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 $117 million and $115 million at September 30, 2016 and December 31, 2015, respectively, is presented in the following table:



(Dollars in thousands)	September 30, 2016		December 31, 2015
Commercial loans:
Software and internet	$	5,393,425	$	5,437,915
Hardware	1,147,830		1,071,528
Private equity/venture capital	7,412,238		5,467,577
Life science/healthcare	1,732,917		1,710,642
Premium wine	190,223		201,175
Other	368,474		312,278
Total commercial loans	16,245,107		14,201,115
Real estate secured loans:
Premium wine (1)	681,808		646,120
Consumer loans (2)	1,835,630		1,544,440
Other	43,925		44,830
Total real estate secured loans	2,561,363		2,235,390
Construction loans	64,689		78,682
Consumer loans	241,106		226,883
Total loans, net of unearned income (3)	$	19,112,265	$	16,742,070


(1)	Included in our premium wine portfolio are gross construction loans of $109 million and $121 million at September 30, 2016 and December 31, 2015, respectively.


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



(Dollars in thousands)	September 30, 2016		December 31, 2015
Loans for personal residence	$	1,563,697	$	1,312,818
Loans to eligible employees	189,593		156,001
Home equity lines of credit	82,340		75,621
Consumer loans secured by real estate	$	1,835,630	$	1,544,440


(3)	Included within our total loan portfolio are credit card loans of $201 million and $177 million at September 30, 2016 and December 31, 2015, respectively.

Credit Quality

The composition of loans, net of unearned income of $117 million and $115 million at September 30, 2016 and December 31, 2015, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	September 30, 2016		December 31, 2015
Commercial loans:
Software and internet	$	5,393,425	$	5,437,915
Hardware	1,147,830		1,071,528
Private equity/venture capital	7,412,238		5,467,577
Life science/healthcare	1,732,917		1,710,642
Premium wine	872,031		847,295
Other	477,088		435,790
Total commercial loans	17,035,529		14,970,747
Consumer loans:
Real estate secured loans	1,835,630		1,544,440
Other consumer loans	241,106		226,883
Total consumer loans	2,076,736		1,771,323
Total loans, net of unearned income	$	19,112,265	$	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 September 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
September 30, 2016:
Commercial loans:
Software and internet	$	11,975	$	2,715	$	59	$	14,749	$	5,359,727	$	59
Hardware	4,909		6,577		—		11,486		1,095,263		—
Private equity/venture capital	18		4		51		73		7,465,573		51
Life science/healthcare	856		143		—		999		1,690,070		—
Premium wine	12,265		—		—		12,265		860,353		—
Other	93		3		15		111		479,754		15
Total commercial loans	30,116		9,442		125		39,683		16,950,740		125
Consumer loans:
Real estate secured loans	961		—		—		961		1,831,891		—
Other consumer loans	285		—		—		285		238,221		—
Total consumer loans	1,246		—		—		1,246		2,070,112		—
Total gross loans excluding impaired loans	31,362		9,442		125		40,929		19,020,852		125
Impaired loans	—		2,587		6,918		9,505		157,642		—
Total gross loans	$	31,362	$	12,029	$	7,043	$	50,434	$	19,178,494	$	125
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 September 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
September 30, 2016:
Commercial loans:
Software and internet	$	57,831	$	—	$	57,831	$	76,679
Hardware	48,687		669		49,356		49,393
Private equity/venture capital	—		—		—		—
Life science/healthcare	54,341		—		54,341		57,222
Premium wine	1,285		—		1,285		1,285
Other	417		—		417		417
Total commercial loans	162,561		669		163,230		184,996
Consumer loans:
Real estate secured loans	1,518		—		1,518		2,789
Other consumer loans	2,399		—		2,399		2,399
Total consumer loans	3,917		—		3,917		5,188
Total	$	166,478	$	669	$	167,147	$	190,184
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 nine months ended September 30, 2016 and 2015:



Three months ended September 30,	Average impaired loans				Interest income on impaired loans
(dollars in thousands)	2016		2015		2016		2015 (1)
Commercial loans:
Software and internet	$	61,481	$	77,156	$	70	$	—
Hardware	45,353		2,796		761		—
Life science/healthcare	55,558		17,184		128		—
Premium wine	1,291		1,213		19		—
Other	3,768		3,132		6		—
Total commercial loans	167,451		101,481		984		—
Consumer loans:
Real estate secured loans	584		162		—		—
Other consumer loans	1,324		—		6		—
Total consumer loans	1,908		162		6		—
Total average impaired loans	$	169,359	$	101,643	$	990	$	—


