ans and Allowance for Loan Losses

We serve a variety of commercial clients in the technology, life science, venture capital/private equity and premium wine industries. Our technology clients generally tend to be in the industries of hardware (semiconductors, communications and electronics), software and related services, and energy and resource innovation ("ERI"). Because of the diverse nature of ERI products and services, for our loan-related reporting purposes, ERI-related loans are reported under our hardware, software, life science and other commercial loan categories, as applicable. Our life science clients are concentrated in the medical devices and biotechnology sectors. Loans made to venture capital/private equity firm clients typically enable them to fund investments prior to their receipt of funds from capital calls. Loans to the premium wine industry focus on vineyards and wineries that produce grapes and wines of high quality.

In addition to commercial loans, we make consumer loans through SVB Private Bank and provide real estate secured loans to eligible employees through our EHOP. Our private banking clients are primarily venture capital/private equity professionals and executive leaders in the innovation companies they support. These products and services include real estate secured home equity lines of credit, which may be used to finance real estate investments and loans used to purchase, renovate or refinance personal residences. These products and services also include restricted stock purchase loans and capital call lines of credit.

We also provide community development loans made as part of our responsibilities under the Community Reinvestment Act. These loans are included within “Construction loans” below and are primarily secured by real estate.

The composition of loans, net of unearned income of $89 million at both June 30, 2014 and December 31, 2013, respectively, is presented in the following table:



(Dollars in thousands)	June 30, 2014		December 31, 2013
Commercial loans:
Software	$	4,212,190	$	4,102,636
Hardware	1,144,144		1,213,032
Venture capital/private equity	2,646,397		2,386,054
Life science	1,166,231		1,170,220
Premium wine	174,837		149,841
Other	244,914		288,904
Total commercial loans	9,588,713		9,310,687
Real estate secured loans:
Premium wine (1)	546,876		514,993
Consumer loans (2)	984,583		873,255
Other	30,355		30,743
Total real estate secured loans	1,561,814		1,418,991
Construction loans	76,221		76,997
Consumer loans	121,963		99,711
Total loans, net of unearned income (3)	$	11,348,711	$	10,906,386


(1)	Included in our premium wine portfolio are gross construction loans of $107 million and $112 million at June 30, 2014 and December 31, 2013, respectively.


(2)	Consumer loans secured by real estate at June 30, 2014 and December 31, 2013 were comprised of the following:



(Dollars in thousands)	June 30, 2014		December 31, 2013
Loans for personal residence	$	785,914	$	685,327
Loans to eligible employees	129,116		121,548
Home equity lines of credit	69,553		66,380
Consumer loans secured by real estate	$	984,583	$	873,255


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

Credit Quality

The composition of loans, net of unearned income of $89 million at both June 30, 2014 and December 31, 2013, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	June 30, 2014		December 31, 2013
Commercial loans:
Software	$	4,212,190	$	4,102,636
Hardware	1,144,144		1,213,032
Venture capital/private equity	2,646,397		2,386,054
Life science	1,166,231		1,170,220
Premium wine	721,713		664,834
Other	351,490		396,644
Total commercial loans	10,242,165		9,933,420
Consumer loans:
Real estate secured loans	984,583		873,255
Other consumer loans	121,963		99,711
Total consumer loans	1,106,546		972,966
Total loans, net of unearned income	$	11,348,711	$	10,906,386

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



(Dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Loans Past Due 90 Days or More Still Accruing Interest
June 30, 2014:
Commercial loans:
Software	$	9,102	$	610	$	56	$	9,768	$	4,226,640	$	56
Hardware	9,047		4		37		9,088		1,140,049		37
Venture capital/private equity	19,588		1		—		19,589		2,651,011		—
Life science	1,892		786		—		2,678		1,174,250		—
Premium wine	—		—		—		—		722,742		—
Other	211		27		—		238		353,444		—
Total commercial loans	39,840		1,428		93		41,361		10,268,136		93
Consumer loans:
Real estate secured loans	167		—		—		167		983,810		—
Other consumer loans	21		1		—		22		121,458		—
Total consumer loans	188		1		—		189		1,105,268		—
Total gross loans excluding impaired loans	40,028		1,429		93		41,550		11,373,404		93
Impaired loans	36		3,722		1,394		5,152		17,194		—
Total gross loans	$	40,064	$	5,151	$	1,487	$	46,702	$	11,390,598	$	93
December 31, 2013:
Commercial loans:
Software	$	9,804	$	1,291	$	99	$	11,194	$	4,102,546	$	99
Hardware	2,679		3,965		—		6,644		1,198,169		—
Venture capital/private equity	4		—		—		4		2,408,382		—
Life science	395		131		—		526		1,179,462		—
Premium wine	—		—		—		—		665,755		—
Other	1,580		142		—		1,722		397,416		—
Total commercial loans	14,462		5,529		99		20,090		9,951,730		99
Consumer loans:
Real estate secured loans	240		—		—		240		872,586		—
Other consumer loans	8		—		—		8		98,965		—
Total consumer loans	248		—		—		248		971,551		—
Total gross loans excluding impaired loans	14,710		5,529		99		20,338		10,923,281		99
Impaired loans	4,657		7,043		4,339		16,039		35,610		—
Total gross loans	$	19,367	$	12,572	$	4,438	$	36,377	$	10,958,891	$	99

