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 $170 million and $173 million at March 31, 2019 and December 31, 2018, respectively, is presented in the following table:



(Dollars in thousands)	March 31, 2019		December 31, 2018
Commercial loans:
Software/internet	$	6,236,266	$	6,154,755
Hardware	1,256,891		1,234,557
Private equity/venture capital	14,308,077		14,110,560
Life science/healthcare	2,522,731		2,385,612
Premium wine	256,021		249,266
Other	260,206		321,978
Total commercial loans	24,840,192		24,456,728
Real estate secured loans:
Premium wine (1)	758,954		710,397
Consumer loans (2)	2,679,084		2,612,971
Other	40,037		40,435
Total real estate secured loans	3,478,075		3,363,803
Construction loans	111,854		97,077
Consumer loans	420,324		420,672
Total loans, net of unearned income (3)	$	28,850,445	$	28,338,280


(1)	Included in our premium wine portfolio are gross construction loans of $96 million and $99 million at March 31, 2019 and December 31, 2018, respectively.


(2)	Consumer loans secured by real estate at March 31, 2019 and December 31, 2018 were comprised of the following:



(Dollars in thousands)	March 31, 2019		December 31, 2018
Loans for personal residence	$	2,311,701	$	2,251,292
Loans to eligible employees	302,671		290,194
Home equity lines of credit	64,712		71,485
Consumer loans secured by real estate	$	2,679,084	$	2,612,971


(3)	Included within our total loan portfolio are credit card loans of $375 million and $335 million at March 31, 2019 and December 31, 2018, respectively.

Credit Quality

The composition of loans, net of unearned income of $170 million and $173 million at March 31, 2019 and December 31, 2018, respectively, broken out by portfolio segment and class of financing receivable, is as follows:



(Dollars in thousands)	March 31, 2019		December 31, 2018
Commercial loans:
Software/internet	$	6,236,266	$	6,154,755
Hardware	1,256,891		1,234,557
Private equity/venture capital	14,308,077		14,110,560
Life science/healthcare	2,522,731		2,385,612
Premium wine	1,014,975		959,663
Other	412,097		459,490
Total commercial loans	25,751,037		25,304,637
Consumer loans:
Real estate secured loans	2,679,084		2,612,971
Other consumer loans	420,324		420,672
Total consumer loans	3,099,408		3,033,643
Total loans, net of unearned income	$	28,850,445	$	28,338,280

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of March 31, 2019 and December 31, 2018:



(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
March 31, 2019:
Commercial loans:
Software/internet	$	34,680	$	4,042	$	1,945	$	40,667	$	6,147,766	$	1,945
Hardware	379		55		—		434		1,245,841		—
Private equity/venture capital	24,960		—		1		24,961		14,284,752		1
Life science/healthcare	2,711		640		201		3,552		2,522,991		201
Premium wine	2,981		—		—		2,981		1,011,487		—
Other	1		4		1		6		445,402		1
Total commercial loans	65,712		4,741		2,148		72,601		25,658,239		2,148
Consumer loans:
Real estate secured loans	3,050		—		—		3,050		2,664,875		—
Other consumer loans	—		—		—		—		420,647		—
Total consumer loans	3,050		—		—		3,050		3,085,522		—
Total gross loans excluding impaired loans	68,762		4,741		2,148		75,651		28,743,761		2,148
Impaired loans	11,562		2,517		26,412		40,491		160,616		—
Total gross loans	$	80,324	$	7,258	$	28,560	$	116,142	$	28,904,377	$	2,148
December 31, 2018:
Commercial loans:
Software/internet	$	28,134	$	6,944	$	378	$	35,456	$	6,059,672	$	378
Hardware	300		34		4		338		1,233,956		4
Private equity/venture capital	59,481		11		—		59,492		14,054,940		—
Life science/healthcare	16,082		817		19		16,918		2,410,091		19
Premium wine	2,953		14		—		2,967		956,285		—
Other	7,391		163		1		7,555		477,442		1
Total commercial loans	114,341		7,983		402		122,726		25,192,386		402
Consumer loans:
Real estate secured loans	3,598		1,750		1,562		6,910		2,598,496		1,562
Other consumer loans	361		—		—		361		420,359		—
Total consumer loans	3,959		1,750		1,562		7,271		3,018,855		1,562
Total gross loans excluding impaired loans	118,300		9,733		1,964		129,997		28,211,241		1,964
Impaired loans	2,843		1,181		25,092		29,116		140,958		—
Total gross loans	$	121,143	$	10,914	$	27,056	$	159,113	$	28,352,199	$	1,964

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, 2019 and December 31, 2018:



