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 $107 million and $104 million at March 31, 2015 and December 31, 2014, respectively, is presented in the following table:



(Dollars in thousands)	March 31, 2015		December 31, 2014
Commercial loans:
Software and internet	$	4,871,574	$	4,954,676
Hardware	1,067,386		1,131,006
Private equity/venture capital	4,508,670		4,582,906
Life science & healthcare	1,399,449		1,289,904
Premium wine	186,070		187,568
Other	289,010		234,551
Total commercial loans	12,322,159		12,380,611
Real estate secured loans:
Premium wine (1)	613,114		606,753
Consumer loans (2)	1,209,153		1,118,115
Other	39,422		39,651
Total real estate secured loans	1,861,689		1,764,519
Construction loans	85,684		78,626
Consumer loans	170,042		160,520
Total loans, net of unearned income (3)	$	14,439,574	$	14,384,276


(1)	Included in our premium wine portfolio are gross construction loans of $108 million and $112 million at March 31, 2015 and December 31, 2014, respectively.


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



(Dollars in thousands)	March 31, 2015		December 31, 2014
Loans for personal residence	$	1,001,125	$	918,629
Loans to eligible employees	139,761		133,568
Home equity lines of credit	68,267		65,918
Consumer loans secured by real estate	$	1,209,153	$	1,118,115


(3)	Included within our total loan portfolio are credit card loans of $154 million and $131 million at March 31, 2015 and December 31, 2014, respectively.

Credit Quality

The composition of loans, net of unearned income of $107 million and $104 million at March 31, 2015 and December 31, 2014, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	March 31, 2015		December 31, 2014
Commercial loans:
Software and internet	$	4,871,574	$	4,954,676
Hardware	1,067,386		1,131,006
Private equity/venture capital	4,508,670		4,582,906
Life science & healthcare	1,399,449		1,289,904
Premium wine	799,184		794,321
Other	414,116		352,828
Total commercial loans	13,060,379		13,105,641
Consumer loans:
Real estate secured loans	1,209,153		1,118,115
Other consumer loans	170,042		160,520
Total consumer loans	1,379,195		1,278,635
Total loans, net of unearned income	$	14,439,574	$	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 March 31, 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
March 31, 2015:
Commercial loans:
Software and internet	$	1,970	$	162	$	160	$	2,292	$	4,876,739	$	160
Hardware	298		9,219		—		9,517		1,066,598		—
Private equity/venture capital	11,462		—		—		11,462		4,536,175		—
Life science & healthcare	3,768		—		1,689		5,457		1,405,856		1,689
Premium wine	—		—		—		—		800,197		—
Other	1,074		—		—		1,074		410,752		—
Total commercial loans	18,572		9,381		1,849		29,802		13,096,317		1,849
Consumer loans:
Real estate secured loans	415		—		1,250		1,665		1,206,762		1,250
Other consumer loans	410		625		—		1,035		168,782		—
Total consumer loans	825		625		1,250		2,700		1,375,544		1,250
Total gross loans excluding impaired loans	19,397		10,006		3,099		32,502		14,471,861		3,099
Impaired loans	313		5,855		21,920		28,088		14,294		—
Total gross loans	$	19,710	$	15,861	$	25,019	$	60,590	$	14,486,155	$	3,099
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 March 31, 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
March 31, 2015:
Commercial loans:
Software and internet	$	34,716	$	—	$	34,716	$	35,027
Hardware	510		—		510		525
Private equity/venture capital	—		—		—		—
Life science & healthcare	250		—		250		2,453
Premium wine	—		1,270		1,270		1,734
Other	5,356		—		5,356		5,360
Total commercial loans	40,832		1,270		42,102		45,099
Consumer loans:
Real estate secured loans	30		180		210		1,438
Other consumer loans	70		—		70		254
Total consumer loans	100		180		280		1,692
Total	$	40,932	$	1,450	$	42,382	$	46,791
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 months ended March 31, 2015 and 2014:



	Three months ended March 31,
(Dollars in thousands)	2015		2014
Average impaired loans:
Commercial loans:
Software and internet	$	33,725	$	14,677
Hardware	1,643		16,020
Life science & healthcare	400		1,022
Premium wine	1,282		1,433
Other	2,139		1,777
Total commercial loans	39,189		34,929
Consumer loans:
Real estate secured loans	195		237
Other consumer loans	88		489
Total consumer loans	283		726
Total average impaired loans	$	39,472	$	35,655

The following tables summarize the activity relating to our allowance for loan losses for the three months ended March 31, 2015 and 2014, broken out by portfolio segment:



Three months ended March 31, 2015 (dollars in thousands)	Beginning Balance December 31, 2014		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance March 31, 2015
Commercial loans:
Software and internet	$	80,981	$	(1,403	)	$	447	$	2,067		$	82,092
Hardware	25,860		(3,210		)	928		(2,320		)	21,258
Private equity/venture capital	27,997		—			—		2,840			30,837
Life science & healthcare	15,208		(225		)	34		306			15,323
Premium wine	4,473		—			—		30			4,503
Other	3,253		(649		)	10		3,537			6,151
Total commercial loans	157,772		(5,487		)	1,419		6,460			160,164
Consumer loans	7,587		—			132		(8		)	7,711
Total allowance for loan losses	$	165,359	$	(5,487	)	$	1,551	$	6,452		$	167,875



Three months ended March 31, 2014 (dollars in thousands)	Beginning Balance December 31, 2013		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance March 31, 2014
Commercial loans:
Software and internet	$	64,084	$	(8,010	)	$	114	$	(947	)	$	55,241
Hardware	36,553		(12,175		)	775		83			25,236
Private equity/venture capital	16,385		—			—		1,291			17,676
Life science & healthcare	11,926		(681		)	98		131			11,474
Premium wine	3,914		—			219		(396		)	3,737
Other	3,680		(284		)	—		645			4,041
Total commercial loans	136,542		(21,150		)	1,206		807			117,405
Consumer loans	6,344		—			106		(313		)	6,137
Total allowance for loan losses	$	142,886	$	(21,150	)	$	1,312	$	494		$	123,542

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



	March 31, 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	$	20,942	$	34,716	$	61,150	$	4,836,858	$	13,695	$	33,287	$	67,286	$	4,921,389
Hardware	12		510		21,246		1,066,876		1,133		2,521		24,727		1,128,485
Private equity/venture capital	—		—		30,837		4,508,670		—		—		27,997		4,582,906
Life science & healthcare	63		250		15,260		1,399,199		121		475		15,087		1,289,429
Premium wine	—		1,270		4,503		797,914		—		1,304		4,473		793,017
Other	2,705		5,356		3,446		408,760		71		233		3,182		352,595
Total commercial loans	23,722		42,102		136,442		13,018,277		15,020		37,820		142,752		13,067,821
Consumer loans	100		280		7,611		1,378,915		31		317		7,556		1,278,318
Total	$	23,822	$	42,382	$	144,053	$	14,397,192	$	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)”. 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. (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 March 31, 2015 and December 31, 2014:



(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
March 31, 2015:
Commercial loans:
Software and internet	$	4,483,199	$	395,832	$	34,716	$	4,913,747
Hardware	874,295		201,820		510		1,076,625
Private equity/venture capital	4,543,600		4,037		—		4,547,637
Life science & healthcare	1,282,275		129,038		250		1,411,563
Premium wine	780,710		19,487		1,270		801,467
Other	404,481		7,345		5,356		417,182
Total commercial loans	12,368,560		757,559		42,102		13,168,221
Consumer loans:
Real estate secured loans	1,199,907		8,520		210		1,208,637
Other consumer loans	165,914		3,903		70		169,887
Total consumer loans	1,365,821		12,423		280		1,378,524
Total gross loans	$	13,734,381	$	769,982	$	42,382	$	14,546,745
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 March 31, 2015 we had nine TDRs with a total carrying value of $10.6 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 $3.1 million to the clients associated with these TDRs as of March 31, 2015. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at March 31, 2015 and December 31, 2014:



(Dollars in thousands)	March 31, 2015		December 31, 2014
Loans modified in TDRs:
Commercial loans:
Software and internet	$	2,707	$	3,784
Hardware	4,510		1,118
Premium wine	1,830		1,891
Other	191		233
Total commercial loans	9,238		7,026
Consumer loans:
Other consumer loans	1,350		125
Total consumer loans	1,350		125
Total	$	10,588	$	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 months ended March 31, 2015 and 2014:



	Three months ended March 31,
(Dollars in thousands)	2015		2014
Loans modified in TDRs during the period:
Commercial loans:
Software and internet	$	—	$	9,737
Hardware	4,000		—
Premium wine	—		650
Other	—		1,746
Total commercial loans	4,000		12,133
Consumer loans:
Real estate secured loans	1,280		—
Total consumer loans	1,280		—
Total loans modified in TDRs during the period (1)	$	5,280	$	12,133


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

During the three months ended March 31, 2015, new TDRs of $5.3 million were modified through payment deferrals granted to our clients.

During the three months ended March 31, 2014, new TDRs of $2.8 million and $9.3 million were modified through forgiveness of principal and payment deferrals granted to our clients, respectively.

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 months ended March 31, 2015. There were no TDRs modified, which defaulted during the three months ended March 31, 2014.



	Three months ended March 31,
(Dollars in thousands)	2015
TDRs modified within the previous 12 months that defaulted during the period:
Consumer loans:
Real estate secured loans	$	30
Total TDRs modified within the previous 12 months that defaulted in the period	$	30

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 March 31, 2015.