791,587

 
359,429

 
191,979

 
49,996

 
96,228

 
3,489,219

Balance sheet dependent
 
256,247

 
269,744

 
404,356

 
78,197

 
288,760

 
1,297,304

Premium wine
 
243,094

 
267,389

 
261,951

 
148,469

 
142,609

 
1,063,512

Other
 
526,850

 
40,511

 
106,247

 
112,764

 
103,749

 
890,121

Total loans (1)
 
$
6,858,591

 
$
3,129,795

 
$
5,536,435

 
$
4,036,279

 
$
13,766,604

 
$
33,327,704

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

At December 31, 2019, loans equal to or greater than $20 million to any single client (individually or in the aggregate) totaled $17.8 billion, or 53.4 percent of our total loan portfolio. These loans represented 397 clients, and of these loans, $37.3 million were on nonaccrual status as of December 31, 2019.
Our three main market segments include (i) technology (software/internet and hardware) and life science/healthcare, (ii) private equity/venture capital, and (iii) SVB Private Bank.
(i) Technology and Life Science/Healthcare
Our technology and life science/healthcare loan portfolios include loans to clients at the various stages of their life cycles and represent the largest segments of our loan portfolio. The primary underwriting method for our technology and life science/healthcare portfolios are classified as investor dependent, balance sheet dependent or cash flow dependent.
Investor dependent loans represent a relatively small percentage of our overall portfolio at 14.6 percent of total loans at March 31, 2020 and 13.3 percent at December 31, 2019. These loans are made to companies in both our Accelerator (early-stage) and Growth practices (mid-stage and later-stage).
Balance sheet dependent loans, which include asset-based loans, represented five percent of total loans at March 31, 2020 and four percent at December 31, 2019. Our asset-based lending, which includes working capital lines and accounts receivable financing, represented two and one percent of total loans at both March 31, 2020 and December 31, 2019.
Cash flow dependent loans, which include sponsor led buyout lending, represented 14 percent of total loans at March 31, 2020 and 13 percent at December 31, 2019. Sponsor led buyout loans represented six percent of total loans at March 31, 2020, compared to seven percent at December 31, 2019.

(ii) Private Equity/Venture Capital
We also provide financial services to clients in the private equity/venture capital community. Our lending to private equity/venture capital firms and funds represented 53 percent of total loans at both March 31, 2020 and December 31, 2019. The vast majority of this portfolio consists of capital call lines of credit, the repayment of which is dependent on the payment of capital calls by the underlying limited partner investors in the funds managed by these firms. These facilities are generally governed by meaningful financial covenants oriented towards ensuring that the funds' remaining callable capital is sufficient to repay the loan, and larger commitments (typically provided to larger private equity funds) are often secured by an assignment of the general partner's right to call capital from the fund's limited partner investors.


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(iii) SVB Private Bank
Our SVB Private Bank clients are primarily private equity/venture capital professionals and senior executives of the innovation companies they support. Our lending to SVB Private Bank clients represented 10 percent of total loans at both March 31, 2020 and December 31, 2019. Many of these clients have mortgages, which represented 85 percent of this portfolio at March 31, 2020; the balance of this portfolio consisted of home equity lines of credit, restricted stock purchase loans, capital call lines of credit and other secured and unsecured lending. In addition, we provide real estate secured loans to eligible employees through our Employee Home Ownership Program.
We expect lending activity in 2020 to be impacted by strong borrowing from technology and life science/healthcare companies looking to bolster their liquidity positions, and prepayment or reduced utilization of capital call lines of credit by private equity/venture capital firms due to a slowdown in investment activities.
Paycheck Protection Program
In April 2020, we started accepting applications under the Paycheck Protection Program ("PPP") administered by the Small Business Association (“SBA”) under the CARES Act and began to originate loans to qualified small businesses. Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage, rent and utility payments. To the extent not forgiven, loans are subject to certain terms including, among others, the following: maximum two-year term; interest rate of 1.0%; six-month deferral of loan payments; and no requirement for any collateral or personal guarantees. PPP borrowers are not required to pay any fees to the government or the lender and the loans may be repaid by the borrower at any time. The SBA, however, will pay lenders a processing fee based on the size of the PPP loan, ranging from 1% to 5% of the loan.
As of May 5, 2020, we have over 4,400 outstanding loans recorded in the amount of approximately $2.0 billion of PPP loans as approved by the SBA and expect to continue funding additional loans as they become approved under the program. This funded amount reflects repayments received as of such date. We expect additional repayments from PPP borrowers, particularly on or prior to May 14, 2020 (subject to any extension permitted by the SBA), in connection with their reliance on certain regulatory “safe harbors” relating to their necessity certification pursuant to SBA guidance.
Additionally, we announced in April 2020 that we intend to donate any processing fees we receive from the SBA, net of our costs incurred, to charitable relief efforts relating to COVID-19. We are also considering participation in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”), which extends credit to eligible PPP loan originators, taking the PPP loans as collateral at face value. (See “Capital Resources - Liquidity.”)
State Concentrations
Approximately 26 percent of our outstanding total loan balances as of March 31, 2020 were to borrowers based in California compared to 27 percent as of December 31, 2019. Additionally, as of March 31, 2020, borrowers in New York and Massachusetts increased to 12 percent and 10 percent of our outstanding total loan balances as of March 31, 2020, respectively, compared to nine percent each as of December 31, 2019. Other than California, New York and Massachusetts, as of March 31, 2020, there are no states with loan balances greater than or equal to 10 percent.
See generally “Risk Factors–Credit Risks” set forth under Part I, Item 1A in our 2019 Form 10-K and including "Risk Factors" under Part II, Item 1A of this report.

Credit Quality Indicators
As of both March 31, 2020 and December 31, 2019, our total criticized loans and nonaccrual loans represented three percent of our total loans. Criticized and nonaccrual loans to early-stage clients represented 18 and 23 percent of our total criticized and nonaccrual loan balances at March 31, 2020 and December 31, 2019, respectively. Loans to early-stage clients represent a relatively small percentage of our overall portfolio at five percent of total loans at both March 31, 2020 and December 31, 2019. It is common for an early-stage client’s remaining liquidity to fall temporarily below the threshold for a pass-rated credit during its capital-raising period for a new round of funding. Based on our experience, for most early-stage clients, this situation typically lasts one to two quarters and generally resolves itself with a subsequent round of venture funding, though there are exceptions, from time to time. As a result, we expect that each of our early-stage clients will reside in our criticized portfolio during a portion of their life cycle.
More specifically, given the economic environment in light of the COVID-19 pandemic, we are closely monitoring our loan portfolio. Notwithstanding the increase of our allowance for credit losses in the first quarter which was largely attributable to longer duration mortgage loans based on our forecast models, we currently expect particularly for 2020 continued strong credit performance for our Private Bank and private equity/venture portfolios, consistent with the historic low credit losses we have typically experienced. However, we expect that our technology, life science/healthcare and premium wine portfolios will be

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likelier to be impacted negatively by the challenging economic environment in 2020. Particular areas of credit focus include: early-stage companies; Sponsor Finance clients; consumer internet and advertising technology clients; life science/healthcare companies that require clinical trials or provide elective services; and wine clients who are dependent on tasting room or restaurant sales.
Credit Quality and Allowance for Credit Losses for Loans and for Unfunded Credit Commitments
Nonperforming assets consist of loans on nonaccrual status, loans past due 90 days or more still accruing interest, and Other Real Estate Owned (“OREO”) and other foreclosed assets. We measure all loans placed on nonaccrual status for impairment based on the fair value of the underlying collateral or the net present value of the expected cash flows. The table below sets forth certain data and ratios between nonperforming loans, nonperforming assets and the allowance for credit losses for loans and unfunded credit commitments:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
Nonperforming, past due, and restructured loans:
 
 
 
 
Nonaccrual loans
 
$
50,607

 
$
102,669

Loans past due 90 days or more still accruing interest
 
4,918

 
3,515

Total nonperforming loans (1)
 
55,525

 
106,184

OREO and other foreclosed assets
 

 

