Loans, Allowance for Loan Losses and Allowance for Unfunded Credit Commitments

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, data, storage, and electronics), software/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 our hardware, software/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 $165 million and $148 million at June 30, 2018 and December 31, 2017, respectively, is presented in the following table:



(Dollars in thousands)	June 30, 2018		December 31, 2017
Commercial loans:
Software/internet	$	6,230,358	$	6,172,531
Hardware	1,269,241		1,193,599
Private equity/venture capital	12,224,155		9,952,377
Life science/healthcare	2,087,872		1,808,827
Premium wine	198,813		204,105
Other	316,392		365,724
Total commercial loans	22,326,831		19,697,163
Real estate secured loans:
Premium wine (1)	685,357		669,053
Consumer loans (2)	2,481,062		2,300,506
Other	41,275		42,068
Total real estate secured loans	3,207,694		3,011,627
Construction loans	64,388		68,546
Consumer loans	397,279		328,980
Total loans, net of unearned income (3)	$	25,996,192	$	23,106,316


(1)	Included in our premium wine portfolio are gross construction loans of $104 million and $100 million at June 30, 2018 and December 31, 2017, respectively.


(2)	Consumer loans secured by real estate at June 30, 2018 and December 31, 2017 were comprised of the following:



(Dollars in thousands)	June 30, 2018		December 31, 2017
Loans for personal residence	$	2,144,326	$	1,995,840
Loans to eligible employees	266,988		243,118
Home equity lines of credit	69,748		61,548
Consumer loans secured by real estate	$	2,481,062	$	2,300,506


(3)	Included within our total loan portfolio are credit card loans of $315 million and $270 million at June 30, 2018 and December 31, 2017, respectively.

Credit Quality

The composition of loans, net of unearned income of $165 million and $148 million at June 30, 2018 and December 31, 2017, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	June 30, 2018		December 31, 2017
Commercial loans:
Software/internet	$	6,230,358	$	6,172,531
Hardware	1,269,241		1,193,599
Private equity/venture capital	12,224,155		9,952,377
Life science/healthcare	2,087,872		1,808,827
Premium wine	884,170		873,158
Other	422,055		476,338
Total commercial loans	23,117,851		20,476,830
Consumer loans:
Real estate secured loans	2,481,062		2,300,506
Other consumer loans	397,279		328,980
Total consumer loans	2,878,341		2,629,486
Total loans, net of unearned income	$	25,996,192	$	23,106,316

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of June 30, 2018 and December 31, 2017:



(Dollars in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Equal to or Greater Than 90 Days Past Due		Total Past Due		Current		Loans Past Due 90 Days or More Still Accruing Interest
June 30, 2018:
Commercial loans:
Software/internet	$	7,996	$	6,271	$	459	$	14,726	$	6,174,542	$	459
Hardware	645		40		3		688		1,238,451		3
Private equity/venture capital	62,536		10		—		62,546		12,170,459		—
Life science/healthcare	671		269		—		940		2,130,976		—
Premium wine	3,350		—		—		3,350		879,176		—
Other	1		3		—		4		436,011		—
Total commercial loans	75,199		6,593		462		82,254		23,029,615		462
Consumer loans:
Real estate secured loans	—		—		—		—		2,473,458		—
Other consumer loans	1,489		—		—		1,489		395,787		—
Total consumer loans	1,489		—		—		1,489		2,869,245		—
Total gross loans excluding impaired loans	76,688		6,593		462		83,743		25,898,860		462
Impaired loans	1,557		2,070		36,196		39,823		138,356		—
Total gross loans	$	78,245	$	8,663	$	36,658	$	123,566	$	26,037,216	$	462
December 31, 2017:
Commercial loans:
Software/internet	$	14,257	$	6,526	$	141	$	20,924	$	6,101,147	$	141
Hardware	1,145		77		50		1,272		1,163,278		50
Private equity/venture capital	86,566		38,580		—		125,146		9,835,317		—
Life science/healthcare	4,390		191		—		4,581		1,841,692		—
Premium wine	418		—		—		418		871,074		—
Other	445		—		—		445		490,292		—
Total commercial loans	107,221		45,374		191		152,786		20,302,800		191
Consumer loans:
Real estate secured loans	2,164		532		—		2,696		2,292,980		—
Other consumer loans	796		—		—		796		327,234		—
Total consumer loans	2,960		532		—		3,492		2,620,214		—
Total gross loans excluding impaired loans	110,181		45,906		191		156,278		22,923,014		191
Impaired loans	1,344		11,902		30,403		43,649		131,212		—
Total gross loans	$	111,525	$	57,808	$	30,594	$	199,927	$	23,054,226	$	191