The following table summarizes our impaired loans as they relate to our allowance for loan losses, broken out by portfolio segment and class of financing receivable as of June 30, 2014 and December 31, 2013:



(Dollars in thousands)	Impaired loans for which there is a related allowance for loan losses		Impaired loans for which there is no related allowance for loan losses		Total carrying value of impaired loans		Total unpaid principal of impaired loans
June 30, 2014:
Commercial loans:
Software	$	13,619	$	797	$	14,416	$	15,747
Hardware	5,502		—		5,502		5,793
Venture capital/private equity	—		—		—		—
Life science	—		—		—		—
Premium wine	—		1,373		1,373		1,761
Other	499		—		499		551
Total commercial loans	19,620		2,170		21,790		23,852
Consumer loans:
Real estate secured loans	—		220		220		1,424
Other consumer loans	336		—		336		628
Total consumer loans	336		220		556		2,052
Total	$	19,956	$	2,390	$	22,346	$	25,904
December 31, 2013:
Commercial loans:
Software	$	27,308	$	310	$	27,618	$	28,316
Hardware	19,329		338		19,667		35,317
Venture capital/private equity	40		—		40		40
Life science	—		1,278		1,278		4,727
Premium wine	—		1,442		1,442		1,778
Other	690		—		690		718
Total commercial loans	47,367		3,368		50,735		70,896
Consumer loans:
Real estate secured loans	—		244		244		1,434
Other consumer loans	670		—		670		941
Total consumer loans	670		244		914		2,375
Total	$	48,037	$	3,612	$	51,649	$	73,271

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable for the three and six months ended June 30, 2014 and 2013:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Average impaired loans:
Commercial loans:
Software	$	15,742	$	5,473	$	15,210	$	4,794
Hardware	6,860		24,519		11,440		24,076
Venture capital/private equity	—		30		—		15
Life science	552		596		787		455
Premium wine	1,398		1,536		1,415		2,936
Other	1,699		4,165		1,738		4,692
Total commercial loans	26,251		36,319		30,590		36,968
Consumer loans:
Real estate secured loans	224		4,071		231		3,374
Other consumer loans	374		1,069		431		1,099
Total consumer loans	598		5,140		662		4,473
Total average impaired loans	$	26,849	$	41,459	$	31,252	$	41,441

The following tables summarize the activity relating to our allowance for loan losses for the three and six months ended June 30, 2014 and 2013, broken out by portfolio segment:



Three months ended June 30, 2014 (dollars in thousands)	Beginning Balance March 31, 2014		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance June 30, 2014
Commercial loans:
Software	$	55,241	$	(4,015	)	$	119	$	1,894		$	53,239
Hardware	25,236		(412		)	1,182		(1,226		)	24,780
Venture capital/private equity	17,676		—			—		1,328			19,004
Life science	11,474		(249		)	190		(818		)	10,597
Premium wine	3,737		—			19		(210		)	3,546
Other	4,041		(1,706		)	10		873			3,218
Total commercial loans	117,405		(6,382		)	1,520		1,841			114,384
Consumer loans	6,137		—			101		106			6,344
Total allowance for loan losses	$	123,542	$	(6,382	)	$	1,621	$	1,947		$	120,728



Six months ended June 30, 2014 (dollars in thousands)	Beginning Balance December 31, 2013		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance June 30, 2014
Commercial loans:
Software	$	64,084	$	(12,025	)	$	233	$	947		$	53,239
Hardware	36,553		(12,587		)	1,957		(1,143		)	24,780
Venture capital/private equity	16,385		—			—		2,619			19,004
Life science	11,926		(930		)	288		(687		)	10,597
Premium wine	3,914		—			238		(606		)	3,546
Other	3,680		(1,990		)	10		1,518			3,218
Total commercial loans	136,542		(27,532		)	2,726		2,648			114,384
Consumer loans	6,344		—			207		(207		)	6,344
Total allowance for loan losses	$	142,886	$	(27,532	)	$	2,933	$	2,441		$	120,728