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



Nine months ended September 30,	Average impaired loans				Interest income on impaired loans
(dollars in thousands)	2016		2015		2016		2015 (1)
Commercial loans:
Software and internet	$	84,005	$	54,543	$	133	$	—
Hardware	31,000		1,944		1,467		—
Life science/healthcare	42,857		6,526		128		—
Premium wine	1,834		1,245		54		—
Other	4,369		3,498		21		—
Total commercial loans	164,065		67,756		1,803		—
Consumer loans:
Real estate secured loans	282		180		—		—
Other consumer loans	715		55		17		—
Total consumer loans	997		235		17		—
Total average impaired loans	$	165,062	$	67,991	$	1,820	$	—


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



Three months ended September 30, 2016 (dollars in thousands)	Beginning Balance June 30, 2016		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance September 30, 2016
Commercial loans:
Software and internet	$	104,229	$	(16,526	)	$	305	$	8,591		$	(261	)	$	96,338
Hardware	23,871		(3,058		)	1,080		11,048			(336		)	32,605
Private equity/venture capital	49,807		—			—		2,203			(67		)	51,943
Life science/healthcare	41,852		(28		)	361		(5,298		)	161			37,048
Premium wine	4,810		—			—		288			(9		)	5,089
Other	9,480		(5,004		)	207		142			(4		)	4,821
Total commercial loans	234,049		(24,616		)	1,953		16,974			(516		)	227,844
Consumer loans	10,674		—			131		1,976			(60		)	12,721
Total allowance for loan losses	$	244,723	$	(24,616	)	$	2,084	$	18,950		$	(576	)	$	240,565



Three months ended September 30, 2015 (dollars in thousands)	Beginning Balance June 30, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments (1)			Ending Balance September 30, 2015
Commercial loans:
Software and internet	$	106,728	$	(24,815	)	$	195	$	5,965		$	(7	)	$	88,066
Hardware	20,472		—			240		(70		)	—			20,642
Private equity/venture capital	29,276		—			—		3,170			(4		)	32,442
Life science/healthcare	17,233		(117		)	50		19,815			(22		)	36,959
Premium wine	4,409		—			—		253			—			4,662
Other	5,894		(4,186		)	173		2,941			(49		)	4,773
Total commercial loans	184,012		(29,118		)	658		32,074			(82		)	187,544
Consumer loans	8,632		—			4		1,329			(2		)	9,963
Total allowance for loan losses	$	192,644	$	(29,118	)	$	662	$	33,403		$	(84	)	$	197,507


(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.



Nine months ended September 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 September 30, 2016
Commercial loans:
Software and internet	$	103,045	$	(56,742	)	$	4,525	$	46,438		$	(928	)	$	96,338
Hardware	23,085		(6,559		)	1,502		15,010			(433		)	32,605
Private equity/venture capital	35,282		—			—		17,008			(347		)	51,943
Life science/healthcare	36,576		(3,029		)	1,037		3,252			(788		)	37,048
Premium wine	5,205		—			—		(138		)	22			5,089
Other	4,252		(5,034		)	880		4,573			150			4,821
Total commercial loans	207,445		(71,364		)	7,944		86,143			(2,324		)	227,844
Consumer loans	10,168		(102		)	214		2,481			(40		)	12,721
Total allowance for loan losses	$	217,613	$	(71,466	)	$	8,158	$	88,624		$	(2,364	)	$	240,565



Nine months ended September 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 September 30, 2015
Commercial loans:
Software and internet	$	80,981	$	(26,980	)	$	1,239	$	32,834		$	(8	)	$	88,066
Hardware	25,860		(4,049		)	3,049		(4,291		)	73			20,642
Private equity/venture capital	27,997		—			—		4,551			(106		)	32,442
Life science/healthcare	15,208		(3,336		)	129		24,976			(18		)	36,959
Premium wine	4,473		—			7		182			—			4,662
Other	3,253		(4,974		)	729		5,874			(109		)	4,773
Total commercial loans	157,772		(39,339		)	5,153		64,126			(168		)	187,544
Consumer loans	7,587		—			136		2,242			(2		)	9,963
Total allowance for loan losses	$	165,359	$	(39,339	)	$	5,289	$	66,368		$	(170	)	$	197,507


