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 $116 million and $115 million at June 30, 2016 and December 31, 2015, respectively, is presented in the following table:



(Dollars in thousands)	June 30, 2016		December 31, 2015
Commercial loans:
Software and internet	$	5,530,874	$	5,437,915
Hardware	1,123,433		1,071,528
Private equity/venture capital	7,078,544		5,467,577
Life science/healthcare	1,780,974		1,710,642
Premium wine	191,183		201,175
Other	378,399		312,278
Total commercial loans	16,083,407		14,201,115
Real estate secured loans:
Premium wine (1)	638,053		646,120
Consumer loans (2)	1,748,419		1,544,440
Other	44,350		44,830
Total real estate secured loans	2,430,822		2,235,390
Construction loans	79,772		78,682
Consumer loans	239,777		226,883
Total loans, net of unearned income (3)	$	18,833,778	$	16,742,070


(1)	Included in our premium wine portfolio are gross construction loans of $107 million and $121 million at June 30, 2016 and December 31, 2015, respectively.


(2)	Consumer loans secured by real estate at June 30, 2016 and December 31, 2015 were comprised of the following:



(Dollars in thousands)	June 30, 2016		December 31, 2015
Loans for personal residence	$	1,495,858	$	1,312,818
Loans to eligible employees	175,269		156,001
Home equity lines of credit	77,292		75,621
Consumer loans secured by real estate	$	1,748,419	$	1,544,440


(3)	Included within our total loan portfolio are credit card loans of $181 million and $177 million at June 30, 2016 and December 31, 2015, respectively.

Credit Quality

The composition of loans, net of unearned income of $116 million and $115 million at June 30, 2016 and December 31, 2015, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	June 30, 2016		December 31, 2015
Commercial loans:
Software and internet	$	5,530,874	$	5,437,915
Hardware	1,123,433		1,071,528
Private equity/venture capital	7,078,544		5,467,577
Life science/healthcare	1,780,974		1,710,642
Premium wine	829,236		847,295
Other	502,521		435,790
Total commercial loans	16,845,582		14,970,747
Consumer loans:
Real estate secured loans	1,748,419		1,544,440
Other consumer loans	239,777		226,883
Total consumer loans	1,988,196		1,771,323
Total loans, net of unearned income	$	18,833,778	$	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 June 30, 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
June 30, 2016:
Commercial loans:
Software and internet	$	16,406	$	1,138	$	54	$	17,598	$	5,459,384	$	54
Hardware	201		48		—		249		1,108,574		—
Private equity/venture capital	11,258		63		—		11,321		7,118,442		—
Life science/healthcare	503		26		358		887		1,743,728		358
Premium wine	4,537		—		—		4,537		825,275		—
Other	98		—		—		98		500,293		—
Total commercial loans	33,003		1,275		412		34,690		16,755,696		412
Consumer loans:
Real estate secured loans	—		—		—		—		1,747,021		—
Other consumer loans	45,008		83		—		45,091		193,745		—
Total consumer loans	45,008		83		—		45,091		1,940,766		—
Total gross loans excluding impaired loans	78,011		1,358		412		79,781		18,696,462		412
Impaired loans	2,975		662		16,182		19,819		153,840		—
Total gross loans	$	80,986	$	2,020	$	16,594	$	99,600	$	18,850,302	$	412
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 June 30, 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
June 30, 2016:
Commercial loans:
Software and internet	$	93,971	$	—	$	93,971	$	101,358
Hardware	22,751		—		22,751		22,786
Private equity/venture capital	—		—		—		—
Life science/healthcare	49,265		—		49,265		51,412
Premium wine	1,296		—		1,296		1,296
Other	5,467		—		5,467		5,467
Total commercial loans	172,750		—		172,750		182,319
Consumer loans:
Real estate secured loans	123		—		123		1,387
Other consumer loans	786		—		786		786
Total consumer loans	909		—		909		2,173
Total	$	173,659	$	—	$	173,659	$	184,492
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 and six months ended June 30, 2016 and 2015:



Three months ended June 30,	Average impaired loans				Interest income on impaired loans
(dollars in thousands)	2016		2015		2016		2015 (1)
Commercial loans:
Software and internet	$	101,168	$	52,747	$	438	$	—
Hardware	23,221		1,393		442		—
Life science/healthcare	33,324		1,993		—		—
Premium wine	2,040		1,239		18		—
Other	5,485		5,222		7		—
Total commercial loans	165,238		62,594		905		—
Consumer loans:
Real estate secured loans	127		183		—		—
Other consumer loans	786		76		11		—
Total consumer loans	913		259		11		—
Total average impaired loans	$	166,151	$	62,853	$	916	$	—


(1)	For the three months ended June 30, 2015 all impaired loans were nonaccrual loans and no interest income was recognized.