Three months ended June 30, 2013 (dollars in thousands)	Beginning Balance March 31, 2013		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance June 30, 2013
Commercial loans:
Software	$	45,010	$	(3,574	)	$	397	$	4,965		$	46,798
Hardware	27,869		(4,434		)	403		9,350			33,188
Venture capital/private equity	10,482		—			—		3,111			13,593
Life science	13,946		(491		)	886		(2,600		)	11,741
Premium wine	3,699		—			41		53			3,793
Other	3,975		(6,007		)	2,375		3,311			3,654
Total commercial loans	104,981		(14,506		)	4,102		18,190			112,767
Consumer loans	7,224		(869		)	67		382			6,804
Total allowance for loan losses	$	112,205	$	(15,375	)	$	4,169	$	18,572		$	119,571



Six months ended June 30, 2013 (dollars in thousands)	Beginning Balance December 31, 2012		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance June 30, 2013
Commercial loans:
Software	$	42,648	$	(5,092	)	$	639	$	8,603		$	46,798
Hardware	29,761		(6,431		)	849		9,009			33,188
Venture capital/private equity	9,963		—			—		3,630			13,593
Life science	13,606		(2,561		)	1,089		(393		)	11,741
Premium wine	3,523		—			131		139			3,793
Other	3,912		(6,048		)	2,381		3,409			3,654
Total commercial loans	103,413		(20,132		)	5,089		24,397			112,767
Consumer loans	7,238		(869		)	447		(12		)	6,804
Total allowance for loan losses	$	110,651	$	(21,001	)	$	5,536	$	24,385		$	119,571

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



	June 30, 2014								December 31, 2013
	Individually Evaluated for Impairment				Collectively Evaluated for Impairment				Individually Evaluated for Impairment				Collectively Evaluated for Impairment
(Dollars in thousands)	Allowance for loan losses		Recorded investment in loans		Allowance for loan losses		Recorded investment in loans		Allowance for loan losses		Recorded investment in loans		Allowance for loan losses		Recorded investment in loans
Commercial loans:
Software	$	2,979	$	14,416	$	50,260	$	4,197,774	$	11,261	$	27,617	$	52,823	$	4,075,019
Hardware	1,443		5,502		23,337		1,138,642		9,673		19,667		26,880		1,193,365
Venture capital/private equity	—		—		19,004		2,646,397		19		39		16,366		2,386,015
Life science	—		—		10,597		1,166,231		—		1,278		11,926		1,168,942
Premium wine	—		1,373		3,546		720,340		—		1,442		3,914		663,392
Other	118		499		3,100		350,991		156		690		3,524		395,954
Total commercial loans	4,540		21,790		109,844		10,220,375		21,109		50,733		115,433		9,882,687
Consumer loans	141		556		6,203		1,105,990		168		915		6,176		972,051
Total	$	4,681	$	22,346	$	116,047	$	11,326,365	$	21,277	$	51,648	$	121,609	$	10,854,738

Credit Quality Indicators

For each individual client, we establish an internal credit risk rating for that loan, which is used for assessing and monitoring credit risk as well as performance of the loan and the overall portfolio. Our internal credit risk ratings are also used to summarize the risk of loss due to failure by an individual borrower to repay the loan. For our internal credit risk ratings, each individual loan is given a risk rating of 1 through 10. Loans risk-rated 1 through 4 are performing loans and translate to an internal rating of “Pass”, with loans risk-rated 1 being cash secured. Loans risk-rated 5 through 7 are performing loans, however, we consider them as demonstrating higher risk which requires more frequent review of the individual exposures; these translate to an internal rating of “Performing (Criticized)”. A majority of our Performing (Criticized) loans are from our SVB Accelerator practice, serving our emerging or early stage clients. Loans risk-rated 8 and 9 are loans that are considered to be impaired and are on nonaccrual status. Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), or when we have determined, based upon most recent available information, that the timely collection of principal or interest is not probable; these loans are deemed “impaired” (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2013 Form 10-K). Loans rated 10 are charged-off and are not included as part of our loan portfolio balance. We review our credit quality indicators for performance and appropriateness of risk ratings as part of our evaluation process for our allowance for loan losses.

