Loans and Allowance for Loan Losses

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

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

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

The composition of loans, net of unearned income of $110 million and $104 million at June 30, 2015 and December 31, 2014, respectively, is presented in the following table:



(Dollars in thousands)	June 30, 2015		December 31, 2014
Commercial loans:
Software and internet	$	4,980,553	$	4,954,676
Hardware	1,048,848		1,131,006
Private equity/venture capital	3,987,448		4,582,906
Life science & healthcare	1,475,568		1,289,904
Premium wine	190,997		187,568
Other	254,084		234,551
Total commercial loans	11,937,498		12,380,611
Real estate secured loans:
Premium wine (1)	632,410		606,753
Consumer loans (2)	1,340,316		1,118,115
Other	33,279		39,651
Total real estate secured loans	2,006,005		1,764,519
Construction loans	91,207		78,626
Consumer loans	226,720		160,520
Total loans, net of unearned income (3)	$	14,261,430	$	14,384,276


(1)	Included in our premium wine portfolio are gross construction loans of $109 million and $112 million at June 30, 2015 and December 31, 2014, respectively.


(2)	Consumer loans secured by real estate at June 30, 2015 and December 31, 2014 were comprised of the following:



(Dollars in thousands)	June 30, 2015		December 31, 2014
Loans for personal residence	$	1,124,238	$	918,629
Loans to eligible employees	146,591		133,568
Home equity lines of credit	69,487		65,918
Consumer loans secured by real estate	$	1,340,316	$	1,118,115


(3)	Included within our total loan portfolio are credit card loans of $169 million and $131 million at June 30, 2015 and December 31, 2014, respectively.

Credit Quality

The composition of loans, net of unearned income of $110 million and $104 million at June 30, 2015 and December 31, 2014, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	June 30, 2015		December 31, 2014
Commercial loans:
Software and internet	$	4,980,553	$	4,954,676
Hardware	1,048,848		1,131,006
Private equity/venture capital	3,987,448		4,582,906
Life science & healthcare	1,475,568		1,289,904
Premium wine	823,407		794,321
Other	378,570		352,828
Total commercial loans	12,694,394		13,105,641
Consumer loans:
Real estate secured loans	1,340,316		1,118,115
Other consumer loans	226,720		160,520
Total consumer loans	1,567,036		1,278,635
Total loans, net of unearned income	$	14,261,430	$	14,384,276

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of June 30, 2015 and December 31, 2014:



(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, 2015:
Commercial loans:
Software and internet	$	6,012	$	7,593	$	47	$	13,652	$	4,922,953	$	47
Hardware	764		3,317		—		4,081		1,051,998		—
Private equity/venture capital	18		—		—		18		4,023,814		—
Life science & healthcare	379		652		—		1,031		1,485,591		—
Premium wine	150		1,799		—		1,949		822,184		—
Other	—		38		—		38		376,320		—
Total commercial loans	7,323		13,399		47		20,769		12,682,860		47
Consumer loans:
Real estate secured loans	—		279		—		279		1,339,655		—
Other consumer loans	16		—		—		16		226,549		—
Total consumer loans	16		279		—		295		1,566,204		—
Total gross loans excluding impaired loans	7,339		13,678		47		21,064		14,249,064		47
Impaired loans	27,525		—		—		27,525		73,277		—
Total gross loans	$	34,864	$	13,678	$	47	$	48,589	$	14,322,341	$	47
December 31, 2014:
Commercial loans:
Software and internet	$	10,989	$	1,627	$	52	$	12,668	$	4,950,291	$	52
Hardware	13,424		126		—		13,550		1,124,423		—
Private equity/venture capital	40,773		—		—		40,773		4,580,526		—
Life science & healthcare	738		786		—		1,524		1,298,728		—
Premium wine	—		—		—		—		795,345		—
Other	178		3		—		181		354,939		—
Total commercial loans	66,102		2,542		52		68,696		13,104,252		52
Consumer loans:
Real estate secured loans	1,592		341		1,250		3,183		1,114,286		1,250
Other consumer loans	—		—		—		—		160,212		—
Total consumer loans	1,592		341		1,250		3,183		1,274,498		1,250
Total gross loans excluding impaired loans	67,694		2,883		1,302		71,879		14,378,750		1,302
Impaired loans	598		1,293		22,320		24,211		13,926		—
Total gross loans	$	68,292	$	4,176	$	23,622	$	96,090	$	14,392,676	$	1,302