Six months ended June 30,	Average impaired loans				Interest income on impaired loans
(dollars in thousands)	2016		2015		2016		2015 (1)
Commercial loans:
Software and internet	$	95,268	$	43,236	$	763	$	—
Hardware	23,824		1,518		749		—
Life science/healthcare	36,507		1,197		—		—
Premium wine	2,106		1,261		35		—
Other	4,669		3,681		15		—
Total commercial loans	162,374		50,893		1,562		—
Consumer loans:
Real estate secured loans	131		189		—		—
Other consumer loans	410		82		11		—
Total consumer loans	541		271		11		—
Total average impaired loans	$	162,915	$	51,164	$	1,573	$	—


(1)	For the six months ended June 30, 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 and six months ended June 30, 2016 and 2015, broken out by portfolio segment:



Three months ended June 30, 2016 (dollars in thousands)	Beginning Balance March 31, 2016		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2016
Commercial loans:
Software and internet	$	106,898	$	(18,055	)	$	260	$	16,215		$	(1,089	)	$	104,229
Hardware	23,836		(2,015		)	183		2,003			(136		)	23,871
Private equity/venture capital	43,686		—			—		6,562			(441		)	49,807
Life science/healthcare	30,285		(606		)	185		12,853			(865		)	41,852
Premium wine	5,244		—			—		(465		)	31			4,810
Other	9,547		—			599		(714		)	48			9,480
Total commercial loans	219,496		(20,676		)	1,227		36,454			(2,452		)	234,049
Consumer loans	10,753		—			34		(121		)	8			10,674
Total allowance for loan losses	$	230,249	$	(20,676	)	$	1,261	$	36,333		$	(2,444	)	$	244,723



Three months ended June 30, 2015 (dollars in thousands)	Beginning Balance March 31, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments (1)			Ending Balance June 30, 2015
Commercial loans:
Software and internet	$	82,092	$	(762	)	$	597	$	24,732		$	69		$	106,728
Hardware	21,258		(839		)	1,881		(1,823		)	(5		)	20,472
Private equity/venture capital	30,837		—			—		(1,557		)	(4		)	29,276
Life science/healthcare	15,323		(2,994		)	45		4,846			13			17,233
Premium wine	4,503		—			7		(101		)	—			4,409
Other	6,151		(139		)	409		(505		)	(22		)	5,894
Total commercial loans	160,164		(4,734		)	2,939		25,592			51			184,012
Consumer loans	7,711		—			—		921			—			8,632
Total allowance for loan losses	$	167,875	$	(4,734	)	$	2,939	$	26,513		$	51		$	192,644


(1)	Reflects foreign currency translation adjustments within the allowance for loan losses. Prior period amounts were previously reported with loan recoveries and have been revised to conform to current period presentation.



Six months ended June 30, 2016 (dollars in thousands)	Beginning Balance December 31, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2016
Commercial loans:
Software and internet	$	103,045	$	(40,216	)	$	4,220	$	37,847		$	(667	)	$	104,229
Hardware	23,085		(3,501		)	422		3,962			(97		)	23,871
Private equity/venture capital	35,282		—			—		14,805			(280		)	49,807
Life science/healthcare	36,576		(3,001		)	676		8,550			(949		)	41,852
Premium wine	5,205		—			—		(426		)	31			4,810
Other	4,252		(30		)	673		4,431			154			9,480
Total commercial loans	207,445		(46,748		)	5,991		69,169			(1,808		)	234,049
Consumer loans	10,168		(102		)	83		505			20			10,674
Total allowance for loan losses	$	217,613	$	(46,850	)	$	6,074	$	69,674		$	(1,788	)	$	244,723



Six months ended June 30, 2015 (dollars in thousands)	Beginning Balance December 31, 2014		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments (1)			Ending Balance June 30, 2015
Commercial loans:
Software and internet	$	80,981	$	(2,165	)	$	1,044	$	26,869		$	(1	)	$	106,728
Hardware	25,860		(4,049		)	2,809		(4,221		)	73			20,472
Private equity/venture capital	27,997		—			—		1,381			(102		)	29,276
Life science/healthcare	15,208		(3,219		)	79		5,161			4			17,233
Premium wine	4,473		—			7		(71		)	—			4,409
Other	3,253		(788		)	556		2,933			(60		)	5,894
Total commercial loans	157,772		(10,221		)	4,495		32,052			(86		)	184,012
Consumer loans	7,587		—			132		913			—			8,632
Total allowance for loan losses	$	165,359	$	(10,221	)	$	4,627	$	32,965		$	(86	)	$	192,644


(1)	Reflects foreign currency translation adjustments within the allowance for loan losses. Prior period amounts were previously reported with loan recoveries and have been revised to conform to current period presentation.