Total nonperforming assets
 
$
55,525

 
$
106,184

Performing TDRs
 
$
23,460

 
$
31,990

Nonperforming loans as a percentage of total loans (1)
 
0.15
%
 
0.32
%
Nonperforming assets as a percentage of total assets
 
0.07

 
0.15

Allowance for credit losses for loans
 
$
548,963

 
$
304,924

As a percentage of total loans (1)
 
1.53
%
 
0.91
%
As a percentage of total nonperforming loans (1)
 
988.68

 
287.17

Allowance for credit losses for nonaccrual loans
 
$
34,876

 
$
44,859

As a percentage of total loans (1)
 
0.10
%
 
0.13
%
As a percentage of total nonperforming loans (1)
 
62.81

 
42.25

Allowance for credit losses for total performing loans
 
$
514,087

 
$
260,065

As a percentage of total loans (1)
 
1.43
%
 
0.78
%
As a percentage of total performing loans (1)
 
1.43

 
0.78

Total loans (1)
 
$
35,968,085

 
$
33,327,704

Total performing loans (1)
 
35,912,560

 
33,221,520

Allowance for credit losses for unfunded credit commitments (2)
 
84,690

 
67,656

As a percentage of total unfunded credit commitments
 
0.34
%
 
0.28
%
Total unfunded credit commitments (3)
 
$
24,668,310

 
$
24,521,920

 
 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed, and ratios are calculated, using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed, and ratios calculated, using the gross basis.
(2)
The “allowance for credit losses for unfunded credit commitments” is included as a component of other liabilities and any provision is included in the “provision for credit losses” in the statement of income. See “Provision for Credit Losses” for a discussion of the changes to the allowance.
(3)
Includes unfunded loan commitments and letters of credit.

Our allowance for credit losses for loans as a percentage of total loans increased 62 basis points to 1.53 percent at March 31, 2020, compared to 0.91 percent at December 31, 2019. The 62 basis points increase was due primarily to a 58 basis points increase for our performing loan reserve as a percentage of total loans and an eight basis points increase due to the day one impact of adopting CECL, partially offset by a four basis points decrease for nonaccrual loans.
Our allowance for credit losses for performing loans was $514.1 million at March 31, 2020, compared to $260.1 million at December 31, 2019. Included in the allowance for credit losses at March 31, 2020 is the day one impact of adopting CECL of

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$22.4 million driven by an increase in our expected credit loss for our Investor Dependent loan portfolio given the higher relative risk and longer-duration, which is taken into account under the CECL methodology, partially offset by a decrease for our Private Equity/Venture Capital loan portfolio, given its higher historical credit quality and shorter duration. The remaining $231.6 million increase was due primarily to an increase of $190.7 million related to the expected credit losses for our performing loan reserves based on our forecast models of the current economic environment and $40.9 million related to period-end loan growth of $2.8 billion.
Our allowance for credit losses for nonaccrual loans was $34.9 million at March 31, 2020, compared to $44.9 million at December 31, 2019. The $10.0 million decrease was due primarily to $21.1 million in repayments, $18.3 million in charge-offs, partially offset by $26.3 million in new nonaccrual loans as noted above and $3.1 million due to the day one impact of adopting CECL. Repayments were primarily driven by $12.9 million for one Sponsor Led Buyout client that was added to our nonaccrual loan portfolio during the third quarter of 2019.
The following table presents a summary of changes in nonaccrual loans for the three months ended March 31, 2020 and 2019
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Balance, beginning of period (1)
 
$
102,669

 
$
94,142

Additions
 
36,346

 
50,857

Paydowns and other reductions
 
(62,677
)
 
(6,481
)
Charge-offs
 
(25,731
)
 
(4,895
)
Balance, end of period (1)
 
$
50,607

 
$
133,623

 
 
(1)
For the quarter ended March 31, 2020, loan amounts are disclosed using the amortized cost basis as a result of the adoption of CECL. Prior period loan amounts are disclosed using the gross basis.

Nonaccrual loans were $50.6 million at March 31, 2020, compared to $103.0 million at December 31, 2019. Our nonaccrual loan balance decreased $52.4 million primarily driven by $62.7 million in paydowns and other reductions and $25.7 million charge-offs, partially offset by $36.3 million in new nonaccrual loans. Repayments were primarily driven by $34.5 million for one Sponsor Led Buyout client that was added to our nonaccrual loan portfolio during the third quarter of 2019. New nonaccrual loans were driven primarily by $12.3 million for two growth stage Investor Dependent technology clients. As of March 31, 2020, we have specifically reserved $34.9 million for our nonaccrual loans.
Average nonaccrual loans for the three months ended March 31, 2020 were $71.6 million compared to $106.4 million for the comparable 2019 period. The $34.8 million decrease in average nonaccrual loans for the three months ended March 31, 2020 compared to March 31, 2019 was primarily driven by one large recovery of $34.5 million for one Sponsor Led Buyout client as mentioned above. If the nonaccrual loans had not been nonperforming, $0.4 million in interest income would have been recorded for the three months ended March 31, 2020, compared to $1.7 million for the comparable 2019 period.
Accrued Interest Receivable and Other Assets
A summary of accrued interest receivable and other assets at March 31, 2020 and December 31, 2019 is as follows:
(Dollars in thousands)
 
March 31, 2020

December 31, 2019
 
% Change      
Derivative assets (1)
 
$
472,525

 
$
332,814

 
42.0
 %
Foreign exchange spot contract assets, gross
 
945,762

 
810,275

 
16.7

Accrued interest receivable
 
190,100

 
216,962

 
(12.4
)
FHLB and Federal Reserve Bank stock
 
116,323

 
60,258

 
93.0

Net deferred tax assets (2)
 

 
28,433

 

Accounts receivable
 
92,485

 
47,663

 
94.0

Other assets
 
241,860

 
248,828

 
(2.8
)
Total accrued interest receivable and other assets
 
$
2,059,055

 
$
1,745,233

 
18.0

 
 
(1)
See "Derivatives" section below.
(2)
See "Other Liabilities" section below.

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Foreign Exchange Spot Contract Assets
Foreign exchange spot contract assets represent unsettled client trades at the end of the period. The increase of $135.5 million was primarily due to an overall increase in the amount of unsettled spot trades at period-end as compared to December 31, 2019.
Accrued Interest Receivable
The decrease of $26.7 million in accrued interest receivable is reflective of lower accrued interest receivables on loans and fixed income investments securities from lower overall market rates as well as the decrease in period-end fixed income securities of $1.6 billion at March 31, 2020 as compared to December 31, 2019.
FHLB and Federal Reserve Bank stock
The increase of $56.1 million in FHLB and Federal Reserve Bank stock is a result of an increase in the amount of stock required to be held by the Bank under the FHLB's membership guidelines relative to outstanding FHLB borrowings. Outstanding short-term FHLB advances were $2.7 billion at March 31, 2020 compared to zero at December 31, 2019.
Accounts Receivable
The increase of $44.8 million in accounts receivable was primarily driven by an increase of $47.0 million related to the unsettled transactions for the termination of our interest rate swap cash flow hedges as of March 31, 2020. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional details of this transaction.
Derivatives
Derivative instruments are recorded as a component of other assets and other liabilities on the balance sheet. The following table provides a summary of derivative assets and liabilities at March 31, 2020 and December 31, 2019:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
 
% Change 
Assets:
 
 
 
 
 
 
Equity warrant assets
 
$
152,710

 
$
165,473

 
(7.7
)%
Foreign exchange forward and option contracts
 
239,272

 
115,854

 
106.5

Client interest rate derivatives
 
80,543

 
28,811

 
179.6

Interest rate swaps
 

 
22,676

 

Total derivative assets
 
$
472,525

 
$
332,814

 
42.0

Liabilities:
 
 
 
 
 
 
Foreign exchange forward and option contracts
 
$
195,891

 
$
98,207

 
99.5

Client interest rate derivatives
 
31,533

 
14,154

 
122.8

Interest rate swaps
 

 
25,623

 

Total derivative liabilities
 
$
227,424

 
$
137,984

 
64.8

Equity Warrant Assets
In connection with negotiating credit facilities and certain other services, we often obtain rights to acquire stock in the form of equity warrant assets in primarily private, venture-backed companies in the technology and life science/healthcare industries. At March 31, 2020, we held warrants in 2,342 companies, compared to 2,268 companies at December 31, 2019. Warrants in 19 companies each had values greater than $1.0 million and collectively represented $46.7 million, or 30.6 percent, of the fair value of the total warrant portfolio at March 31, 2020. The change in fair value of equity warrant assets is recorded in "Gains on equity warrant assets, net" in noninterest income, a component of consolidated net income.