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, 2015 and December 31, 2014:



(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, 2015:
Commercial loans:
Software and internet	$	89,471	$	—	$	89,471	$	89,877
Hardware	2,357		—		2,357		2,385
Private equity/venture capital	—		—		—		—
Life science & healthcare	2,433		—		2,433		2,433
Premium wine	—		1,236		1,236		1,725
Other	5,066		—		5,066		5,195
Total commercial loans	99,327		1,236		100,563		101,615
Consumer loans:
Real estate secured loans	—		172		172		1,404
Other consumer loans	67		—		67		254
Total consumer loans	67		172		239		1,658
Total	$	99,394	$	1,408	$	100,802	$	103,273
December 31, 2014:
Commercial loans:
Software and internet	$	33,287	$	—	$	33,287	$	34,218
Hardware	1,403		1,118		2,521		2,535
Private equity/venture capital	—		—		—		—
Life science & healthcare	475		—		475		2,453
Premium wine	—		1,304		1,304		1,743
Other	233		—		233		233
Total commercial loans	35,398		2,422		37,820		41,182
Consumer loans:
Real estate secured loans	—		192		192		1,412
Other consumer loans	125		—		125		305
Total consumer loans	125		192		317		1,717
Total	$	35,523	$	2,614	$	38,137	$	42,899

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, 2015 and 2014:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2015		2014		2015		2014
Average impaired loans:
Commercial loans:
Software and internet	$	52,747	$	15,742	$	43,236	$	15,210
Hardware	1,393		6,860		1,518		11,440
Life science & healthcare	1,993		552		1,197		787
Premium wine	1,239		1,398		1,261		1,415
Other	5,222		1,699		3,681		1,738
Total commercial loans	62,594		26,251		50,893		30,590
Consumer loans:
Real estate secured loans	183		224		189		231
Other consumer loans	76		374		82		431
Total consumer loans	259		598		271		662
Total average impaired loans	$	62,853	$	26,849	$	51,164	$	31,252

The following tables summarize the activity relating to our allowance for loan losses for the three and six months ended June 30, 2015 and 2014, broken out by portfolio segment:



Three months ended June 30, 2015 (dollars in thousands)	Beginning Balance March 31, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance June 30, 2015
Commercial loans:
Software and internet	$	82,092	$	(762	)	$	597	$	24,801		$	106,728
Hardware	21,258		(839		)	1,881		(1,828		)	20,472
Private equity/venture capital	30,837		—			—		(1,561		)	29,276
Life science & healthcare	15,323		(2,994		)	45		4,859			17,233
Premium wine	4,503		—			7		(101		)	4,409
Other	6,151		(139		)	460		(578		)	5,894
Total commercial loans	160,164		(4,734		)	2,990		25,592			184,012
Consumer loans	7,711		—			—		921			8,632
Total allowance for loan losses	$	167,875	$	(4,734	)	$	2,990	$	26,513		$	192,644



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 and internet	$	55,241	$	(4,015	)	$	119	$	1,894		$	53,239
Hardware	25,236		(412		)	1,182		(1,226		)	24,780
Private equity/venture capital	17,676		—			—		1,328			19,004
Life science & healthcare	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, 2015 (dollars in thousands)	Beginning Balance December 31, 2014		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance June 30, 2015
Commercial loans:
Software and internet	$	80,981	$	(2,165	)	$	1,044	$	26,868		$	106,728
Hardware	25,860		(4,049		)	2,809		(4,148		)	20,472
Private equity/venture capital	27,997		—			—		1,279			29,276
Life science & healthcare	15,208		(3,219		)	79		5,165			17,233
Premium wine	4,473		—			7		(71		)	4,409
Other	3,253		(788		)	470		2,959			5,894
Total commercial loans	157,772		(10,221		)	4,409		32,052			184,012
Consumer loans	7,587		—			132		913			8,632
Total allowance for loan losses	$	165,359	$	(10,221	)	$	4,541	$	32,965		$	192,644



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 and internet	$	64,084	$	(12,025	)	$	233	$	947		$	53,239
Hardware	36,553		(12,587		)	1,957		(1,143		)	24,780
Private equity/venture capital	16,385		—			—		2,619			19,004
Life science & healthcare	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

