Loans and Allowance for Loan Losses

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 (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 and internet, life science/healthcare and other commercial loan categories, 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 $111 million and $115 million at March 31, 2016 and December 31, 2015, respectively, is presented in the following table:



(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial loans:
Software and internet	$	5,454,552	$	5,437,915
Hardware	1,056,933		1,071,528
Private equity/venture capital	6,299,608		5,467,577
Life science/healthcare	1,727,992		1,710,642
Premium wine	183,917		201,175
Other	357,600		312,278
Total commercial loans	15,080,602		14,201,115
Real estate secured loans:
Premium wine (1)	653,993		646,120
Consumer loans (2)	1,653,531		1,544,440
Other	44,603		44,830
Total real estate secured loans	2,352,127		2,235,390
Construction loans	74,003		78,682
Consumer loans	228,415		226,883
Total loans, net of unearned income (3)	$	17,735,147	$	16,742,070


(1)	Included in our premium wine portfolio are gross construction loans of $106 million and $121 million at March 31, 2016 and December 31, 2015, respectively.


(2)	Consumer loans secured by real estate at March 31, 2016 and December 31, 2015 were comprised of the following:



(Dollars in thousands)	March 31, 2016		December 31, 2015
Loans for personal residence	$	1,414,665	$	1,312,818
Loans to eligible employees	167,818		156,001
Home equity lines of credit	71,048		75,621
Consumer loans secured by real estate	$	1,653,531	$	1,544,440


(3)	Included within our total loan portfolio are credit card loans of $193 million and $177 million at March 31, 2016 and December 31, 2015, respectively.

Credit Quality

The composition of loans, net of unearned income of $111 million and $115 million at March 31, 2016 and December 31, 2015, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	March 31, 2016		December 31, 2015
Commercial loans:
Software and internet	$	5,454,552	$	5,437,915
Hardware	1,056,933		1,071,528
Private equity/venture capital	6,299,608		5,467,577
Life science/healthcare	1,727,992		1,710,642
Premium wine	837,910		847,295
Other	476,206		435,790
Total commercial loans	15,853,201		14,970,747
Consumer loans:
Real estate secured loans	1,653,531		1,544,440
Other consumer loans	228,415		226,883
Total consumer loans	1,881,946		1,771,323
Total loans, net of unearned income	$	17,735,147	$	16,742,070

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of March 31, 2016 and December 31, 2015:



(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, 2016:
Commercial loans:
Software and internet	$	13,989	$	2,578	$	2	$	16,569	$	5,368,871	$	2
Hardware	1,181		149		20		1,350		1,035,479		20
Private equity/venture capital	21,212		29		—		21,241		6,324,848		—
Life science/healthcare	6,978		37		—		7,015		1,700,711		—
Premium wine	712		—		—		712		836,496		—
Other	850		89		5		944		472,921		5
Total commercial loans	44,922		2,882		27		47,831		15,739,326		27
Consumer loans:
Real estate secured loans	7,166		—		—		7,166		1,645,047		—
Other consumer loans	80		1,800		—		1,880		226,369		—
Total consumer loans	7,246		1,800		—		9,046		1,871,416		—
Total gross loans excluding impaired loans	52,168		4,682		27		56,877		17,610,742		27
Impaired loans	1,575		—		13,237		14,812		163,650		—
Total gross loans	$	53,743	$	4,682	$	13,264	$	71,689	$	17,774,392	$	27
December 31, 2015:
Commercial loans:
Software and internet	$	3,384	$	6,638	$	—	$	10,022	$	5,371,222	$	—
Hardware	1,061		66		—		1,127		1,051,368		—
Private equity/venture capital	—		17		—		17		5,511,912		—
Life science/healthcare	853		6,537		—		7,390		1,665,801		—
Premium wine	16		65		—		81		847,249		—
Other	14		22		—		36		438,313		—
Total commercial loans	5,328		13,345		—		18,673		14,885,865		—
Consumer loans:
Real estate secured loans	4,911		865		—		5,776		1,537,421		—
Other consumer loans	228		115		—		343		226,369		—
Total consumer loans	5,139		980		—		6,119		1,763,790		—
Total gross loans excluding impaired loans	10,467		14,325		—		24,792		16,649,655		—
Impaired loans	333		—		7,221		7,554		175,130		—
Total gross loans	$	10,800	$	14,325	$	7,221	$	32,346	$	16,824,785	$	—