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The following table provides a summary of transactions and valuation changes for equity warrant assets for the three months ended March 31, 2020 and 2019
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Balance, beginning of period
 
$
165,473

 
$
149,238

New equity warrant assets
 
4,519

 
4,471

Non-cash changes in fair value, net
 
(5,472
)
 
16,238

Exercised equity warrant assets
 
(11,484
)
 
(7,317
)
Terminated equity warrant assets
 
(326
)
 
(415
)
Balance, end of period
 
$
152,710

 
$
162,215

Foreign Exchange Forward and Foreign Currency Option Contracts
We enter into foreign exchange forward contracts and foreign currency option contracts with clients involved in foreign activities, either as the purchaser or seller, depending upon the clients’ needs. For each forward or option contract entered into with our clients, we enter into an opposite way forward or option contract with a correspondent bank, which mitigates the risk of fluctuations in currency rates. We also enter into forward contracts with correspondent banks to economically reduce our foreign exchange exposure related to certain foreign currency denominated instruments. Net gains and losses on the revaluation of foreign currency denominated instruments are recorded in the line item “Other” as part of noninterest income, a component of consolidated net income. We have not experienced nonperformance by any of our counterparties and therefore have not incurred any related losses. Further, we anticipate performance by all counterparties. Our net exposure for foreign exchange forward and foreign currency option contracts, net of cash collateral, was zero at March 31, 2020 and $22.2 million at December 31, 2019. For additional information on our foreign exchange forward contracts and foreign currency option contracts, see Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.

Client Interest Rate Derivatives
We sell interest rate contracts to clients who wish to mitigate their interest rate exposure. We economically reduce the interest rate risk from this business by entering into opposite way contracts with correspondent banks. Our net exposure for client interest rate derivative contracts, net of cash collateral, was $80.1 million at March 31, 2020 and $28.6 million at December 31, 2019. For additional information on our client interest rate derivatives, see Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Interest Rate Swaps
To manage interest rate risk on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815 and record them in other assets and other liabilities. Refer to Note 11 — “Derivative Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional information regarding the termination of our interest rate swap cash flow hedges at March 31, 2020.
Deposits
Deposits were $61.9 billion at March 31, 2020, an increase of $0.1 billion, or 0.2 percent, compared to $61.8 billion at December 31, 2019.
At March 31, 2020, the aggregate balance of time deposit accounts individually equal to or greater than $100,000 totaled $171 million, compared to $185 million at December 31, 2019. At March 31, 2020, $167 million of the time deposit accounts individually equal to or greater than $100,000 were scheduled to mature within one year. No material portion of our deposits has been obtained from a single depositor and the loss of any one depositor would not materially affect our business. Approximately 12 percent and 13 percent of our total deposits at March 31, 2020 and December 31, 2019, respectively, were from our clients in Asia.
We expect in 2020 that our deposit growth will be impacted by: slower cash burn rates as clients look to conserve cash; shifting of off-balance investments to on-balance deposits by clients to preserve flexibility; and a slowdown in investment and exit activities impacting client liquidity levels and potential private equity/venture capital firm distributions to their partners.
Short-Term Borrowings
As of March 31, 2020, we had $3.1 billion in short-term borrowings, compared to $17.4 million as of December 31, 2019. The increase was due to cash management strategies related to the COVID-19 pandemic. For more information on our short-term debt, see Note 10 — “Short-Term Borrowings and Long-Term Debt” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Long-Term Debt
Our long-term debt was $348.1 million at March 31, 2020 and $348.0 million at December 31, 2019. As of March 31, 2020, long-term debt included our 3.50% Senior Notes. For more information on our long-term debt, see Note 10 — “Short-Term Borrowings and Long-Term Debt” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Other Liabilities
A summary of other liabilities at March 31, 2020 and December 31, 2019 is as follows:
(Dollars in thousands)
 
March 31, 2020
 
December 31, 2019
 
% Change  
Foreign exchange spot contract liabilities, gross
 
$
1,011,264

 
$
888,360

 
13.8

Accrued compensation
 
117,559

 
354,393

 
(66.8
)
Allowance for unfunded credit commitments
 
84,690

 
67,656

 
25.2

Derivative liabilities (1)
 
227,424

 
137,984

 
64.8

Net deferred tax liabilities
 
92,782

 

 

Other liabilities
 
667,234

 
593,359

 
12.5

Total other liabilities
 
$
2,200,953

 
$
2,041,752

 
7.8

 
 
(1)
See “Derivatives” section above.

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Foreign Exchange Spot Contract Liabilities
Foreign exchange spot contract liabilities represent unsettled client trades at the end of the period. The increase of $122.9 million was due primarily to an increase in the fair value of unsettled spot trades at March 31, 2019 as compared to December 31, 2019, due to increases in the mark-to-market valuations driven by increases in the U.S. dollar against other currencies.
Accrued Compensation
Accrued compensation includes amounts for our Incentive Compensation Plan, Direct Drive Incentive Compensation Plan, Retention Program, Warrant Incentive Plan, ESOP, SVB Leerink Incentive Compensation Plan, SVB Leerink Retention Award and other compensation arrangements. The decrease of $236.8 million was primarily the result of the payout of our 2019 incentive compensation plans during the first quarter of 2020, partially offset by the accrual for the three months ended March 31, 2020.
Allowance for Unfunded Credit Commitments
Allowance for unfunded credit commitments includes an allowance for both our unfunded loan commitments and our letters of credit. The increase of $17.0 million was due primarily to the day one impact of the adoption of CECL of $22.8 million partially offset by the reduction of credit losses of $5.5 million driven by a decrease in the expected future commitments for milestone tranches, which are tied to company performance or additional funding rounds, based on our forecast models of the current economic environment, including the impact of the COVID-19 pandemic.

Net Deferred Tax Liabilities
Net deferred tax liabilities increased due to the recording of pre-tax unrealized gains to accumulated other comprehensive income from the termination of our interest rate swap cash flow hedge contracts partially offset by timing differences related to warrants and unrealized losses on our foreign currency loans.

Other Liabilities
Other liabilities includes various accrued liability amounts for other operational transactions. The increase of $73.9 million was reflective primarily of a $46.2 million increase in new commitments for our qualified affordable tax credit funds, a $24.3 million increase in current taxes payable and a $23.5 million increase in investment securities payable, partially offset by a decrease of $28.4 million in merchant services card payables due to the timing of settlements.
Noncontrolling Interests
Noncontrolling interests totaled $148.5 million and $150.8 million at March 31, 2020 and December 31, 2019, respectively. The $2.3 million decrease was due primarily to a loss attributable to noncontrolling interests of $2.0 million for the three months ended March 31, 2020.
Fair Value Measurements
The following table summarizes our financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
 
 
March 31, 2020
 
December 31, 2019
(Dollars in thousands)
 
Total Balance  
 
Level 3     
 
Total Balance  
 
Level 3     
Assets carried at fair value
 
$
13,404,754

 
$
149,992

 
$
14,672,330

 
$
161,172

As a percentage of total assets
 
17.9
%
 
0.2
%
 
20.7
%
 
0.2
%
As a percentage of assets carried at fair value
 
 
 
1.1

 
 
 
1.1

Liabilities carried at fair value
 
$
227,424

 
$

 
$
137,984

 
$

As a percentage of total liabilities
 
0.3
%
 
%
 
0.2
%
 
%
Financial assets valued using Level 3 measurements consist of our non-marketable investment securities in shares of private company stock and equity warrant assets (rights to shares of private and public company capital stock). The valuation methodologies of our non-marketable securities carried under fair value accounting and equity warrant assets involve a significant degree of management judgment. Refer to Note 17 — “Fair Value of Financial Instruments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for a summary of the valuation techniques and significant inputs used for each class of Level 3 assets.