(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, 2019:
Commercial loans:
Software/internet	$	45,908	$	53,026	$	98,934	$	117,640
Hardware	8,054		11,753		19,807		20,482
Private equity/venture capital	2,247		3,700		5,947		5,947
Life science/healthcare	52,944		14,427		67,371		78,353
Premium wine	—		1,236		1,236		1,305
Other	4		—		4		4
Total commercial loans	109,157		84,142		193,299		223,731
Consumer loans:
Real estate secured loans	1,827		5,967		7,794		9,691
Other consumer loans	14		—		14		15
Total consumer loans	1,841		5,967		7,808		9,706
Total	$	110,998	$	90,109	$	201,107	$	233,437
December 31, 2018:
Commercial loans:
Software/internet	$	49,625	$	65,225	$	114,850	$	131,858
Hardware	1,256		10,250		11,506		12,159
Private equity/venture capital	—		3,700		3,700		3,700
Life science/healthcare	17,791		16,276		34,067		44,446
Premium wine	—		1,301		1,301		1,365
Other	411		—		411		411
Total commercial loans	69,083		96,752		165,835		193,939
Consumer loans:
Real estate secured loans	3,919		320		4,239		5,969
Other consumer loans	—		—		—		—
Total consumer loans	3,919		320		4,239		5,969
Total	$	73,002	$	97,072	$	170,074	$	199,908

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 months ended March 31, 2019 and 2018:



Three months ended March 31,	Average impaired loans				Interest income recognized on impaired loans
(Dollars in thousands)	2019		2018		2019		2018
Commercial loans:
Software/internet	$	104,312	$	108,788	$	603	$	532
Hardware	16,815		38,426		252		363
Private equity/venture capital	5,198		302		—		—
Life science/healthcare	44,163		22,679		347		37
Premium wine	1,256		2,769		18		36
Other	140		11		—		—
Total commercial loans	171,884		172,975		1,220		968
Consumer loans:
Real estate secured loans	9,613		3,063		54		—
Other consumer loans	5		739		—		5
Total consumer loans	9,618		3,802		54		5
Total average impaired loans	$	181,502	$	176,777	$	1,274	$	973

The following tables summarize the activity relating to our allowance for loan losses for the three months ended March 31, 2019 and 2018, broken out by portfolio segment:



Three months ended March 31, 2019	Beginning Balance December 31, 2018		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance March 31, 2019
(Dollars in thousands)	Beginning Balance December 31, 2018		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance March 31, 2019
Commercial loans:
Software/internet	$	103,567	$	(8,254	)	$	1,054	$	(658	)	$	(26	)	$	95,683
Hardware	19,725		(253		)	56		5,384			209			25,121
Private equity/venture capital	98,581		—			—		(1,079		)	(42		)	97,460
Life science/healthcare	32,180		(23		)	105		22,672			880			55,814
Premium wine	3,355		—			—		427			17			3,799
Other	3,558		(411		)	—		59			2			3,208
Total commercial loans	260,966		(8,941		)	1,215		26,805			1,040			281,085
Total consumer loans	19,937		(59		)	210		(984		)	(38		)	19,066
Total allowance for loan losses	$	280,903	$	(9,000	)	$	1,425	$	25,821		$	1,002		$	300,151



Three months ended March 31, 2018	Beginning Balance December 31, 2017		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance March 31, 2018
(Dollars in thousands)	Beginning Balance December 31, 2017		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Foreign Currency Translation Adjustments			Ending Balance March 31, 2018
Commercial loans:
Software/internet	$	96,104	$	(6,671	)	$	573	$	12,801		$	488		$	103,295
Hardware	27,614		(2,953		)	588		3,104			119			28,472
Private equity/venture capital	82,468		—			10		8,805			335			91,618
Life science/healthcare	24,924		(864		)	53		1,631			62			25,806
Premium wine	3,532		—			—		(161		)	(6		)	3,365
Other	3,941		(99		)	537		(906		)	9			3,482
Total commercial loans	238,583		(10,587		)	1,761		25,274			1,007			256,038
Total consumer loans	16,441		—			27		1,722			66			18,256
Total allowance for loan losses	$	255,024	$	(10,587	)	$	1,788	$	26,996		$	1,073		$	274,294

The following table summarizes the activity relating to our allowance for unfunded credit commitments for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
(Dollars in thousands)	2019		2018
Allowance for unfunded credit commitments, beginning balance	$	55,183	$	51,770
Provision for unfunded credit commitments	2,730		976
Foreign currency translation adjustments	57		77
Allowance for unfunded credit commitments, ending balance (1)	$	57,970	$	52,823


(1)	See Note 16—“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 March 31, 2019 and December 31, 2018, broken out by portfolio segment:



	March 31, 2019								December 31, 2018
	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	$	22,770	$	98,934	$	72,913	$	6,137,332	$	28,527	$	114,850	$	75,040	$	6,039,905
Hardware	5,311		19,807		19,810		1,237,084		1,253		11,506		18,472		1,223,051
Private equity/venture capital	2,247		5,947		95,213		14,302,130		—		3,700		98,581		14,106,860
Life science/healthcare	30,730		67,371		25,084		2,455,360		7,484		34,067		24,696		2,351,545
Premium wine	—		1,236		3,799		1,013,739		—		1,301		3,355		958,362
Other	4		4		3,204		412,093		411		411		3,147		459,079
Total commercial loans	61,062		193,299		220,023		25,557,738		37,675		165,835		223,291		25,138,802
Total consumer loans	163		7,808		18,903		3,091,600		266		4,239		19,671		3,029,404
Total	$	61,225	$	201,107	$	238,926	$	28,649,338	$	37,941	$	170,074	$	242,962	$	28,168,206

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 2018 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, 2019 and December 31, 2018:



(Dollars in thousands)	Pass		Performing (Criticized)		Performing Impaired (Criticized)		Nonperforming Impaired (Nonaccrual)		Total
March 31, 2019:
Commercial loans:
Software/internet	$	5,619,634	$	568,799	$	36,336	$	62,598	$	6,287,367
Hardware	1,096,461		149,814		11,753		8,054		1,266,082
Private equity/venture capital	14,306,933		2,780		—		5,947		14,315,660
Life science/healthcare	2,422,438		104,105		14,427		52,944		2,593,914
Premium wine	945,712		68,756		968		268		1,015,704
Other	425,012		20,396		—		4		445,412
Total commercial loans	24,816,190		914,650		63,484		129,815		25,924,139
Consumer loans:
Real estate secured loans	2,656,069		11,856		4,000		3,794		2,675,719
Other consumer loans	419,732		915		—		14		420,661
Total consumer loans	3,075,801		12,771		4,000		3,808		3,096,380
Total gross loans	$	27,891,991	$	927,421	$	67,484	$	133,623	$	29,020,519
December 31, 2018:
Commercial loans:
Software/internet	$	5,574,332	$	520,796	$	48,069	$	66,781	$	6,209,978
Hardware	1,146,985		87,309		10,250		1,256		1,245,800
Private equity/venture capital	14,098,281		16,151		—		3,700		14,118,132
Life science/healthcare	2,291,356		135,653		16,276		17,791		2,461,076
Premium wine	909,965		49,287		1,017		284		960,553
Other	467,653		17,344		—		411		485,408
Total commercial loans	24,488,572		826,540		75,612		90,223		25,480,947
Consumer loans:
Real estate secured loans	2,584,261		21,145		320		3,919		2,609,645
Other consumer loans	419,771		949		—		—		420,720
Total consumer loans	3,004,032		22,094		320		3,919		3,030,365
Total gross loans	$	27,492,604	$	848,634	$	75,932	$	94,142	$	28,511,312

Troubled Debt Restructurings

As of March 31, 2019, we had 19 TDRs with a total carrying value of $86.9 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were $3.3 million of unfunded commitments available for funding to the clients associated with these TDRs as of March 31, 2019.

The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at March 31, 2019 and December 31, 2018:



(Dollars in thousands)	March 31, 2019		December 31, 2018
Loans modified in TDRs:
Commercial loans:
Software/internet	$	55,493	$	58,089
Hardware	11,759		9,665
Life science/healthcare	16,532		12,738
Premium wine	2,806		2,883
Total commercial loans	86,590		83,375
Consumer loans:
Other consumer loans	318		320
Total loans modified in TDRs	$	86,908	$	83,695

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, 2019 and 2018:



	Three months ended March 31,
(Dollars in thousands)	2019		2018
Loans modified in TDRs during the period:
Commercial loans:
Software/internet	$	677	$	756
Hardware	—		1,559
Life science/healthcare	5,000		1,239
Total commercial loans	5,677		3,554
Consumer loans:
Other consumer loans	—		326
Total loans modified in TDRs during the period (1)	$	5,677	$	3,880


(1)	There were $2.2 million of partial charge-offs for the three months ended March 31, 2019 and no partial charge-offs during the three months ended March 31, 2018.

During the three months ended March 31, 2019 and 2018, all new TDRs of $5.7 million and $3.9 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 months ended March 31, 2019 and 2018:



	Three months ended March 31,
(Dollars in thousands)	2019		2018
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software/internet	$	—	$	3,032
Life science/healthcare	5,000		—
Total TDRs modified within the previous 12 months that defaulted in the period	$	5,000	$	3,032

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 March 31, 2019.