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, 2016 and December 31, 2015:



(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, 2016:
Commercial loans:
Software and internet	$	108,871	$	561	$	109,432	$	122,585
Hardware	27,702		214		27,916		28,764
Private equity/venture capital	—		—		—		—
Life science/healthcare	33,040		—		33,040		34,205
Premium wine	1,295		1,132		2,427		2,991
Other	5,516		—		5,516		5,516
Total commercial loans	176,424		1,907		178,331		194,061
Consumer loans:
Real estate secured loans	131		—		131		1,388
Other consumer loans	—		—		—		—
Total consumer loans	131		—		131		1,388
Total	$	176,555	$	1,907	$	178,462	$	195,449
December 31, 2015:
Commercial loans:
Software and internet	$	100,866	$	—	$	100,866	$	125,494
Hardware	27,736		—		27,736		27,869
Private equity/venture capital	—		—		—		—
Life science/healthcare	50,429		925		51,354		55,310
Premium wine	898		1,167		2,065		2,604
Other	520		—		520		520
Total commercial loans	180,449		2,092		182,541		211,797
Consumer loans:
Real estate secured loans	143		—		143		1,393
Other consumer loans	—		—		—		—
Total consumer loans	143		—		143		1,393
Total	$	180,592	$	2,092	$	182,684	$	213,190

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, 2016 and 2015:



Three months ended March 31,	Average impaired loans				Interest income on impaired loans
(dollars in thousands)	2016		2015		2016		2015 (1)
Commercial loans:
Software and internet	$	89,367	$	33,725	$	421	$	—
Hardware	24,426		1,643		397		—
Life science/healthcare	39,690		400		133		—
Premium wine	2,171		1,282		17		—
Other	3,853		2,139		7		—
Total commercial loans	159,507		39,189		975		—
Consumer loans:
Real estate secured loans	135		195		—		—
Other consumer loans	34		88		—		—
Total consumer loans	169		283		—		—
Total average impaired loans	$	159,676	$	39,472	$	975	$	—


(1)	For the three months ended March 31, 2015 all impaired loans were nonaccrual loans and no interest income was recognized.

The following tables summarize the activity relating to our allowance for loan losses for the three months ended March 31, 2016 and 2015, broken out by portfolio segment:



Three months ended March 31, 2016 (dollars in thousands)	Beginning Balance December 31, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance March 31, 2016
Commercial loans:
Software and internet	$	103,045	$	(22,161	)	$	3,960	$	22,054		$	106,898
Hardware	23,085		(1,486		)	239		1,998			23,836
Private equity/venture capital	35,282		—			—		8,404			43,686
Life science/healthcare	36,576		(2,395		)	491		(4,387		)	30,285
Premium wine	5,205		—			—		39			5,244
Other	4,252		(30		)	730		4,595			9,547
Total commercial loans	207,445		(26,072		)	5,420		32,703			219,496
Consumer loans	10,168		(102		)	49		638			10,753
Total allowance for loan losses	$	217,613	$	(26,174	)	$	5,469	$	33,341		$	230,249



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

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of March 31, 2016 and December 31, 2015, broken out by portfolio segment:



	March 31, 2016								December 31, 2015
	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	$	36,886	$	109,432	$	70,012	$	5,345,120	$	34,098	$	100,866	$	68,947	$	5,337,049
Hardware	2,872		27,916		20,964		1,029,017		3,160		27,736		19,925		1,043,792
Private equity/venture capital	—		—		43,686		6,299,608		—		—		35,282		5,467,577
Life science/healthcare	11,735		33,040		18,550		1,694,952		20,230		51,354		16,346		1,659,288
Premium wine	129		2,427		5,115		835,483		90		2,065		5,115		845,230
Other	5,052		5,516		4,495		470,690		52		520		4,200		435,270
Total commercial loans	56,674		178,331		162,822		15,674,870		57,630		182,541		149,815		14,788,206
Consumer loans	131		131		10,622		1,881,815		143		143		10,025		1,771,180
Total	$	56,805	$	178,462	$	173,444	$	17,556,685	$	57,773	$	182,684	$	159,840	$	16,559,386