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The inherent uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material. The timing and amount of changes in fair value, if any, of these financial instruments depend upon factors beyond our control, including the performance of the underlying companies, fluctuations in the market prices of the preferred or common stock of the underlying companies, general volatility and interest rate market factors, and legal and contractual restrictions. The timing and amount of actual net proceeds, if any, from the disposition of these financial instruments depend upon factors beyond our control, including investor demand for IPOs, levels of M&A activity, legal and contractual restrictions on our ability to sell, and the perceived and actual performance of portfolio companies. All of these factors are difficult to predict and there can be no assurances that we will realize the full value of these securities, which could result in significant losses. See generally “Risk Factors” set forth under Part I, Item 1A in our 2019 Form 10-K and under Part II, Item 1A of this report.
During the three months ended March 31, 2020, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $14.6 million, primarily reflective of net gains realized on exercised warrant assets. During the three months ended March 31, 2019, the Level 3 assets that are measured at fair value on a recurring basis experienced net realized and unrealized gains of $19.1 million primarily reflective of valuation increases from our private company warrant portfolio driven by healthy funding rounds and net gains realized on exercised warrant assets due to IPO activity.
Capital Resources
We maintain an adequate capital base to support anticipated asset growth, operating needs, and credit and other business risks, and to provide for SVB Financial and the Bank to be in compliance with applicable regulatory capital guidelines, including the joint agency rules implementing the "Basel III" capital rules (the "Capital Rules"). Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of our capital stock or other securities. Under the oversight of the Finance Committee of our Board of Directors, management engages in regular capital planning processes in an effort to optimize the use of the capital available to us and to appropriately plan for our future capital needs. The capital plan considers capital needs for the foreseeable future and allocates capital to both existing and future business activities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. In addition, we conduct capital stress tests as part of our annual capital planning process. The capital stress tests allow us to assess the impact of adverse changes in the economy and interest rates on our capital adequacy position.
SVBFG Stockholders’ Equity
SVBFG stockholders’ equity totaled $7.0 billion at March 31, 2020, an increase of $0.5 billion, or 8.7 percent, compared to $6.5 billion at December 31, 2019. This increase was due primarily to net income available to common stockholders of $132.3 million and increase in other comprehensive income was driven primarily by a $543.9 million ($393.1 million net of tax) increase in the fair value of our AFS securities portfolio reflective of decreases in period-end market interest rates and a $226.9 million ($163.9 million net of tax) gain from the termination of our interest rate swap cash flow hedge contracts, partially offset by a reclassification to net income for realized gains of $61.2 million ($44.2 million net of tax) attributable to sales of AFS securities.
Funds generated through retained earnings are a significant source of capital and liquidity and are expected to continue to be so in the future.
Capital Ratios
Both SVB Financial and the Bank are subject to various regulatory capital requirements administered by state and federal banking agencies.
Regulatory capital ratios for SVB Financial and the Bank exceeded minimum federal regulatory guidelines under the Capital Rules as well as for a "well capitalized" bank holding company and insured depository institution, respectively, as of March 31, 2020 and December 31, 2019. Capital ratios for SVB Financial and the Bank, compared to the minimum capital ratios, are set forth below:

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March 31,
2020
 
December 31, 2019
 
Required Minimum (1)
 
Well Capitalized Minimum
SVB Financial:
 
 
 
 
 
 
 
 
CET 1 risk-based capital ratio (2)(3)
 
12.35
%
 
12.58
%
 
7.0
%
 
N/A

Tier 1 risk-based capital ratio (3)
 
13.35

 
13.43

 
8.5

 
6.0

Total risk-based capital ratio (3)
 
14.45

 
14.23

 
10.5

 
10.0

Tier 1 leverage ratio (2)(3)
 
9.00

 
9.06

 
4.0

 
N/A  

Tangible common equity to tangible assets ratio (4)(5)
 
8.70

 
8.39

 
N/A  

 
N/A  

Tangible common equity to risk-weighted assets ratio (4)(5)
 
13.40

 
12.76

 
N/A  

 
N/A  

Bank:
 
 
 
 
 
 
 
 
CET 1 risk-based capital ratio (3)
 
10.90
%
 
11.12
%
 
7.0
%
 
6.5
%
Tier 1 risk-based capital ratio (3)
 
10.90

 
11.12

 
8.5

 
8.0

Total risk-based capital ratio (3)
 
12.04

 
11.96

 
10.5

 
10.0

Tier 1 leverage ratio (3)
 
7.21

 
7.30

 
4.0

 
5.0

Tangible common equity to tangible assets ratio (4)(5)
 
7.63

 
7.24

 
N/A  

 
N/A  

Tangible common equity to risk-weighted assets ratio (4)(5)
 
11.99

 
11.31

 
N/A  

 
N/A  

 
 
 
(1)
Percentages represent the minimum capital ratios plus, as applicable, the fully phased-in 2.5% CET1 capital conservation buffer under the Capital Rules.
(2)
"Well-Capitalized Minimum" CET 1 risk-based capital and Tier 1 leverage ratios are not formally defined under applicable banking regulations for bank holding companies.
(3)
Capital ratios include regulatory capital phase-in of the allowance for credit losses under the 2020 CECL Interim Final Rule for periods beginning March 31, 2020.
(4)
See below for a reconciliation of non-GAAP tangible common equity to tangible assets and tangible common equity to risk-weighted assets.
(5)
The Federal Reserve has not issued any minimum guidelines for the tangible common equity to tangible assets ratio or the tangible common equity to risk-weighted assets ratio, however, we believe these ratios provide meaningful supplemental information regarding our capital levels and are therefore provided above.
Regulatory Capital Phase-In under the 2020 CECL Interim Final Rule ("IFR")
Federal banking regulatory agencies have provided relief to banking organizations by way of an interim final rule based on the recent disruptions in economic conditions caused by COVID-19 as well as the significant resources required to implement CECL. The interim final rule provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the estimated impact of CECL on regulatory capital for two years, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition, in total). The interim final rule provides electing banking organizations with a methodology for delaying the effect on regulatory capital of an estimated amount of the increase in the allowance for credit loss ("ACL") that can be attributed to the adoption of CECL, relative to the increase in the allowance for loan and lease losses ("ALLL") that would have occurred for banking organizations operating under the incurred loss methodology. Accordingly, we have elected to use the regulatory capital phase-in under the IFR.
Based on the methodology under the IFR, we received a 19 bps and 18 bps benefit to our Common Equity Tier 1 and Tier 1 Capital Ratios, respectively, along with an 11 bps benefit to our Leverage Ratios for SVB Financial Group and the Bank.
Regulatory Capital: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996
On July 22, 2019, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve Board issued a final rule titled Regulatory Capital: Simplifications to the Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("Simplifications Rule"), which simplified the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and the calculation of minority interest. These provisions in the Simplifications Rule were effective as April 1, 2020. Under the effective date revision in this final rule, non-advanced approaches banking organizations, such as SVB Financial Group, may implement the simplification rule beginning on January 1, 2020. As such, we have elected to adopt these provisions effective January 1, 2020.
Our total risk-based capital ratios for both SVBFG and the Bank as of March 31, 2020, increased compared to December 31, 2019 as a result of an increase in capital, offset by an increase in our risk-weighted assets. The increase in capital was due to net income, an increase in our allowance for credits losses for loans and HTM securities and an increase in minority interest for SVBFG reflective of the implementation of the Simplifications Rule. These increases in capital were partially offset by a decrease in

