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. Because of the diverse nature of ERI products and services, ERI-related loans are reported under our hardware, software and internet, life science/healthcare and other commercial loan categories, as applicable, for loan-related reporting. 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 $125 million and $115 million at December 31, 2016 and 2015, respectively, is presented in the following table:



	December 31,
(Dollars in thousands)	2016		2015
Commercial loans:
Software and internet	$	5,627,031	$	5,437,915
Hardware	1,180,398		1,071,528
Private equity/venture capital	7,691,148		5,467,577
Life science/healthcare	1,853,004		1,710,642
Premium wine	200,156		201,175
Other	393,551		312,278
Total commercial loans	16,945,288		14,201,115
Real estate secured loans:
Premium wine (1)	678,166		646,120
Consumer loans (2)	1,926,968		1,544,440
Other	43,487		44,830
Total real estate secured loans	2,648,621		2,235,390
Construction loans	64,671		78,682
Consumer loans	241,364		226,883
Total loans, net of unearned income (3)	$	19,899,944	$	16,742,070


(1)	Included in our premium wine portfolio are gross construction loans of $110 million and $121 million at December 31, 2016 and 2015, respectively.


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



	December 31,
(Dollars in thousands)	2016		2015
Loans for personal residence	$	1,655,349	$	1,312,818
Loans to eligible employees	199,291		156,001
Home equity lines of credit	72,328		75,621
Consumer loans secured by real estate	$	1,926,968	$	1,544,440


(3)	Included within our total loan portfolio are credit card loans of $224 million and $177 million at December 31, 2016 and 2015, respectively.

Credit Quality

The composition of loans, net of unearned income of $125 million and $115 million at December 31, 2016 and 2015, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



	December 31,
(Dollars in thousands)	2016		2015
Commercial loans:
Software and internet	$	5,627,031	$	5,437,915
Hardware	1,180,398		1,071,528
Private equity/venture capital	7,691,148		5,467,577
Life science/healthcare	1,853,004		1,710,642
Premium wine	878,322		847,295
Other	501,709		435,790
Total commercial loans	17,731,612		14,970,747
Consumer loans:
Real estate secured loans	1,926,968		1,544,440
Other consumer loans	241,364		226,883
Total consumer loans	2,168,332		1,771,323
Total loans, net of unearned income	$	19,899,944	$	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 December 31, 2016 and 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
December 31, 2016:
Commercial loans:
Software and internet	$	37,087	$	1,162	$	6	$	38,255	$	5,507,575	$	6
Hardware	5,591		36		27		5,654		1,118,065		27
Private equity/venture capital	689		—		—		689		7,747,222		—
Life science/healthcare	283		551		—		834		1,827,490		—
Premium wine	1,003		4		—		1,007		876,185		—
Other	34		300		—		334		504,021		—
Total commercial loans	44,687		2,053		33		46,773		17,580,558		33
Consumer loans:
Real estate secured loans	850		—		—		850		1,923,266		—
Other consumer loans	1,402		—		—		1,402		237,353		—
Total consumer loans	2,252		—		—		2,252		2,160,619		—
Total gross loans excluding impaired loans	46,939		2,053		33		49,025		19,741,177		33
Impaired loans	34,636		3,451		11,180		49,267		185,193		—
Total gross loans	$	81,575	$	5,504	$	11,213	$	98,292	$	19,926,370	$	33
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 for the years ended December 31, 2016 and 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
December 31, 2016:
Commercial loans:
Software and internet	$	121,658	$	1,090	$	122,748	$	129,648
Hardware	65,395		—		65,395		70,683
Private equity/venture capital	—		—		—		—
Life science/healthcare	38,361		—		38,361		41,130
Premium wine	3,187		—		3,187		3,187
Other	867		—		867		867
Total commercial loans	229,468		1,090		230,558		245,515
Consumer loans:
Real estate secured loans	1,504		—		1,504		2,779
Other consumer loans	2,398		—		2,398		2,398
Total consumer loans	3,902		—		3,902		5,177
Total	$	233,370	$	1,090	$	234,460	$	250,692
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 and the related interest income while impaired, broken out by portfolio segment and class of financing receivable during 2016, 2015 and 2014:



Year ended December 31, (Dollars in thousands)	Average impaired loans						Interest income on impaired loans
Year ended December 31, (Dollars in thousands)	2016		2015		2014		2016		2015		2014 (1)
Commercial loans:
Software and internet	$	89,462	$	63,825	$	14,357	$	1,054	$	344	$	—
Hardware	39,108		8,854		6,634		2,624		574		—
Private equity/venture capital	—		—		—		—		—		—
Life science/healthcare	40,620		18,083		516		155		132		—
Premium wine	2,056		1,455		1,381		28		12		—
Other	3,442		2,758		1,088		6		8		—
Total commercial loans	174,688		94,975		23,976		3,867		1,070		—
Consumer loans:
Real estate secured loans	588		172		218		—		—		—
Other consumer loans	1,136		41		322		17		—		—
Total consumer loans	1,724		213		540		17		—		—
Total average impaired loans	$	176,412	$	95,188	$	24,516	$	3,884	$	1,070	$	—


(1)	In 2014, 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 2016, 2015 and 2014 broken out by portfolio segment:



Year ended December 31, 2016 (Dollars in thousands)	Beginning Balance December 31, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance December 31, 2016
Year ended December 31, 2016 (Dollars in thousands)	Beginning Balance December 31, 2015		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance December 31, 2016
Commercial loans:
Software and internet	$	103,045	$	(68,784	)	$	7,278	$	58,350		$	(2,501	)	$	97,388
Hardware	23,085		(13,233		)	1,667		20,851			(1,204		)	31,166
Private equity/venture capital	35,282		—			—		15,114			(97		)	50,299
Life science/healthcare	36,576		(9,693		)	1,129		(2,543		)	(23		)	25,446
Premium wine	5,205		—			—		(1,260		)	170			4,115
Other	4,252		(5,045		)	1,880		3,373			308			4,768
Total commercial loans	207,445		(96,755		)	11,954		93,885			(3,347		)	213,182
Consumer loans	10,168		(102		)	258		1,812			48			12,184
Total allowance for loan losses	$	217,613	$	(96,857	)	$	12,212	$	95,697		$	(3,299	)	$	225,366



Year ended December 31, 2015 (Dollars in thousands)	Beginning Balance December 31, 2014		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance December 31, 2015
Year ended December 31, 2015 (Dollars in thousands)	Beginning Balance December 31, 2014		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance December 31, 2015
Commercial loans:
Software and internet	$	80,981	$	(33,246	)	$	1,621	$	53,696		$	(7	)	$	103,045
Hardware	25,860		(5,145		)	3,332		(1,035		)	73			23,085
Private equity/venture capital	27,997		—			—		7,391			(106		)	35,282
Life science/healthcare	15,208		(7,291		)	277		28,400			(18		)	36,576
Premium wine	4,473		—			7		725			—			5,205
Other	3,253		(4,990		)	809		5,736			(556		)	4,252
Total commercial loans	157,772		(50,672		)	6,046		94,913			(614		)	207,445
Consumer loans	7,587		(296		)	163		2,716			(2		)	10,168
Total allowance for loan losses	$	165,359	$	(50,968	)	$	6,209	$	97,629		$	(616	)	$	217,613



Year ended December 31, 2014 (Dollars in thousands)	Beginning Balance December 31, 2013		Charge-offs			Recoveries		Provision for Loan Losses		Foreign Currency Translation Adjustments			Ending Balance December 31, 2014
Year ended December 31, 2014 (Dollars in thousands)	Beginning Balance December 31, 2013		Charge-offs			Recoveries		Provision for Loan Losses		Foreign Currency Translation Adjustments			Ending Balance December 31, 2014
Commercial loans:
Software and internet	$	64,084	$	(21,031	)	$	1,425	$	36,547	$	(44	)	$	80,981
Hardware	36,553		(15,265		)	2,238		2,417		(83		)	25,860
Private equity/venture capital	16,385		—			—		11,632		(20		)	27,997
Life science/healthcare	11,926		(2,951		)	374		5,925		(66		)	15,208
Premium wine	3,914		(35		)	240		354		—			4,473
Other	3,680		(3,886		)	1,748		1,760		(49		)	3,253
Total commercial loans	136,542		(43,168		)	6,025		58,635		(262		)	157,772
Consumer loans	6,344		—			379		851		13			7,587
Total allowance for loan losses	$	142,886	$	(43,168	)	$	6,404	$	59,486	$	(249	)	$	165,359