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2015 and December 31, 2014, broken out by portfolio segment:



	June 30, 2015								December 31, 2014
	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 and internet	$	46,169	$	89,471	$	60,559	$	4,891,082	$	13,695	$	33,287	$	67,286	$	4,921,389
Hardware	481		2,357		19,991		1,046,491		1,133		2,521		24,727		1,128,485
Private equity/venture capital	—		—		29,276		3,987,448		—		—		27,997		4,582,906
Life science & healthcare	1,616		2,433		15,617		1,473,135		121		475		15,087		1,289,429
Premium wine	—		1,236		4,409		822,171		—		1,304		4,473		793,017
Other	2,532		5,066		3,362		373,504		71		233		3,182		352,595
Total commercial loans	50,798		100,563		133,214		12,593,831		15,020		37,820		142,752		13,067,821
Consumer loans	67		239		8,565		1,566,797		31		317		7,556		1,278,318
Total	$	50,865	$	100,802	$	141,779	$	14,160,628	$	15,051	$	38,137	$	150,308	$	14,346,139

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)”. Loans risk-rated 8 and 9 are loans that are considered to be impaired and are on nonaccrual status. (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2014 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, 2015 and December 31, 2014:



(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
June 30, 2015:
Commercial loans:
Software and internet	$	4,459,368	$	477,237	$	89,471	$	5,026,076
Hardware	920,574		135,505		2,357		1,058,436
Private equity/venture capital	4,019,826		4,006		—		4,023,832
Life science & healthcare	1,375,174		111,448		2,433		1,489,055
Premium wine	806,346		17,787		1,236		825,369
Other	365,538		10,820		5,066		381,424
Total commercial loans	11,946,826		756,803		100,563		12,804,192
Consumer loans:
Real estate secured loans	1,329,834		10,100		172		1,340,106
Other consumer loans	222,397		4,168		67		226,632
Total consumer loans	1,552,231		14,268		239		1,566,738
Total gross loans	$	13,499,057	$	771,071	$	100,802	$	14,370,930
December 31, 2014:
Commercial loans:
Software and internet	$	4,611,253	$	351,706	$	33,287	$	4,996,246
Hardware	945,998		191,975		2,521		1,140,494
Private equity/venture capital	4,615,231		6,068		—		4,621,299
Life science & healthcare	1,165,266		134,986		475		1,300,727
Premium wine	774,962		20,383		1,304		796,649
Other	346,153		8,967		233		355,353
Total commercial loans	12,458,863		714,085		37,820		13,210,768
Consumer loans:
Real estate secured loans	1,112,396		5,073		192		1,117,661
Other consumer loans	158,162		2,050		125		160,337
Total consumer loans	1,270,558		7,123		317		1,277,998
Total gross loans	$	13,729,421	$	721,208	$	38,137	$	14,488,766

TDRs

As of June 30, 2015 we had seven TDRs with a total carrying value of $33.9 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were less than $0.1 million of unfunded commitments available for funding to the clients associated with these TDRs as of June 30, 2015. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at June 30, 2015 and December 31, 2014:



(Dollars in thousands)	June 30, 2015		December 31, 2014
Loans modified in TDRs:
Commercial loans:
Software and internet	$	30,214	$	3,784
Hardware	2,413		1,118
Premium wine	1,236		1,891
Other	—		233
Total commercial loans	33,863		7,026
Consumer loans:
Other consumer loans	33		125
Total consumer loans	33		125
Total	$	33,896	$	7,151

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, 2015 and 2014:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2015		2014		2015		2014
Loans modified in TDRs during the period:
Commercial loans:
Software and internet	$	27,525	$	455	$	27,525	$	12,816
Hardware	—		—		2,040		—
Premium wine	—		—		—		641
Total loans modified in TDRs during the period (1)	$	27,525	$	455	$	29,565	$	13,457


(1)	There were no partial charge-offs on loans classified as TDRs during the three and six months ended June 30, 2015 or June 31, 2014.

During the three and six months ended June 30, 2015, new TDRs of $27.5 million and $29.6 million were modified through payment deferrals granted to our clients.

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.

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, 2015 and 2014:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2015		2014		2015		2014
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software and internet	$	27,525	$	236	$	27,525	$	236
Total TDRs modified within the previous 12 months that defaulted in the period	$	27,525	$	236	$	27,525	$	236

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, 2015.