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retained earnings due to the stock repurchase program for SVBFG. The increase in risk-weighted assets was primarily driven by our robust period-end loan growth.
Our tier 1 capital and leverage ratios for both SVBFG and the Bank as of March 31, 2020, decreased compared to December 31, 2019 driven primarily by an increase in risk-weighted and average assets, offset by an increase in tier 1 capital. The increase in risk-weighted and average assets was driven primarily by loan growth, increased cash and cash equivalents and increased fixed income investment securities. The increase in tier 1 capital for the Bank was driven primarily by net income. The increase in tier 1 capital for SVBFG was driven primarily by net income and an increase in minority interest due to the Simplifications Rule, offset by a decrease in retained earnings due to common stock repurchases under our stock repurchase program.
Our CET 1 capital ratio decreased for both SVBFG and the Bank as of March 31, 2020, compared to December 31, 2019 as a result of an increase in capital, partially offset by the increase our risk-weighted assets. The increase in capital was due to net income and an increase in the allowance for credit losses for loans and HTM securities. These increases in capital were partially offset by the increase in risk weighted assets, driven by our robust period-end loan growth.
All of our reported capital ratios remain above the levels considered to be “well capitalized” under applicable banking regulations.
The tangible common equity to tangible assets ratio and the tangible common equity to risk-weighted assets ratios are not required by GAAP or applicable bank regulatory requirements. However, we believe these ratios provide meaningful supplemental information regarding our capital levels. Our management uses, and believes that investors benefit from referring to, these ratios in evaluating the adequacy of the Company’s capital levels; however, these financial measures should be considered in addition to, not as a substitute for or preferable to, comparable financial measures prepared in accordance with GAAP. These ratios are calculated by dividing total SVBFG stockholders' equity, by total period-end assets and risk-weighted assets, after reducing both amounts by acquired intangibles, if any. The manner in which this ratio is calculated varies among companies. Accordingly, our ratio is not necessarily comparable to similar measures of other companies.
The following table provides a reconciliation of non-GAAP financial measures with financial measures defined by GAAP for SVB Financial and the Bank for the periods ended March 31, 2020 and December 31, 2019:
 
 
SVB Financial
 
Bank
Non-GAAP tangible common equity and tangible assets
   (Dollars in thousands, except ratios)
 
March 31,
2020
 
December 31,
2019
 
March 31,
2020
 
December 31,
2019
GAAP SVBFG stockholders’ equity
 
$
7,034,749

 
$
6,470,307

 
$
5,617,402

 
$
5,034,095

Less: preferred stock
 
340,138

 
340,138

 

 

Less: intangible assets
 
185,895

 
187,240

 

 

Tangible common equity
 
$
6,508,716

 
$
5,942,929

 
$
5,617,402

 
$
5,034,095

GAAP total assets
 
$
75,009,640

 
$
71,004,903

 
$
73,630,526

 
$
69,563,817

Less: intangible assets
 
185,895

 
187,240

 

 

Tangible assets
 
$
74,823,745

 
$
70,817,663

 
$
73,630,526

 
$
69,563,817

Risk-weighted assets
 
$
48,578,473

 
$
46,577,485

 
$
46,839,951

 
$
44,502,150

Non-GAAP tangible common equity to tangible assets
 
8.70
%
 
8.39
%
 
7.63
%
 
7.24
%
Non-GAAP tangible common equity to risk-weighted assets
 
13.40

 
12.76

 
11.99

 
11.31

The tangible common equity to tangible assets ratio and the tangible common equity to risk weighted assets ratio increased for SVBFG and the Bank during the three months ended March 31, 2020. The tangible common equity to risk-weighted assets ratio increased as a result of increase in equity due to unrealized gains on AFS securities and unrealized gains due to the termination of our interest rate swap cash flow hedge contracts as mentioned above. The growth in period-end risk-weighted assets was primarily due to increases in cash and cash equivalents and period-end loan growth.
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

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and standby letters of credit, please refer to Note 15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Commitments to Invest in Venture Capital and Private Equity Funds
Subject to applicable regulatory requirements, including the Volcker Rule, 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 15 — “Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
Liquidity
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations, including, as necessary, paying creditors, meeting depositors’ needs, accommodating loan demand and growth, funding investments, repurchasing securities and other operating or capital needs, without incurring undue cost or risk, or causing a disruption to normal operating conditions.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Our Asset/Liability Committee (“ALCO”), which is a management committee, provides oversight to the liquidity management process and recommends policy guidelines for the approval of the Finance Committee of our Board of Directors, and courses of action to address our actual and projected liquidity needs. Additionally, we routinely conduct liquidity stress testing as part of our liquidity management practices.
Our deposit base is, and historically has been, our primary source of liquidity. Our deposit levels and cost of deposits may fluctuate from time to time due to a variety of factors, including market conditions, prevailing interest rates, changes in client deposit behaviors, availability of insurance protection, and our offering of deposit products. We may also offer more investment alternatives for our off-balance sheet products which may impact deposit levels. At March 31, 2020, our period-end total deposit balances were $61.9 billion, compared to $61.8 billion at December 31, 2019.
Our liquidity requirements can also be met through the use of our portfolio of liquid assets. Our definition of liquid assets includes cash and cash equivalents in excess of the minimum levels necessary to carry out normal business operations, short-term investment securities maturing within one year, available-for-sale securities eligible and available for financing or pledging purposes with a maturity in excess of one year and anticipated near-term cash flows from investments.
We have certain facilities in place to enable us to access short-term borrowings on a secured and unsecured basis. Our secured facilities include collateral pledged to the FHLB of San Francisco and the discount window at the FRB (using both fixed income securities and loans as collateral). Our unsecured facility consists of our uncommitted federal funds lines. As of March 31, 2020, collateral pledged to the FHLB of San Francisco was comprised primarily of fixed income investment securities and loans and had a carrying value of $4.8 billion, of which $1.4 billion was available to support additional borrowings. As of March 31, 2020, collateral pledged to the discount window at the FRB was comprised of fixed income investment securities and had a carrying value of $1.0 billion, all of which was unused and available to support additional borrowings. Our total unused and available borrowing capacity for our uncommitted federal funds lines totaled $1.6 billion at March 31, 2020. Our total unused and available borrowing capacity under our master repurchase agreements with various financial institutions totaled $3.3 billion at March 31, 2020.
In connection with our participation in the PPP under the CARES Act as discussed, we are considering participating in the Federal Reserve’s PPPLF. The PPPLF is intended to facilitate lending under the PPP, and extends credit to eligible PPP loan originators on a non-recourse basis, taking PPP loans as collateral at face value. Additionally, interim final capital rules issued by federal bank regulatory agencies have neutralized the regulatory capital effects of participating in the PPP, and have also clarified that a zero percent risk weight applies to loans covered by the PPP for capital purposes.
On a stand-alone basis, SVB Financial’s primary liquidity channels include dividends from the Bank, its portfolio of liquid assets, and its ability to raise debt and capital. Consistent with recent prior quarters, the Bank has paid a quarterly dividend to SVB Financial. For the three months ended March 31, 2020, the dividend amount paid was $50.0 million. The ability of the Bank

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to pay dividends is subject to certain regulations described in “Business—Supervision and Regulation—Restriction on Dividends” under Part I, Item 1 of our 2019 Form 10-K.
Consolidated Summary of Cash Flows
Below is a summary of our average cash position and statement of cash flows for the three months ended March 31, 2020 and 2019. For further details, see our “Interim Consolidated Statements of Cash Flows (Unaudited)” under Part I, Item 1 of this report.
 
