Loans and Allowance for Loan Losses

We serve a variety of commercial clients in the technology, life science, venture capital/private equity 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 clean technology. Because of the diverse nature of clean technology products and services, for our loan-related reporting purposes, cleantech-related loans are reported under our hardware, software, life science and other commercial loan categories, as applicable. Our life science clients are concentrated in the medical devices and biotechnology sectors. Loans made to venture capital/private equity 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 loans through SVB Private Bank primarily to venture capital/private equity professionals. 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 real estate secured loans to eligible employees through our EHOP.

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 $73.8 million and $60.2 million at September 30, 2012 and December 31, 2011, respectively, is presented in the following table:



(Dollars in thousands)	September 30, 2012		December 31, 2011
Commercial loans:
Software	$	2,952,866	$	2,492,849
Hardware	1,192,716		952,303
Venture capital/private equity	1,393,943		1,117,419
Life science	1,027,693		863,737
Premium wine	133,810		130,245
Other	309,970		342,147
Total commercial loans	7,010,998		5,898,700
Real estate secured loans:
Premium wine (1)	379,837		345,988
Consumer loans (2)	609,370		534,001
Total real estate secured loans	989,207		879,989
Construction loans	48,558		30,256
Consumer loans	143,606		161,137
Total loans, net of unearned income (3)	$	8,192,369	$	6,970,082


(1)	Included in our premium wine portfolio are gross construction loans of $148.4 million and $110.8 million at September 30, 2012 and December 31, 2011, respectively.


(2)	Consumer loans secured by real estate at September 30, 2012 and December 31, 2011 were comprised of the following:



(Dollars in thousands)	September 30, 2012		December 31, 2011
Loans for personal residence	$	432,004	$	350,359
Loans to eligible employees	107,969		99,704
Home equity lines of credit	69,397		83,938
Consumer loans secured by real estate	$	609,370	$	534,001


(3)	Included within our total loan portfolio are credit card loans of $66.2 million and $49.7 million at September 30, 2012 and December 31, 2011, respectively.

Credit Quality

The composition of loans, net of unearned income of $73.8 million and $60.2 million at September 30, 2012 and December 31, 2011, respectively, broken out by portfolio segment and class of financing receivable is as follows:



(Dollars in thousands)	September 30, 2012		December 31, 2011
Commercial loans:
Software	$	2,952,866	$	2,492,849
Hardware	1,192,716		952,303
Venture capital/private equity	1,393,943		1,117,419
Life science	1,027,693		863,737
Premium wine	513,647		476,233
Other	358,528		372,403
Total commercial loans	7,439,393		6,274,944
Consumer loans:
Real estate secured loans	609,370		534,001
Other consumer loans	143,606		161,137
Total consumer loans	752,976		695,138
Total loans, net of unearned income	$	8,192,369	$	6,970,082

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of September 30, 2012 and December 31, 2011:



(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, 2012:
Commercial loans:
Software	$	5,323	$	273	$	—	$	5,596	$	2,975,008	$	—
Hardware	8,901		181		5,000		14,082		1,163,848		5,000
Venture capital/private equity	1,651		—		—		1,651		1,406,695		—
Life science	8,646		1,875		—		10,521		1,027,806		—
Premium wine	49		—		—		49		512,621		—
Other	74		—		—		74		358,862		—
Total commercial loans	24,644		2,329		5,000		31,973		7,444,840		5,000
Consumer loans:
Real estate secured loans	—		—		—		—		607,117		—
Other consumer loans	—		—		—		—		142,841		—
Total consumer loans	—		—		—		—		749,958		—
Total gross loans excluding impaired loans	24,644		2,329		5,000		31,973		8,194,798		5,000
Impaired loans	331		501		2,953		3,785		35,612		—
Total gross loans	$	24,975	$	2,830	$	7,953	$	35,758	$	8,230,410	$	5,000
December 31, 2011:
Commercial loans:
Software	$	415	$	1,006	$	—	$	1,421	$	2,515,327	$	—
Hardware	1,951		45		—		1,996		954,690		—
Venture capital/private equity	45		—		—		45		1,128,475		—
Life science	398		78		—		476		871,626		—
Premium wine	1		174		—		175		475,406		—
Other	15		—		—		15		370,539		—
Total commercial loans	2,825		1,303		—		4,128		6,316,063		—
Consumer loans:
Real estate secured loans	—		—		—		—		515,534		—
Other consumer loans	590		—		—		590		157,389		—
Total consumer loans	590		—		—		590		672,923		—
Total gross loans excluding impaired loans	3,415		1,303		—		4,718		6,988,986		—
Impaired loans	1,350		1,794		6,613		9,757		26,860		—
Total gross loans	$	4,765	$	3,097	$	6,613	$	14,475	$	7,015,846	$	—