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2016 and December 31, 2015, broken out by portfolio segment:



	June 30, 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	$	33,705	$	93,971	$	70,524	$	5,436,903	$	34,098	$	100,866	$	68,947	$	5,337,049
Hardware	2,327		22,751		21,544		1,100,682		3,160		27,736		19,925		1,043,792
Private equity/venture capital	—		—		49,807		7,078,544		—		—		35,282		5,467,577
Life science/healthcare	23,380		49,265		18,472		1,731,709		20,230		51,354		16,346		1,659,288
Premium wine	130		1,296		4,680		827,940		90		2,065		5,115		845,230
Other	5,047		5,467		4,433		497,054		52		520		4,200		435,270
Total commercial loans	64,589		172,750		169,460		16,672,832		57,630		182,541		149,815		14,788,206
Consumer loans	202		909		10,472		1,987,287		143		143		10,025		1,771,180
Total	$	64,791	$	173,659	$	179,932	$	18,660,119	$	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 June 30, 2016 and December 31, 2015:



(Dollars in thousands)	Pass		Performing (Criticized)		Performing Impaired (Criticized)		Nonperforming Impaired (Nonaccrual)		Total
June 30, 2016:
Commercial loans:
Software and internet	$	4,896,785	$	580,197	$	24,097	$	69,874	$	5,570,953
Hardware	958,512		150,311		22,694		57		1,131,574
Private equity/venture capital	7,129,763		—		—		—		7,129,763
Life science/healthcare	1,601,046		143,569		—		49,265		1,793,880
Premium wine	802,929		26,883		1,296		—		831,108
Other	491,745		8,646		467		5,000		505,858
Total commercial loans	15,880,780		909,606		48,554		124,196		16,963,136
Consumer loans:
Real estate secured loans	1,747,021		—		—		123		1,747,144
Other consumer loans	238,836		—		786		—		239,622
Total consumer loans	1,985,857		—		786		123		1,986,766
Total gross loans	$	17,866,637	$	909,606	$	49,340	$	124,319	$	18,949,902
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 June 30, 2016 we had 17 TDRs with a total carrying value of $78.3 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were $3.5 million of unfunded commitments available for funding to the clients associated with these TDRs as of June 30, 2016.

The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at June 30, 2016 and December 31, 2015:



(Dollars in thousands)	June 30, 2016		December 31, 2015
Loans modified in TDRs:
Commercial loans:
Software and internet	$	49,427	$	56,790
Hardware	107		473
Life science/healthcare	24,501		51,878
Premium wine	2,983		2,065
Other	467		519
Total commercial loans	77,485		111,725
Consumer loans:
Other consumer loans	786		—
Total consumer loans	786		—
Total	$	78,271	$	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 and six months ended June 30, 2016 and 2015:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2016		2015		2016		2015
Loans modified in TDRs during the period:
Commercial loans:
Software and internet	$	4,402	$	27,525	$	5,525	$	27,525
Hardware	—		—		—		2,040
Premium wine	—		—		506		—
Total commercial loans	4,402		27,525		6,031		29,565
Consumer loans:
Other consumer loans	786		—		786		—
Total consumer loans	786		—		786		—
Total loans modified in TDRs during the period (1)	$	5,188	$	27,525	$	6,817	$	29,565


(1)	There were $0.5 million and $4.3 million of partial charge-offs during the three and six months ended June 30, 2016 and no partial charge-offs during the three and six months ended June 30, 2015.

During the three months ended June 30, 2016, all new TDRs were modified through payment deferrals granted to our clients. During the six months ended June 30, 2016, $5.7 million of new TDRs were modified through payment deferrals granted to our clients and $1.1 million were modified through partial forgiveness of principal.

During the three and six months ended June 30, 2015, new TDRs of $27.5 million and $29.6 million, respectively, 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.

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, 2016 and 2015:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2016		2015		2016		2015
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software and internet	$	1,474	$	27,525	$	1,474	$	27,525
Premium wine	506		—		506		—
Total TDRs modified within the previous 12 months that defaulted in the period	$	1,980	$	27,525	$	1,980	$	27,525