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)”. When a significant payment delay occurs on a criticized loan, the loan is impaired. The loan is also considered for nonaccrual status if full repayment is determined to be improbable. All of our nonaccrual loans are risk-rated 8 or 9 and are classified under the nonperforming impaired category. (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2015 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, 2016 and December 31, 2015:



(Dollars in thousands)	Pass		Performing (Criticized)		Performing Impaired (Criticized)		Nonperforming Impaired (Nonaccrual)		Total
March 31, 2016:
Commercial loans:
Software and internet	$	4,832,174	$	553,266	$	27,657	$	81,775	$	5,494,872
Hardware	882,651		154,178		27,589		327		1,064,745
Private equity/venture capital	6,345,463		626		—		—		6,346,089
Life science/healthcare	1,557,912		149,814		7,461		25,579		1,740,766
Premium wine	797,390		39,818		1,294		1,133		839,635
Other	466,715		7,150		516		5,000		479,381
Total commercial loans	14,882,305		904,852		64,517		113,814		15,965,488
Consumer loans:
Real estate secured loans	1,652,213		—		—		131		1,652,344
Other consumer loans	227,463		786		—		—		228,249
Total consumer loans	1,879,676		786		—		131		1,880,593
Total gross loans	$	16,761,981	$	905,638	$	64,517	$	113,945	$	17,846,081
December 31, 2015:
Commercial loans:
Software and internet	$	4,933,179	$	448,065	$	23,321	$	77,545	$	5,482,110
Hardware	955,675		96,820		27,306		430		1,080,231
Private equity/venture capital	5,474,929		37,000		—		—		5,511,929
Life science/healthcare	1,544,555		128,636		7,247		44,107		1,724,545
Premium wine	825,058		22,272		898		1,167		849,395
Other	429,481		8,868		520		—		438,869
Total commercial loans	14,162,877		741,661		59,292		123,249		15,087,079
Consumer loans:
Real estate secured loans	1,539,468		3,729		—		143		1,543,340
Other consumer loans	224,601		2,111		—		—		226,712
Total consumer loans	1,764,069		5,840		—		143		1,770,052
Total gross loans	$	15,926,946	$	747,501	$	59,292	$	123,392	$	16,857,131

TDRs

As of March 31, 2016 we had 17 TDRs with a total carrying value of $86.0 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 March 31, 2016.

The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at March 31, 2016 and December 31, 2015:



(Dollars in thousands)	March 31, 2016		December 31, 2015
Loans modified in TDRs:
Commercial loans:
Software and internet	$	57,836	$	56,790
Hardware	155		473
Life science/healthcare	25,104		51,878
Premium wine	2,427		2,065
Other	517		519
Total commercial loans	86,039		111,725
Consumer loans:
Other consumer loans	—		—
Total consumer loans	—		—
Total	$	86,039	$	111,725

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, 2016 and 2015:



	Three months ended March 31,
(Dollars in thousands)	2016		2015
Loans modified in TDRs during the period:
Commercial loans:
Software and internet (1)	$	10,854	$	—
Hardware	—		4,000
Premium wine	505		—
Total commercial loans	11,359		4,000
Consumer loans:
Real estate secured loans	—		1,280
Total consumer loans	—		1,280
Total loans modified in TDRs during the period (1)	$	11,359	$	5,280


(1)	There were $3.8 million of partial charge-offs during the three months ended March 31, 2016 and no partial charge-offs during the three months ended March 31, 2015.

During the three months ended March 31, 2016, new TDRs of $9.0 million were modified through partial forgiveness of principal and $2.4 million were modified through payment deferrals granted to our clients.

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

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.

There were no loans modified in TDRs within the previous 12 months that subsequently defaulted during the three months ended March 31, 2016. We had $30 thousand of consumer real estate secured loans modified within the previous 12 months that defaulted during the three months ended March 31, 2015.

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, 2016.