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, 2018 and December 31, 2017:



(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, 2018:
Commercial loans:
Software/internet	$	58,136	$	44,384	$	102,520	$	126,752
Hardware	17,093		25,201		42,294		43,403
Private equity/venture capital	—		—		—		—
Life science/healthcare	26,170		250		26,420		31,517
Premium wine	331		2,193		2,524		2,576
Other	8		—		8		36
Total commercial loans	101,738		72,028		173,766		204,284
Consumer loans:
Real estate secured loans	3,254		1,159		4,413		6,012
Other consumer loans	—		—		—		—
Total consumer loans	3,254		1,159		4,413		6,012
Total	$	104,992	$	73,187	$	178,179	$	210,296
December 31, 2017:
Commercial loans:
Software/internet	$	49,645	$	61,009	$	110,654	$	129,006
Hardware	15,637		20,713		36,350		41,721
Private equity/venture capital	658		—		658		984
Life science/healthcare	20,521		1,166		21,687		26,360
Premium wine	—		2,877		2,877		2,911
Other	32		—		32		165
Total commercial loans	86,493		85,765		172,258		201,147
Consumer loans:
Real estate secured loans	1,331		850		2,181		3,712
Other consumer loans	422		—		422		436
Total consumer loans	1,753		850		2,603		4,148
Total	$	88,246	$	86,615	$	174,861	$	205,295

The following tables summarize our average impaired loans and interest income recognized on impaired loans, broken out by portfolio segment and class of financing receivable for the three and six months ended June 30, 2018 and 2017:



Three months ended June 30,	Average impaired loans				Interest income recognized on impaired loans
(Dollars in thousands)	2018		2017		2018		2017
Commercial loans:
Software/internet	$	110,101	$	136,374	$	315	$	711
Hardware	37,058		29,771		237		510
Private equity/venture capital	72		327		—		3
Life science/healthcare	21,790		36,033		5		191
Premium wine	2,604		3,221		36		38
Other	379		708		—		—
Total commercial loans	172,004		206,434		593		1,453
Consumer loans:
Real estate secured loans	4,466		1,360		3		—
Other consumer loans	693		1,679		—		—
Total consumer loans	5,159		3,039		3		—
Total average impaired loans	$	177,163	$	209,473	$	596	$	1,453



Six months ended June 30,	Average impaired loans				Interest income recognized on impaired loans
(Dollars in thousands)	2018		2017		2018		2017
Commercial loans:
Software/internet	$	109,444	$	123,145	$	562	$	938
Hardware	37,742		31,940		289		943
Private equity/venture capital	187		342		—		5
Life science/healthcare	22,234		37,488		11		291
Premium wine	2,686		3,217		72		76
Other	195		885		—		—
Total commercial loans	172,488		197,017		934		2,253
Consumer loans:
Real estate secured loans	3,765		1,424		8		—
Other consumer loans	716		1,914		—		—
Total consumer loans	4,481		3,338		8		—
Total average impaired loans	$	176,969	$	200,355	$	942	$	2,253

The following tables summarize the activity relating to our allowance for loan losses for the three and six months ended June 30, 2018 and 2017, broken out by portfolio segment:



Three months ended June 30, 2018	Beginning Balance March 31, 2018		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2018
(Dollars in thousands)	Beginning Balance March 31, 2018		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2018
Commercial loans:
Software/internet	$	103,295	$	(13,402	)	$	404	$	13,179		$	(828	)	$	102,648
Hardware	28,472		(461		)	643		6,447			(406		)	34,695
Private equity/venture capital	91,618		(112		)	—		(2,237		)	140			89,409
Life science/healthcare	25,806		—			3		9,876			(621		)	35,064
Premium wine	3,365		—			—		78			(5		)	3,438
Other	3,482		(1,164		)	566		13			(1		)	2,896
Total commercial loans	256,038		(15,139		)	1,616		27,356			(1,721		)	268,150
Total consumer loans	18,256		(289		)	310		300			(18		)	18,559
Total allowance for loan losses	$	274,294	$	(15,428	)	$	1,926	$	27,656		$	(1,739	)	$	286,709