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



	December 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	$	28,245	$	122,748	$	69,143	$	5,504,283	$	34,098	$	100,866	$	68,947	$	5,337,049
Hardware	9,995		65,395		21,171		1,115,003		3,160		27,736		19,925		1,043,792
Private equity/venture capital	—		—		50,299		7,691,148		—		—		35,282		5,467,577
Life science/healthcare	8,709		38,361		16,737		1,814,643		20,230		51,354		16,346		1,659,288
Premium wine	520		3,187		3,595		875,135		90		2,065		5,115		845,230
Other	233		867		4,535		500,842		52		520		4,200		435,270
Total commercial loans	47,702		230,558		165,480		17,501,054		57,630		182,541		149,815		14,788,206
Consumer loans	1,123		3,902		11,061		2,164,430		143		143		10,025		1,771,180
Total	$	48,825	$	234,460	$	176,541	$	19,665,484	$	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 a further description of nonaccrual loans, refer to Note 2—"Summary of Significant Accounting Policies" of the "Notes to the Consolidated Financial Statements" under Part II, Item 8 of this report). 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 December 31, 2016 and 2015:



(Dollars in thousands)	Pass		Performing (Criticized)		Performing Impaired (Criticized)		Nonperforming Impaired (Nonaccrual)		Total
December 31, 2016:
Commercial loans:
Software and internet	$	4,924,923	$	620,907	$	46,143	$	76,605	$	5,668,578
Hardware	985,889		137,830		58,814		6,581		1,189,114
Private equity/venture capital	7,747,317		594		—		—		7,747,911
Life science/healthcare	1,707,499		120,825		6,578		31,783		1,866,685
Premium wine	865,354		11,838		2,696		491		880,379
Other	480,845		23,510		464		403		505,222
Total commercial loans	16,711,827		915,504		114,695		115,863		17,857,889
Consumer loans:
Real estate secured loans	1,914,512		9,604		—		1,504		1,925,620
Other consumer loans	238,256		499		786		1,612		241,153
Total consumer loans	2,152,768		10,103		786		3,116		2,166,773
Total gross loans	$	18,864,595	$	925,607	$	115,481	$	118,979	$	20,024,662
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 December 31, 2016 we had 20 TDRs with a total carrying value of $96.1 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. This compares to 17 TDRs with a total carrying value of $111.7 million as of December 31, 2015. There were unfunded commitments available for funding of $1.6 million to the clients associated with these TDRs as of December 31, 2016. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at December 31, 2016 and 2015:



	December 31,
(Dollars in thousands)	2016		2015
Loans modified in TDRs:
Commercial loans:
Software and internet	$	52,646	$	56,790
Hardware	14,870		473
Life science/healthcare	24,176		51,878
Premium wine	3,194		2,065
Other	387		519
Total commercial loans	95,273		111,725
Consumer loans:
Other consumer loans	786		—
Total consumer loans	786		—
Total loans modified in TDRs	$	96,059	$	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 2016, 2015 and 2014:



	Year ended December 31,
(Dollars in thousands)	2016		2015		2014
Loans modified in TDRs during the period:
Commercial loans:
Software and internet	$	23,574	$	56,790	$	1,033
Hardware	14,870		286		1,118
Private equity/venture capital	—		—		—
Life science/healthcare	1,638		51,878		—
Premium wine	677		898		587
Other	—		519		—
Total commercial loans	40,759		110,371		2,738
Consumer loans:
Other consumer loans	786		—		—
Total consumer loans	786		—		—
Total loans modified in TDRs during the period (1)	$	41,545	$	110,371	$	2,738


(1)	During 2016 we had $3.6 million of partial charge-offs on loans classified as TDRs. We had $23.5 million of partial charge-offs in 2015 and we did not have any partial charge-offs in 2014.

All new TDRs in 2016 and 2015 were modified through payment deferrals granted to our clients. New TDRs in 2014 included $1.7 million of payment deferrals and $1.0 million of principal forgiveness.

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 their respective periods, broken out by portfolio segment and class of financing receivable. During the 2014 year, there were no TDRs modified within the previous 12 months that defaulted.



	December 31,
(Dollars in thousands)	2016		2015		2014
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software and internet	$	—	$	16,804	$	—
Hardware	134		286		—
Premium wine	491		—		—
Life science/healthcare	—		943		—
Total commercial loans	625		18,033		—
Consumer loans:
Other consumer loans	786		—		—
Total TDRs modified within the previous 12 months that defaulted in the period	$	1,411	$	18,033	$	—

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 December 31, 2016.