The following table summarizes the credit quality indicators, broken out by portfolio segment and class of financing receivables as of June 30, 2014 and December 31, 2013:



(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
June 30, 2014:
Commercial loans:
Software	$	3,956,825	$	279,583	$	14,416	$	4,250,824
Hardware	972,454		176,683		5,502		1,154,639
Venture capital/private equity	2,668,213		2,387		—		2,670,600
Life science	1,066,046		110,882		—		1,176,928
Premium wine	713,329		9,413		1,373		724,115
Other	334,167		19,515		499		354,181
Total commercial loans	9,711,034		598,463		21,790		10,331,287
Consumer loans:
Real estate secured loans	980,226		3,751		220		984,197
Other consumer loans	118,659		2,821		336		121,816
Total consumer loans	1,098,885		6,572		556		1,106,013
Total gross loans	$	10,809,919	$	605,035	$	22,346	$	11,437,300
December 31, 2013:
Commercial loans:
Software	$	3,875,043	$	238,697	$	27,618	$	4,141,358
Hardware	995,055		209,758		19,667		1,224,480
Venture capital/private equity	2,408,386		—		40		2,408,426
Life science	1,091,993		87,995		1,278		1,181,266
Premium wine	652,747		13,008		1,442		667,197
Other	383,602		15,536		690		399,828
Total commercial loans	9,406,826		564,994		50,735		10,022,555
Consumer loans:
Real estate secured loans	868,789		4,037		244		873,070
Other consumer loans	95,586		3,387		670		99,643
Total consumer loans	964,375		7,424		914		972,713
Total gross loans	$	10,371,201	$	572,418	$	51,649	$	10,995,268

TDRs

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



(Dollars in thousands)	June 30, 2014		December 31, 2013
Loans modified in TDRs:
Commercial loans:
Software	$	13,053	$	5,860
Hardware	4,108		13,329
Venture capital/ private equity	—		77
Premium wine	2,014		1,442
Other	804		1,055
Total commercial loans	19,979		21,763
Consumer loans:
Other consumer loans	336		670
Total consumer loans	336		670
Total	$	20,315	$	22,433

The following table summarizes the recorded investment in loans modified in TDRs, broken out by portfolio segment and class of financing receivable, for modifications made during the three and six months ended June 30, 2014 and 2013:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
Loans modified in TDRs during the period:
Commercial loans:
Software	$	455	$	778	$	12,816	$	778
Hardware	—		5,629		—		5,629
Venture capital/ private equity	—		89		—		676
Premium wine	—		—		641		—
Total commercial loans	455		6,496		13,457		7,083
Consumer loans:
Other consumer loans	—		—		—		70
Total consumer loans	—		—		—		70
Total loans modified in TDR’s during the period (1)	$	455	$	6,496	$	13,457	$	7,153


(1)	There were no partial charge-offs on loans classified as TDRs for the three and six months ended June 30, 2014. There were partial charge-offs of $1.2 million for both the three and six months ended June 30, 2013.

During the three months ended June 30, 2014, new TDRs of $0.5 million were modified through payment deferrals granted to our clients. During the six months ended June 30, 2014, new TDRs of $10.8 million were modified through payment deferrals granted to our clients and $2.7 million were modified through partial forgiveness of principal.

During the three and six months ended June 30, 2013, new TDRs of $6.5 million and $7.2 million, respectively, were modified through payment deferrals granted to our clients and no principal or interest was forgiven.

The related allowance for loan losses for the majority of our TDRs is determined on an individual basis by comparing the carrying value of the loan to the present value of the estimated future cash flows, discounted at the pre-modification contractual interest rate. For certain TDRs, the related allowance for loan losses is determined based on the fair value of the collateral if the loan is collateral dependent.

The following table summarizes the recorded investment in loans modified in TDRs within the previous 12 months that subsequently defaulted during the three and six months ended June 30, 2014 and 2013, broken out by portfolio segment and class of financing receivable.



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2014		2013		2014		2013
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software	$	236	$	—	$	236	$	—
Hardware	—		4,154		—		4,154
Other	—		—		—		2,750
Total commercial loans	236		4,154		236		6,904
Consumer loans	—		70		—		70
Total TDRs modified within the previous 12 months that defaulted in the period	$	236	$	4,224	$	236	$	6,974

Charge-offs and defaults on previously restructured loans are evaluated to determine the impact to the allowance for loan losses, if any. The evaluation of these defaults may impact the assumptions used in calculating the reserve on other TDRs and impaired loans as well as management’s overall outlook of macroeconomic factors that affect the reserve on the loan portfolio as a whole. After evaluating the charge-offs and defaults experienced on our TDRs we determined that no change to our reserving methodology was necessary to determine the allowance for loan losses as of June 30, 2014.