Three months ended June 30, 2017	Beginning Balance March 31, 2017		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2017
(Dollars in thousands)	Beginning Balance March 31, 2017		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2017
Commercial loans:
Software/internet	$	109,502	$	(19,401	)	$	1,236	$	1,527		$	73		$	92,937
Hardware	23,284		(249		)	77		4,474			214			27,800
Private equity/venture capital	57,078		—			—		9,263			444			66,785
Life science/healthcare	31,542		(4,678		)	8		819			39			27,730
Premium wine	4,343		—			—		(1,155		)	(55		)	3,133
Other	4,377		(753		)	180		316			15			4,135
Total commercial loans	230,126		(25,081		)	1,501		15,244			730			222,520
Total consumer loans	13,004		—			1,034		(59		)	(3		)	13,976
Total allowance for loan losses	$	243,130	$	(25,081	)	$	2,535	$	15,185		$	727		$	236,496



Six months ended June 30, 2018	Beginning Balance December 31, 2017		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2018
(Dollars in thousands)	Beginning Balance December 31, 2017		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2018
Commercial loans:
Software/internet	$	96,104	$	(20,073	)	$	977	$	25,980		$	(340	)	$	102,648
Hardware	27,614		(3,414		)	1,231		9,551			(287		)	34,695
Private equity/venture capital	82,468		(112		)	10		6,568			475			89,409
Life science/healthcare	24,924		(864		)	56		11,507			(559		)	35,064
Premium wine	3,532		—			—		(83		)	(11		)	3,438
Other	3,941		(1,263		)	1,103		(893		)	8			2,896
Total commercial loans	238,583		(25,726		)	3,377		52,630			(714		)	268,150
Total consumer loans	16,441		(289		)	337		2,022			48			18,559
Total allowance for loan losses	$	255,024	$	(26,015	)	$	3,714	$	54,652		$	(666	)	$	286,709



Six months ended June 30, 2017	Beginning Balance December 31, 2016		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2017
(Dollars in thousands)	Beginning Balance December 31, 2016		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance June 30, 2017
Commercial loans:
Software/internet	$	97,388	$	(27,381	)	$	2,407	$	20,246		$	277		$	92,937
Hardware	31,166		(4,273		)	344		394			169			27,800
Private equity/venture capital	50,299		—			—		15,969			517			66,785
Life science/healthcare	25,446		(6,410		)	44		8,527			123			27,730
Premium wine	4,115		—			—		(929		)	(53		)	3,133
Other	4,768		(1,047		)	477		(74		)	11			4,135
Total commercial loans	213,182		(39,111		)	3,272		44,133			1,044			222,520
Total consumer loans	12,184		—			1,055		731			6			13,976
Total allowance for loan losses	$	225,366	$	(39,111	)	$	4,327	$	44,864		$	1,050		$	236,496

The following table summarizes the activity relating to our allowance for unfunded credit commitments for the three and six months ended June 30, 2018 and 2017:



	Three months ended June 30,					Six months ended June 30,
(Dollars in thousands)	2018			2017		2018			2017
Beginning balance	$	52,823		$	46,335	$	51,770		$	45,265
Provision for unfunded credit commitments	1,424			621		2,400			1,676
Foreign currency translation adjustments	(143		)	44		(66		)	59
Ending balance (1)	$	54,104		$	47,000	$	54,104		$	47,000


(1)	See Note 13—“Off-Balance Sheet Arrangements, Guarantees and Other Commitments” of the “Notes to Interim Consolidated Financial Statements (unaudited)” under Part I, Item 1 of this report for additional disclosures related to our commitments to extend credit.

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2018 and December 31, 2017, broken out by portfolio segment:



	June 30, 2018								December 31, 2017
	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/internet	$	25,320	$	102,520	$	77,328	$	6,127,838	$	23,088	$	110,654	$	73,016	$	6,061,877
Hardware	13,392		42,294		21,303		1,226,947		8,450		36,350		19,164		1,157,249
Private equity/venture capital	—		—		89,409		12,224,155		330		658		82,138		9,951,719
Life science/healthcare	14,442		26,420		20,622		2,061,452		9,315		21,687		15,609		1,787,140
Premium wine	—		2,524		3,438		881,646		—		2,877		3,532		870,281
Other	8		8		2,888		422,047		32		32		3,909		476,306
Total commercial loans	53,162		173,766		214,988		22,944,085		41,215		172,258		197,368		20,304,572
Total consumer loans	515		4,413		18,044		2,873,928		578		2,603		15,863		2,626,883
Total	$	53,677	$	178,179	$	233,032	$	25,818,013	$	41,793	$	174,861	$	213,231	$	22,931,455