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, 2012 and December 31, 2011:



(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, 2012:
Commercial loans:
Software	$	2,634	$	182	$	2,816	$	3,324
Hardware	27,129		—		27,129		42,415
Life Science	—		—		—		—
Premium wine	—		3,079		3,079		3,317
Other	—		2,745		2,745		6,894
Total commercial loans	29,763		6,006		35,769		55,950
Consumer loans:
Real estate secured loans	120		2,288		2,408		7,407
Other consumer loans	1,220		—		1,220		1,371
Total consumer loans	1,340		2,288		3,628		8,778
Total	$	31,103	$	8,294	$	39,397	$	64,728
December 31, 2011:
Commercial loans:
Software	$	1,142	$	—	$	1,142	$	1,540
Hardware	4,754		429		5,183		8,843
Life science	—		311		311		523
Premium wine	—		3,212		3,212		3,341
Other	4,303		1,050		5,353		9,104
Total commercial loans	10,199		5,002		15,201		23,351
Consumer loans:
Real estate secured loans	—		18,283		18,283		22,410
Other consumer loans	3,133		—		3,133		3,197
Total consumer loans	3,133		18,283		21,416		25,607
Total	$	13,332	$	23,285	$	36,617	$	48,958

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during the three and nine months ended September 30, 2012 and 2011:



	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2012		2011		2012		2011
Average impaired loans:
Commercial loans:
Software	$	2,689	$	2,562	$	2,040	$	2,652
Hardware	18,490		7,071		17,407		6,086
Life science	—		827		78		1,498
Premium wine	3,093		1,954		3,334		2,345
Other	2,619		7,604		3,590		4,453
Total commercial loans	26,891		20,018		26,449		17,034
Consumer loans:
Real estate secured loans	2,411		18,746		5,967		19,476
Other consumer loans	1,266		1,107		2,152		369
Total consumer loans	3,677		19,853		8,119		19,845
Total average impaired loans	$	30,568	$	39,871	$	34,568	$	36,879

The following tables summarize the activity relating to our allowance for loan losses for the three and nine months ended September 30, 2012 and 2011, broken out by portfolio segment:



Three months ended September 30, 2012 (dollars in thousands)	Beginning Balance June 30, 2012		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance September 30, 2012
Commercial loans:
Software	$	37,981	$	—		$	374	$	(1,110	)	$	37,245
Hardware	22,632		(1,849		)	106		6,796			27,685
Venture capital/private equity	9,652		—			—		991			10,643
Life science	11,660		(2,781		)	3		3,281			12,163
Premium wine	3,396		—			228		(463		)	3,161
Other	4,942		(7		)	30		(1,708		)	3,257
Total commercial loans	90,263		(4,637		)	741		7,787			94,154
Consumer loans	7,903		—			466		(999		)	7,370
Total allowance for loan losses	$	98,166	$	(4,637	)	$	1,207	$	6,788		$	101,524