 
Three months ended March 31,
(Dollars in thousands)
 
2020
 
2019
Average cash and cash equivalents
 
$
8,106,167

 
$
4,987,487

Percentage of total average assets
 
11.2
%
 
8.7
%
Net cash provided by operating activities
 
$
168,125

 
$
340,750

Net cash (used for) provided by investing activities
 
(599,041
)
 
904,427

Net cash provided by financing activities
 
3,210,581

 
2,250,167

Net increase in cash and cash equivalents
 
$
2,779,665

 
$
3,495,344

Average cash and cash equivalents increased by $3.1 billion, or 62.5 percent, to $8.1 billion for the three months ended March 31, 2020, compared to $5.0 billion for the comparable 2019 period.
Cash provided by operating activities was $168.1 million for the three months ended March 31, 2020, reflective primarily of net income before noncontrolling interests and dividends of $133.6 million and a net increase of $34 million in adjustments to reconcile net income to net cash primarily due to the increase in the provision for credit losses and proceeds for the settled transactions for the termination of interest rate swap cash flow hedge contracts, partially offset by the decrease in accrued compensation.
Cash used for investing activities of $0.6 billion for the three months ended March 31, 2020 was driven by $1.9 billion in purchases of fixed income investment securities and a $2.8 billion increase in loan balances, partially offset by $2.7 billion in proceeds from the sale of AFS securities and $1.4 billion of proceeds from maturities and principle pay downs from our fixed income investment securities portfolio.
Cash provided by financing activities was $3.2 billion for the three months ended March 31, 2020, reflective primarily of a $3.1 billion increase in short term borrowings.
Cash and cash equivalents were $9.6 billion and $7.1 billion, respectively, at March 31, 2020 and 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk Management
Market risk is defined as the risk of adverse fluctuations in the market value of financial instruments due to changes in market interest rates. Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our rate-sensitive assets and liabilities, widening or tightening of credit spreads, changes in the general level of market interest rates and changes in the shape and level of the benchmark LIBOR/SWAP yield curve. Additionally, changes in interest rates can influence the rate of principal prepayments on mortgage securities, which affects the rate of amortization of purchase premiums and discounts. Other market risks include foreign currency exchange risk and equity price risk (including the effect of competition on product pricing). All these risks are important considerations but are also inherently difficult to predict and to assess the impact of each on simulation results. Consequently, simulations used to analyze the sensitivity of net interest income to changes in interest rates will differ from actual results due to differences in the timing and frequency of rate resets, the magnitude of changes in market rates, the impact of competition, fluctuating business conditions, and the impact of strategies taken by management to mitigate these risks.
Interest rate risk is managed by our ALCO. ALCO reviews the sensitivity of the market valuation on earning assets and funding liabilities and the modeled 12-month projection of net interest income from changes in interest rates, structural changes in investment and funding portfolios, loan and deposit activity and current market conditions. Relevant metrics and guidelines, which are approved by the Finance Committee of our Board of Directors and are included in our Interest Rate Risk Policy, are monitored on an ongoing basis.

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Interest rate risk is managed primarily through strategies involving our fixed income securities portfolio, available funding channels and capital market activities. In addition, our policies permit the use of off-balance sheet derivatives, such as interest rate swaps, to assist with managing interest rate risk.
We utilize a simulation model to perform sensitivity analysis on the economic value of equity and net interest income under a variety of interest rate scenarios, balance sheet forecasts and business strategies. The simulation model provides a dynamic assessment of interest rate sensitivity embedded within our balance sheet which measures the potential variability in economic value and net interest income relating solely to changes in market interest rates over time. We review our interest rate risk position and sensitivity to market interest rates regularly.    
Model Simulation and Sensitivity Analysis
A specific application of our simulation model involves measurement of the impact of changes in market interest rates on the economic value of equity (“EVE”). EVE is defined as the market value of assets, less the market value of liabilities. Another application of the simulation model measures the impact of changes in market interest rates on net interest income (“NII”) assuming a static balance sheet size and composition as of the period-end reporting date. In the NII simulation, the level of market interest rates as well as the size and composition of the balance sheet are held constant over the simulation horizon. Simulated cash flows during the scenario horizon are assumed to be replaced as they occur, which maintains the balance sheet at its current size and composition. Yield and spread assumptions on cash and investment balances reflect current market rates and the shape of the yield curve. Yield and spread assumptions on loans reflect recent market impacts on product pricing. Similarly, we make certain deposit decay rate assumptions on demand deposits and interest-bearing deposits, which are replenished to hold the level and mix of funding liabilities constant. Changes in market interest rates that affect net interest income are principally short-term interest rates and include the following benchmark indexes: (i) the National Prime Rate, (ii) 1-month and 3-month LIBOR, and (iii) the Federal Funds target rate. Changes in these short-term rates impact interest earned on our variable rate loans and balances held as cash and cash equivalents. Additionally, simulated changes in deposit pricing relative to changes in market rates, commonly referred to as deposit beta, generally follow overall changes in short-term interest rates, although actual changes may lag in terms of timing and magnitude.
The NII simulation results presented here include an "asymmetric" beta assumption that is applied in the NII and EVE simulation models for interest-bearing deposits. This reflects management expectations that deposit repricing behavior in a falling rate environment would be different than repricing behavior in a rising rate environment. This model assumes the overall beta for interest-bearing deposits in a falling rate environment would be approximately 60 percent. That is, overall changes in interest-bearing deposit rates would be approximately 60 percent of the change in short-term market rates. These repricing assumptions are reflected as changes in interest expense on interest-bearing deposit balances.


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The following table presents our EVE and NII sensitivity exposure related to an instantaneous and sustained parallel shift in market interest rates of 100 and 200 basis points ("bps") at March 31, 2020 and December 31, 2019:
Change in interest rates (bps)
(Dollars in thousands)
 
Estimated
 
Estimated Increase/(Decrease) in EVE
 
Estimated
 
Estimated Increase/(Decrease) in NII
 
EVE
 
Amount
 
Percent
 
NII
 
Amount
 
Percent
March 31, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
+200
 
$
10,519,005

 
$
138,025

 
1.3
 %
 
$
2,443,279

 
$
559,545

 
29.7
 %
+100
 
10,600,353

 
219,373

 
2.1

 
2,160,226

 
276,492

 
14.7

 
10,380,980

 

 

 
1,883,734

 

 

-100
 
10,333,795

 
(47,185
)
 
(0.5
)
 
1,790,704

 
(93,030
)
 
(4.9
)
-200
 
10,417,466

 
36,486

 
0.4

 
1,774,703

 
(109,031
)
 
(5.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
+200
 
$
9,930,270

 
$
(253,659
)
 
(2.5
)%
 
$
2,528,158

 
$
421,358

 
20.0
 %
+100
 
10,056,711

 
(127,218
)
 
(1.2
)
 
2,314,686

 
207,886

 
9.9

 
10,183,929

 

 

 
2,106,800

 

 

-100
 
10,138,558

 
(45,371
)
 
(0.4
)
 
1,927,801

 
(178,999
)
 
(8.5
)
-200
 
10,000,585

 
(183,344
)
 
(1.8
)
 
1,760,283

 
(346,517
)
 
(16.4
)
Economic Value of Equity
The estimated EVE in the preceding table is based on a combination of valuation methodologies including a discounted cash flow analysis and a multi-path lattice-based valuation. Both methodologies use publicly available market interest rates to determine discounting factors on projected cash flows. The model simulations and calculations are highly assumption-dependent and will change regularly as the composition of earning assets and funding liabilities change (including the impact of changes in the value of interest rate derivatives, if any), as interest rate environments evolve, and as we change our assumptions in response to relevant market conditions, competition or business circumstances. These calculations do not reflect forecast changes in our balance sheet or changes we may make to reduce our EVE exposure as a part of our overall interest rate risk management strategy.
As with any method of measuring interest rate risk, certain limitations are inherent in the method of analysis presented in the preceding table. We are exposed to yield curve risk, prepayment risk, basis risk and yield spread compression, which cannot be fully modeled and expressed using the above methodology. Accordingly, the results in the preceding table should not be relied upon as a precise indicator of actual results in the event of changing market interest rates. Additionally, the resulting EVE and NII estimates are not intended to represent and should not be construed to represent our estimate of the underlying EVE or forecast of NII.
Our base EVE as of March 31, 2020 increased $197 million from December 31, 2019, driven by overall balance sheet growth. For the period ended March 31, 2020, compared to December 31, 2019, cash and loan balances increased by $2.8 billion each, offset by a decrease of $1.6 billion in fixed income investments in our AFS and HTM portfolios. Deposits remained relatively flat with a shift in the mix of deposits resulting in a $2.1 billion increase in noninterest-bearing balances and a $1.9 billion decrease in interest bearing balances. Short-term borrowings increased by $3.1 billion.
Decreases in interest rates at the beginning of March partially offset the increase in base EVE from balance sheet growth. The market value of noninterest-bearing deposits is more sensitive to changes in rates. Growth in noninterest-bearing balances coupled with lower overall rates result in a higher EVE sensitivity in the +100 and +200 rate shock scenarios. As of March 31, 2020, noninterest-bearing deposits represented 70 percent of total deposit balances, up four percent as compared to December 31, 2019. Purchases in fixed income investments during Q1 2020 were not material and did not have an impact on EVE sensitivity in the +100 and +200 rate shock scenarios. Due to the sudden decrease in market rates that occurred in March 2020, EVE sensitivity measures in the -100 and -200 bps rate shock scenarios do not represent the full magnitude of those rate shocks because we assume that U.S. Federal Fund rates are floored at zero. Rates at the short end of the rate curve were over 100 bps, accordingly in the -100 bps rate shock, market values behave as we would expect them to; EVE decreases reflective of the change in market value of deposits as they are greater than the change in the market value of our assets. However, in the -200 bps scenario, all rates floor out to zero and there is not much room for interest-bearing deposit rates to move, so their sensitivity actually decreases while the change in the market value of assets remains the same as in the -100 bps scenario as the rates for those are already floored. As a result, we do not get a full -200 bps rate shock as the sensitivity metrics on deposits are asymmetrical. Therefore, the sensitivity measures in these scenarios essentially reflect results similar to what would be seen in a -25 to -50 bps rate shock range.