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 full repayment of a criticized loan has been deemed improbable under the original contractual terms but full repayment remains probable overall, the loan is considered to be a “Performing Impaired (Criticized)” loan. 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 2017 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, 2018 and December 31, 2017:



(Dollars in thousands)	Pass		Performing (Criticized)		Performing Impaired (Criticized)		Nonperforming Impaired (Nonaccrual)		Total
June 30, 2018:
Commercial loans:
Software/internet	$	5,645,661	$	543,607	$	25,369	$	77,151	$	6,291,788
Hardware	1,163,629		75,510		25,201		17,093		1,281,433
Private equity/venture capital	12,229,454		3,551		—		—		12,233,005
Life science/healthcare	1,909,151		222,765		250		26,170		2,158,336
Premium wine	840,649		41,877		2,193		331		885,050
Other	432,652		3,363		—		8		436,023
Total commercial loans	22,221,196		890,673		53,013		120,753		23,285,635
Consumer loans:
Real estate secured loans	2,462,007		11,451		324		4,089		2,477,871
Other consumer loans	396,902		374		—		—		397,276
Total consumer loans	2,858,909		11,825		324		4,089		2,875,147
Total gross loans	$	25,080,105	$	902,498	$	53,337	$	124,842	$	26,160,782
December 31, 2017:
Commercial loans:
Software/internet	$	5,655,739	$	466,332	$	31,794	$	78,860	$	6,232,725
Hardware	1,112,574		51,976		20,165		16,185		1,200,900
Private equity/venture capital	9,955,082		5,381		—		658		9,961,121
Life science/healthcare	1,720,613		125,660		1,167		20,520		1,867,960
Premium wine	834,537		36,955		2,476		401		874,369
Other	469,721		21,016		—		32		490,769
Total commercial loans	19,748,266		707,320		55,602		116,656		20,627,844
Consumer loans:
Real estate secured loans	2,282,375		13,301		—		2,181		2,297,857
Other consumer loans	326,851		1,179		—		422		328,452
Total consumer loans	2,609,226		14,480		—		2,603		2,626,309
Total gross loans	$	22,357,492	$	721,800	$	55,602	$	119,259	$	23,254,153

Troubled Debt Restructurings

As of June 30, 2018 we had 20 TDRs with a total carrying value of $128.9 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were $0.6 million of unfunded commitments available for funding to the clients associated with these TDRs as of June 30, 2018.

The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at June 30, 2018 and December 31, 2017:



(Dollars in thousands)	June 30, 2018		December 31, 2017
Loans modified in TDRs:
Commercial loans:
Software/internet	$	50,202	$	73,455
Hardware	49,834		51,132
Private equity/venture capital	—		350
Life science/healthcare	25,460		19,235
Premium wine	3,048		3,198
Total commercial loans	128,544		147,370
Consumer loans:
Other consumer loans	325		423
Total	$	128,869	$	147,793

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, 2018 and 2017:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2018		2017		2018		2017
Loans modified in TDRs during the period:
Commercial loans:
Software/internet	$	14,783	$	16,135	$	14,783	$	22,242
Hardware	1,954		—		3,448		—
Private equity/venture capital	—		—		—		—
Life science/healthcare	6,231		4,588		7,461		4,588
Premium wine	—		190		—		190
Total commercial loans	22,968		20,913		25,692		27,020
Consumer loans:
Other consumer loans	—		—		325		—
Total consumer loans	—		—		325		—
Total loans modified in TDRs during the period (1)	$	22,968	$	20,913	$	26,017	$	27,020


(1)	There were $8.5 million of partial charge-offs for both the three and six months ended June 30, 2018 and $12.5 million and $15.1 million of partial charge-offs during the three and six months ended June 30, 2017, respectively.

During the three and six months ended June 30, 2018 all new TDRs of $23.0 million and $26.0 million, respectively, were modified through payment deferrals granted to our clients. During the three and six months ended June 30, 2017, all new TDRs of $20.9 million and $27.0 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, 2018 and 2017:



	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2018		2017		2018		2017
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software/internet	$	19,625	$	—	$	22,657	$	—
Hardware	3,449		—		3,449		—
Life science/healthcare	1,230		—		1,230		—
Premium wine	—		190		—		190
Total TDRs modified within the previous 12 months that defaulted in the period	$	24,304	$	190	$	27,336	$	190

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 for TDRs was necessary to determine the allowance for loan losses as of June 30, 2018.