Nine months ended September 30, 2012 (dollars in thousands)	Beginning Balance December 31, 2011		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance September 30, 2012
Commercial loans:
Software	$	38,263	$	(2,977	)	$	4,462	$	(2,503	)	$	37,245
Hardware	16,810		(16,110		)	540		26,445			27,685
Venture capital/private equity	7,319		—			—		3,324			10,643
Life science	10,243		(3,016		)	316		4,620			12,163
Premium wine	3,914		(584		)	493		(662		)	3,161
Other	5,817		(2,463		)	1,181		(1,278		)	3,257
Total commercial loans	82,366		(25,150		)	6,992		29,946			94,154
Consumer loans	7,581		(607		)	1,026		(630		)	7,370
Total allowance for loan losses	$	89,947	$	(25,757	)	$	8,018	$	29,316		$	101,524



Three months ended September 30, 2011 (dollars in thousands)	Beginning Balance June 30, 2011		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance September 30, 2011
Commercial loans:
Software	$	31,873	$	(3,125	)	$	2,718	$	4,899		$	36,365
Hardware	16,042		(4,813		)	44		2,304			13,577
Venture capital/private equity	8,307		—			—		(497		)	7,810
Life science	7,225		(310		)	3,359		(2,110		)	8,164
Premium wine	4,009		—			360		(354		)	4,015
Other	5,869		—			64		(359		)	5,574
Total commercial loans	73,325		(8,248		)	6,545		3,883			75,505
Consumer loans	8,830		—			4,025		(3,114		)	9,741
Total allowance for loan losses	$	82,155	$	(8,248	)	$	10,570	$	769		$	85,246



Nine months ended September 30, 2011 (dollars in thousands)	Beginning Balance December 31, 2010		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance September 30, 2011
Commercial loans:
Software	$	29,288	$	(4,747	)	$	10,638	$	1,186		$	36,365
Hardware	14,688		(4,828		)	356		3,361			13,577
Venture capital/private equity	8,241		—			—		(431		)	7,810
Life science	9,077		(3,972		)	4,487		(1,428		)	8,164
Premium wine	5,492		(449		)	1,090		(2,118		)	4,015
Other	5,318		(2,867		)	471		2,652			5,574
Total commercial loans	72,104		(16,863		)	17,042		3,222			75,505
Consumer loans	10,523		—			4,584		(5,366		)	9,741
Total allowance for loan losses	$	82,627	$	(16,863	)	$	21,626	$	(2,144	)	$	85,246

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of September 30, 2012 and December 31, 2011, broken out by portfolio segment:



	September 30, 2012				December 31, 2011
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial loans:
Software	$	653	$	36,592	$	526	$	37,737
Hardware	5,061		22,624		1,261		15,549
Venture capital/private equity	—		10,643		—		7,319
Life science	—		12,163		—		10,243
Premium wine	—		3,161		—		3,914
Other	—		3,257		1,180		4,637
Total commercial loans	5,714		88,440		2,967		79,399
Consumer loans	289		7,081		740		6,841
Total allowance for loan losses	$	6,003	$	95,521	$	3,707	$	86,240

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)”. A majority of our Performing (Criticized) loans are from our SVB Accelerator practice, serving our emerging or early stage clients. Loans risk-rated 8 and 9 are loans that are considered to be impaired and are on nonaccrual status. Loans are placed on nonaccrual status when they become 90 days past due as to principal or interest payments (unless the principal and interest are well secured and in the process of collection), or when we have determined, based upon most recent available information, that the timely collection of principal or interest is not probable; these loans are deemed “impaired” (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies” under Part II, Item 8 of our 2011 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, 2012 and December 31, 2011:



(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
September 30, 2012:
Commercial loans:
Software	$	2,751,238	$	229,366	$	2,816	$	2,983,420
Hardware	1,069,973		107,957		27,129		1,205,059
Venture capital/private equity	1,406,746		1,600		—		1,408,346
Life science	939,092		99,235		—		1,038,327
Premium wine	501,507		11,163		3,079		515,749
Other	335,201		23,735		2,745		361,681
Total commercial loans	7,003,757		473,056		35,769		7,512,582
Consumer loans:
Real estate secured loans	588,678		18,439		2,408		609,525
Other consumer loans	131,548		11,293		1,220		144,061
Total consumer loans	720,226		29,732		3,628		753,586
Total gross loans	$	7,723,983	$	502,788	$	39,397	$	8,266,168
December 31, 2011:
Commercial loans:
Software	$	2,290,497	$	226,251	$	1,142	$	2,517,890
Hardware	839,230		117,456		5,183		961,869
Venture capital/private equity	1,120,373		8,147		—		1,128,520
Life science	748,129		123,973		311		872,413
Premium wine	434,309		41,272		3,212		478,793
Other	353,434		17,120		5,353		375,907
Total commercial loans	5,785,972		534,219		15,201		6,335,392
Consumer loans:
Real estate secured loans	497,060		18,474		18,283		533,817
Other consumer loans	151,101		6,878		3,133		161,112
Total consumer loans	648,161		25,352		21,416		694,929
Total gross loans	$	6,434,133	$	559,571	$	36,617	$	7,030,321

TDRs

As of September 30, 2012 we had TDRs of $23.5 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. There were unfunded commitments available for funding of $0.1 million to the clients associated with these TDRs as of September 30, 2012. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at September 30, 2012 and December 31, 2011:



(Dollars in thousands)	September 30, 2012		December 31, 2011
Loans modified in TDRs:
Commercial loans:
Software	$	2,459	$	1,142
Hardware	12,193		5,183
Premium wine	1,971		1,949
Other	3,281		4,934
Total commercial loans	19,904		13,208
Consumer loans:
Real estate secured loans	2,363		17,934
Other consumer loans	1,220		3,133
Total consumer loans	3,583		21,067
Total	$	23,487	$	34,275

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, 2012 and 2011:



	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2012		2011		2012		2011
Loans modified in TDRs during the period:
Commercial loans:
Software	$	1,969	$	381	$	1,969	$	941
Hardware	—		801		11,677		2,674
Premium wine	—		—		156		1,993
Other	—		2,247		2,237		2,247
Total commercial loans	1,969		3,429		16,039		7,855
Consumer loans:
Real estate secured loans	—		—		392		—
Other consumer loans	—		—		—		3,322
Total consumer loans	—		—		392		3,322
Total loans modified in TDR’s during the period (1)	$	1,969	$	3,429	$	16,431	$	11,177


(1)	During the three and nine months ended September 30, 2012, we had partial charge-offs of $1.1 million and $11.0 million, respectively, on loans classified as TDRs. There were $0.6 million partial charge-offs on loans classified as TDRs during the three and nine months ended September 30, 2011.

During the three months ended September 30, 2012 all new TDRs were modified through payment deferrals granted to our clients and no principal or interest was forgiven. During the nine months ended September 30, 2012 new TDRs totaling $9.6 million and $6.8 million were modified through forgiveness of principal and payment deferrals granted to our clients, respectively. During the three and nine months ended September 30, 2011 all new TDRs were modified through payment deferrals granted to our clients and no principal or interest was forgiven.

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, 2012 and 2011, broken out by portfolio segment and class of financing receivable:



	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2012		2011		2012		2011
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software	$	—	$	64	$	—	$	64
Hardware	515		1,206		515		3,079
Premium wine	—		1,993		—		1,993
Total commercial loans	515		3,263		515		5,136
Consumer loans:
Real estate secured loans	120		—		120		—
Other consumer loans	—		3,322		—		3,322
Total consumer loans	120		3,322		120		3,322
Total TDRs modified within the previous 12 months that defaulted in the period	$	635	$	6,585	$	635	$	8,458

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, 2012.