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The overall change in mix in the composition of our balance sheet as discussed, results in an EVE profile that experiences positive changes as rates rise, and represents a typical profile for a balance sheet that includes a rate-sensitive loan portfolio funded by a much larger noninterest-bearing deposit base.
12-Month Net Interest Income Simulation
NII sensitivity is measured as the percentage change in projected 12-month net interest income earned in +/-100 and +/-200 basis point interest rate shock scenarios compared to a base scenario where balances and interest rates are held constant over the forecast horizon. At March 31,2020, NII sensitivity was 14.7 percent in the +100 bps interest rate scenario, compared to 9.9 percent at December 31, 2019. Our NII sensitivity in the +200 bps interest rate shock scenario was 29.7 percent compared to 20.0 percent at December 31, 2019. NII sensitivity in the -100 bps scenario of negative 4.9 percent was lower at March 31, 2020, compared to a negative 8.5 percent at December 31, 2019. The -200 bps scenario currently indicates a lower percentage change in NII of negative 5.8 percent at March 31, 2020, compared to negative 16.4 percent at December 31, 2019. However, as noted above, the -100 and -200 bps scenarios are not complete rate shocks in this rate environment, since rates are assumed to be floored at zero. Therefore, the sensitivity measures in these scenarios essentially reflect results similar to what would be seen in a -25 to -50 bps rate shock range. The March 31, 2020 NII sensitivity percentages are inclusive of the realized income or expense associated with interest rate swaps that were partially unwound reflective of the macro hedging process initiated in 2019 to reduce the impact of decreasing rates on NII. The changes in NII sensitivity are primarily the result of the changes in balance sheet composition described previously, combined with the impact of hedges in the respective parallel rate shock scenarios.
Our base case static 12-month NII forecast at March 31, 2020 decreased compared to December 31, 2019 by $223 million, primarily driven by the growth in the balance sheet that has taken place year-to-date combined with an overall relatively lower rate environment, reflective of the decrease in the Fed Funds rate during March 2020, compared to last year. Specifically, a large portion of the loan portfolio is indexed to the Prime rate, which decreased 150 bps due to actions undertaken by the Federal Reserve in March to mitigate a possible economic downturn. The adverse impact of changes in interest rates on NII was tempered to a certain degree by continued growth in the loan portfolio, along with decreases in interest bearing deposit balances and growth in noninterest-bearing deposit balances.
A majority of our loans are indexed to Prime and LIBOR. In the positive parallel simulated rate shock scenarios, interest income on assets that are tied to variable rate indexes, primarily our variable rate loans, are expected to benefit our base 12-month NII projections. The opposite is true for negative rate shock scenarios.
The 12-month NII simulations include repricing assumptions on our interest-bearing deposit products which we set at our discretion based on client needs and our overall funding mix. Repricing of interest-bearing deposits impacts estimated interest expense. As noted previously, repricing deposit rates are generally assumed to be approximately 60 percent of the amount of simulated changes in short-term market interest rates.
The simulation model used in the above analysis incorporates embedded floors on loans, where present, in our interest rate scenarios, which prevent model benchmark rates from moving below zero percent in the down rate scenarios. The embedded floors are also a factor in the up-rate scenarios to the extent a simulated increase in rates is needed before floored rates are cleared. In addition, we assume different deposit balance decay rates based on a historical deposit study of our clients. These assumptions may change in future periods based on changes in client behavior and at management's discretion. Actual changes in our deposit pricing strategies may differ from our current model assumptions and may have an impact on our actual sensitivity overall.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, among other things, processes, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of our most recently completed fiscal quarter, pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

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Changes in Internal Control
Except as set forth below, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Beginning January 1, 2020, we adopted and implemented ASC 326, CECL and have implemented changes to our processes, systems and control activities related to the modeling and recognition of our allowance for credit loss estimates.  The key changes to our processes and control activities included data management, economic forecasting, modeling, qualitative framework, governance and gathering of information provided for disclosures.


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PART II–OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please refer to Note 18 — “Legal Matters” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report.
ITEM 1A. RISK FACTORS
With the exception of the additional risk factor due to ongoing outbreak of COVID-19 below, there are no material changes to the risk factors set forth in our 2019 Annual Report on Form 10-K.
Our business, financial condition, liquidity, capital and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has created significant economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity, capital and results of operations. We cannot predict at this time the extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity, capital and results of operations. The extent of any continued or future adverse effects of the COVID-19 pandemic will depend on future developments, which are highly uncertain and outside our control, including the scope and duration of the pandemic, the direct and indirect impact of the pandemic on our employees, clients, customers, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.
The COVID-19 pandemic has contributed to, among other things (i) increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures; (ii) sudden and significant declines, and significant increases in volatility, in financial markets; (iii) ratings downgrades, credit deterioration and defaults in many industries; (iv) significant draws on credit lines as clients seek to increase liquidity; (v) significant reductions in the targeted federal funds rate (which was reduced to a target rate of between zero and 0.25% in the first quarter and may be reduced to below zero if the Federal Reserve determines economic conditions warrant); and (vi) heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements and the current environment, including increased fraudulent activity. In addition, we also face an increased risk of client disputes, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions. Moreover, we have focused resources and management attention towards managing the impacts from COVID-19 pandemic, which will likely result in a slowdown of our growth initiatives and other investments in the near term.
We are prioritizing the safety of our employees. We have currently moved to a work-from-home plan, prohibited all business travel and postponed or move online all SVB-hosted events, and enabled remote access to our systems. If our work-from-home plan is not effective or if there are negative effects from a prolonged work-from-home arrangement, it may lead to reduced productivity and significant disruptions in our business operations. We are also developing a plan for employees to eventually return to work in our offices, the manner and timing of which are unclear. Our return to work plan will be subject to a variety of complex considerations including, among others, international, federal, state and local government and health organization guidance, health and safety implications (including potential health testing requirements), employee needs, and the practical requirements of potential office reconfigurations or a phased return. It is also possible that our current extended work-from-home model may affect or change our prior—work-in-the-office model, as we may allow an increase in remote working practices.
Many of our counterparties and third-party service providers have also been, and may further be, affected by “stay-at-home” orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with us or provide essential services. As a result, our operational and other risks are generally expected to increase until the pandemic subsides.
We are offering special financial assistance to support certain clients who are experiencing financial hardships related to the COVID-19 pandemic, including offering certain venture-backed companies, Private Bank, Wine and other clients the opportunity to temporarily defer their scheduled loan principal payments. We continue to engage with our clients to understand client needs, and we may implement additional assistance or other relief to supporting clients across various sectors and life stages. Additionally, we are participating as a lender under the Paycheck Protection Program under CARES Act and may participate in other government relief programs in the U.S. or internationally. These government programs are complex and our participation in any of these programs may lead to governmental, regulatory and other scrutiny, litigation and negative publicity and reputation damage for us and our customers who participate. Overall, these relief measures, whether our own programs or our participation