(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 September 30, 2016 and December 31, 2015, broken out by portfolio segment:



	September 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	$	24,815	$	57,831	$	71,523	$	5,335,594	$	34,098	$	100,866	$	68,947	$	5,337,049
Hardware	6,041		49,356		26,564		1,098,474		3,160		27,736		19,925		1,043,792
Private equity/venture capital	—		—		51,943		7,412,238		—		—		35,282		5,467,577
Life science/healthcare	18,206		54,341		18,842		1,678,576		20,230		51,354		16,346		1,659,288
Premium wine	128		1,285		4,961		870,746		90		2,065		5,115		845,230
Other	42		417		4,779		476,671		52		520		4,200		435,270
Total commercial loans	49,232		163,230		178,612		16,872,299		57,630		182,541		149,815		14,788,206
Consumer loans	1,141		3,917		11,580		2,072,819		143		143		10,025		1,771,180
Total	$	50,373	$	167,147	$	190,192	$	18,945,118	$	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 September 30, 2016 and December 31, 2015:



(Dollars in thousands)	Pass		Performing (Criticized)		Performing Impaired (Criticized)		Nonperforming Impaired (Nonaccrual)		Total
September 30, 2016:
Commercial loans:
Software and internet	$	4,752,376	$	622,100	$	5,012	$	52,819	$	5,432,307
Hardware	937,383		169,366		46,849		2,507		1,156,105
Private equity/venture capital	7,465,003		643		—		—		7,465,646
Life science/healthcare	1,549,334		141,735		6,581		47,760		1,745,410
Premium wine	855,731		16,887		1,285		—		873,903
Other	471,320		8,545		417		—		480,282
Total commercial loans	16,031,147		959,276		60,144		103,086		17,153,653
Consumer loans:
Real estate secured loans	1,831,054		1,798		—		1,518		1,834,370
Other consumer loans	238,506		—		787		1,612		240,905
Total consumer loans	2,069,560		1,798		787		3,130		2,075,275
Total gross loans	$	18,100,707	$	961,074	$	60,931	$	106,216	$	19,228,928
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 September 30, 2016 we had 19 TDRs with a total carrying value of $76.0 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were $4.7 million of unfunded commitments available for funding to the clients associated with these TDRs as of September 30, 2016.

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



(Dollars in thousands)	September 30, 2016		December 31, 2015
Loans modified in TDRs:
Commercial loans:
Software and internet	$	36,517	$	56,790
Hardware	10,333		473
Life science/healthcare	25,029		51,878
Premium wine	2,962		2,065
Other	417		519
Total commercial loans	75,258		111,725
Consumer loans:
Other consumer loans	786		—
Total consumer loans	786		—
Total	$	76,044	$	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 nine months ended September 30, 2016 and 2015:



	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2016		2015		2016		2015
Loans modified in TDRs during the period:
Commercial loans:
Software and internet	$	78	$	51,749	$	4,569	$	57,766
Hardware	10,329		—		10,329		2,031
Life science/healthcare	1,714		29,530		1,714		29,530
Premium wine	—		—		495		—
Other	—		518		—		518
Total commercial loans	12,121		81,797		17,107		89,845
Consumer loans:
Other consumer loans	—		—		786		—
Total loans modified in TDRs during the period (1)	$	12,121	$	81,797	$	17,893	$	89,845


(1)	There were $0.7 million and $3.5 million of partial charge-offs during the three and nine months ended September 30, 2016 and $22.4 million of partial charge-offs for loans classified as TDRs in our software and internet loan portfolio during the three and nine months ended September 30, 2015.

During the three and nine months ended September 30, 2016, new TDRs of $12.0 million and $17.6 million, respectively, were modified through payment deferrals granted to our clients. During the three and nine months ended September 30, 2016, new TDRs of $0.1 million and $0.3 million, respectively, were modified through partial forgiveness of principal.

During the three and nine months ended September 30, 2015, new TDRs of $81.8 million and $89.8 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 nine months ended September 30, 2016 and 2015:



	Three months ended September 30,				Nine months ended September 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	$	—	$	11,107	$	584	$	17,124
Hardware	—		2,031		—		2,031
Life science/healthcare	—		958		—		958
Premium wine	790		—		790		—
Total TDRs modified within the previous 12 months that defaulted in the period	$	790	$	14,096	$	1,374	$	20,113

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 September 30, 2016.