112


in government programs, are new programs for us (with new or revised regulatory guidance for the government programs that may be issued at different times throughout the process) and we may not be successful in implementing or administering the programs as intended. Further, the extent to which these programs are successful in assisting our clients is uncertain. If these relief measures are not effective, there may be an adverse effect on our revenue and results of operations, including increased provisions in our allowance for credit losses, higher rates of default and increased credit losses in future periods.
Certain industries where the Company has credit exposure, including the technology, life science/healthcare and premium wine industries, have experienced, and are expected to continue to experience, significant operational and financial challenges as a result of COVID-19. As examples, many of our early-stage clients have limited cash on hand with limited or no financing sources available and may experience difficulties sustaining their businesses; and, our premium wine industry clients may be impacted by the loss of restaurant and winery sales. These negative effects have resulted in a number of clients making higher than usual draws on outstanding lines of credit, which may negatively affect our liquidity if current economic conditions persist. The effects of COVID-19 may also cause our clients to be unable to pay their loans as they come due or decrease the value of collateral, such as accounts receivable, which we expect would cause significant increases in our credit losses. For certain early-stage and mid-stage clients, repayment of loans is dependent upon receipt of additional financing from venture capitalists or others, or in some cases, upon a successful sale to a third party, public offering or other form of liquidity or “exit” event. Further, many of our private equity/venture capital loans are dependent on the payment of capital calls or management fees by underlying limited partner investors in funds managed by private equity and venture capital firm clients. The effects of the COVID-19 pandemic has caused client valuations to drop, reduced the rate of financing or other “exit” events and impaired the ability of investors to meet their financial obligations to our clients, all of which has had and may continue to have an adverse effect on our clients’ ability to repay their loans to us.

In connection with negotiated credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology, life science and healthcare industries subject to applicable regulatory limits. We have also made investments through SVB Financial, SVB Leerink and our SVB Capital family of funds in venture capital funds and direct investments in companies, many of which are required to be carried at fair value or are impacted by changes in fair value. Due to the negative effects of the COVID-19 pandemic as well as recent declines, and significant increases in volatility, in financial markets, the value of these assets have decreased, and may continue to decrease (potentially in a significant manner). Additionally, because valuations of private companies are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value for private companies may differ materially from the values that would have been used if a ready market for these securities existed.

The effects of the COVID-19 pandemic has led to a significant slowdown in IPO and M&A activity, resulting in fewer transactions overall and therefore decreased revenues of SVB Leerink, our investment banking business, as such revenues stem primarily from underwriting and advisory fees associated with capital markets and M&A transactions. The IPO and M&A slowdown also impacts our ability to monetize and realize gains from our equity warrant assets and other nonmarketable securities. Additionally, a slowdown in overall private equity and venture capital investment levels may reduce the need for our clients to borrow from our capital call lines of credit, which are typically utilized by our private equity and venture capital fund clients to make investments prior to receipt of capital called from their respective limited partners.

Our earnings and cash flows are dependent to a large degree on net interest income (the difference between interest income from loans and investments and interest expense on deposits and borrowings). Net interest income is significantly affected by market rates of interest. The significant reductions to the federal funds rate have led to a decrease in the rates and yields on U.S. Treasury securities, in some cases declining below zero. If interest rates are reduced further in response to COVID-19, we expect that our net interest income will decline, perhaps significantly. The overall effect of lower interest rates cannot be predicted at this time and depends on future actions the Federal Reserve may take to increase or reduce the targeted federal funds rate in response to the COVID-19 pandemic, and resulting economic conditions. Our net interest income is also impacted by our loan volume. If our loan levels were to decline, our net interest income would also be negatively impacted.

Our core fee income may be negatively affected by decreasing business activity due to the COVID-19 pandemic. For example, credit card activity and fees have declined, and may continue to decline in the future. Foreign exchange fees and letters of credit and standby letters of credit fees may also decline if the negative effect on business activity persists for a prolonged period of time. Additionally, our deposit levels may fluctuate during the current environment. It is difficult to predict client liquidity in a challenging economic environment, as clients may increase their draws on their lines of credit to bolster their cash positions, or clients may not be able to obtain additional financing which may lead to the depletion of their cash positions. Declines in client deposit levels may negatively affect our liquidity, as well as our net interest income.

The effects of the COVID-19 pandemic on economic and market conditions have increased demands on our liquidity as we meet our clients’ needs. In addition, these adverse developments may negatively affect our capital and leverage ratios. We have

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temporarily suspended our stock repurchases and will reevaluate the program once the economic environment is more stable. We will continue to exercise prudent capital management and monitor the business environment.
Governmental authorities worldwide have taken unprecedented measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the negative effects of COVID-19 or avert severe and prolonged reductions in economic activity.
Other negative effects of COVID-19 that may impact our business, financial condition, liquidity, capital and results of operations cannot be predicted at this time, but it is likely that our business, financial condition, liquidity, capital and results of operations will continue to be adversely affected until the pandemic subsides and the U.S. economy begins to recover. Further, the COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q. Until the pandemic subsides, we expect continued draws on lines of credit, reduced revenues from our lending businesses, increased credit losses in our lending portfolios and reduced activity in our noninterest income-producing lines of business. Even after the pandemic subsides, it is possible that the U.S. and other major economies continue to experience a prolonged recession, which we expect would materially and adversely affect our business, financial condition, liquidity, capital and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
Stock repurchase activity during the three months ended March 31, 2020 was as follows:
Period ended
 
Total number of shares purchased
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced programs
 
Maximum dollar value that may yet be purchased under the programs (1)
January 31, 2020
 
62,655

 
$
245.94

 
62,655

 
$
334,590,536

February 29, 2020
 
181,568

 
245.70

 
181,568

 
289,979,534

March 31, 2020
 

 

 

 

Total
 
244,223

 
$
245.76

 
244,223

 
$
289,979,534

 
(1)
On October 24, 2019, the Company announced that its Board of Directors had authorized a $350 million common stock repurchase program pursuant to which the Company may, from time to time and on or before the program’s expiration date, repurchase shares of its outstanding common stock in the open market, in privately-negotiated transactions, or otherwise, subject to applicable laws and regulations. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the program’s expiration, without any prior notice. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The new stock repurchase program expires on October 29, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.

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ITEM 6. EXHIBITS
Exhibit
Number    
 
Exhibit Description
 
Incorporated by Reference
 
 Filed
 Herewith  
Form
 
File No.
 
Exhibit  
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
X
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
X
104
 
Cover Page Interactive Data File (embedded within the Inline XBRL document)
 
 
 
 
 
 
 
 
 
X





115


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: May 11, 2020
  
/s/ DANIEL BECK
 
  
Daniel Beck
 
  
Chief Financial Officer
 
  
(Principal Financial Officer)
 
 
 
  
SVB Financial Group
 
 
Date: May 11, 2020
  
/s/ KAREN HON
 
  
Karen Hon
 
  
Chief Accounting Officer
 
  
(Principal Accounting Officer)

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EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Greg Becker, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of SVB Financial Group;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 11, 2020
 
/s/ GREG BECKER
 
 
Greg Becker
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)





EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Daniel Beck, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of SVB Financial Group;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 11, 2020
 
/s/ DANIEL BECK
 
 
Daniel Beck
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)





EXHIBIT 32.1
SECTION 1350 CERTIFICATIONS
I, Greg Becker, certify, pursuant to 18 U.S.C. Section 1350, that, to my knowledge, the quarterly report of SVB Financial Group on Form 10-Q for the quarterly period ended March 31, 2020, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of SVB Financial Group.
Date: May 11, 2020
 
/s/ GREG BECKER
 
 
Greg Becker
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
I, Daniel Beck, certify, pursuant to 18 U.S.C. Section 1350, that, to my knowledge, the quarterly report of SVB Financial Group on Form 10-Q for the quarterly period ended March 31, 2020, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of SVB Financial Group.
Date: May 11, 2020
 
/s/ DANIEL BECK
 
 
Daniel Beck
 
 
Chief Financial Officer
 
 
(Principal Financial Officer)