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 consumer loans through SVB Private Bank and provide real estate secured loans to eligible employees through our EHOP. Our private banking clients are primarily 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 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 $78 million and $77 million at March 31, 2013 and December 31, 2012, respectively, is presented in the following table:



(Dollars in thousands)	March 31, 2013		December 31, 2012
Commercial loans:
Software	$	3,455,602	$	3,261,489
Hardware	1,220,691		1,118,370
Venture capital/private equity	1,322,123		1,732,699
Life science	1,017,859		1,066,199
Premium wine	139,017		143,511
Other	342,129		315,453
Total commercial loans	7,497,421		7,637,721
Real estate secured loans:
Premium wine (1)	464,713		413,513
Consumer loans (2)	724,894		685,300
Total real estate secured loans	1,189,607		1,098,813
Construction loans	58,573		65,742
Consumer loans	99,289		144,657
Total loans, net of unearned income (3)	$	8,844,890	$	8,946,933


(1)	Included in our premium wine portfolio are gross construction loans of $133 million and $148 million at March 31, 2013 and December 31, 2012, respectively.


(2)	Consumer loans secured by real estate at March 31, 2013 and December 31, 2012 were comprised of the following:



(Dollars in thousands)	March 31, 2013		December 31, 2012
Loans for personal residence	$	541,115	$	503,378
Loans to eligible employees	112,314		110,584
Home equity lines of credit	71,465		71,338
Consumer loans secured by real estate	$	724,894	$	685,300


(3)	Included within our total loan portfolio are credit card loans of $77 million and $64 million at March 31, 2013 and December 31, 2012, respectively.

Credit Quality

The composition of loans, net of unearned income of $78 million and $77 million at March 31, 2013 and December 31, 2012, respectively, broken out by portfolio segment and class of financing receivable is as follows:



(Dollars in thousands)	March 31, 2013		December 31, 2012
Commercial loans:
Software	$	3,455,602	$	3,261,489
Hardware	1,220,691		1,118,370
Venture capital/private equity	1,322,123		1,732,699
Life science	1,017,859		1,066,199
Premium wine	603,730		557,024
Other	400,702		381,195
Total commercial loans	8,020,707		8,116,976
Consumer loans:
Real estate secured loans	724,894		685,300
Other consumer loans	99,289		144,657
Total consumer loans	824,183		829,957
Total loans, net of unearned income	$	8,844,890	$	8,946,933

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of March 31, 2013 and December 31, 2012:



(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
March 31, 2013:
Commercial loans:
Software	$	2,739	$	1,493	$	5	$	4,237	$	3,480,632	$	5
Hardware	4,034		19		31		4,084		1,206,431		31
Venture capital/private equity	84		1		—		85		1,335,476		—
Life science	5,886		220		—		6,106		1,021,715		—
Premium wine	1,700		—		—		1,700		600,383		—
Other	185		—		—		185		398,877		—
Total commercial loans	14,628		1,733		36		16,397		8,043,514		36
Consumer loans:
Real estate secured loans	605		—		—		605		719,801		—
Other consumer loans	385		—		—		385		97,781		—
Total consumer loans	990		—		—		990		817,582		—
Total gross loans excluding impaired loans	15,618		1,733		36		17,387		8,861,096		36
Impaired loans	2,459		1,740		13,929		18,128		26,218		—
Total gross loans	$	18,077	$	3,473	$	13,965	$	35,515	$	8,887,314	$	36
December 31, 2012:
Commercial loans:
Software	$	5,890	$	238	$	19	$	6,147	$	3,284,489	$	19
Hardware	167		32		—		199		1,107,422		—
Venture capital/private equity	7		—		—		7		1,749,896		—
Life science	207		117		—		324		1,076,468		—
Premium wine	—		—		—		—		554,886		—
Other	280		—		—		280		378,619		—
Total commercial loans	6,551		387		19		6,957		8,151,780		19
Consumer loans:
Real estate secured loans	—		—		—		—		683,254		—
Other consumer loans	111		—		—		111		143,867		—
Total consumer loans	111		—		—		111		827,121		—
Total gross loans excluding impaired loans	6,662		387		19		7,068		8,978,901		19
Impaired loans	3,901		9,676		2,269		15,846		22,433		—
Total gross loans	$	10,563	$	10,063	$	2,288	$	22,914	$	9,001,334	$	19

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, 2013 and December 31, 2012:



(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, 2013:
Commercial loans:
Software	$	6,094	$	—	$	6,094	$	6,196
Hardware	20,722		1,944		22,666		41,943
Life Science	454		—		454		454
Premium wine	—		4,303		4,303		4,731
Other	—		5,294		5,294		10,008
Total commercial loans	27,270		11,541		38,811		63,332
Consumer loans:
Real estate secured loans	2,771		1,672		4,443		9,650
Other consumer loans	1,092		—		1,092		1,310
Total consumer loans	3,863		1,672		5,535		10,960
Total	$	31,133	$	13,213	$	44,346	$	74,292
December 31, 2012:
Commercial loans:
Software	$	3,191	$	72	$	3,263	$	4,475
Hardware	21,863		—		21,863		27,876
Life science	—		—		—		—
Premium wine	—		4,398		4,398		4,716
Other	—		5,415		5,415		9,859
Total commercial loans	25,054		9,885		34,939		46,926
Consumer loans:
Real estate secured loans	—		2,239		2,239		7,185
Other consumer loans	1,101		—		1,101		1,300
Total consumer loans	1,101		2,239		3,340		8,485
Total	$	26,155	$	12,124	$	38,279	$	55,411

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during the three months ended March 31, 2013 and 2012:



	Three months ended March 31,
(Dollars in thousands)	2013		2012
Average impaired loans:
Commercial loans:
Software	$	4,114	$	1,536
Hardware	23,632		12,262
Life science	314		146
Premium wine	4,336		3,383
Other	5,218		4,644
Total commercial loans	37,614		21,971
Consumer loans:
Real estate secured loans	2,676		12,847
Other consumer loans	1,129		3,019
Total consumer loans	3,805		15,866
Total average impaired loans	$	41,419	$	37,837

The following tables summarize the activity relating to our allowance for loan losses for the three months ended March 31, 2013 and 2012, broken out by portfolio segment:



Three months ended March 31, 2013 (dollars in thousands)	Beginning Balance December 31, 2012		Charge-offs			Recoveries		Provision for (Reduction of) Loan Losses			Ending Balance March 31, 2013
Commercial loans:
Software	$	42,648	$	(1,518	)	$	242	$	3,638		$	45,010
Hardware	29,761		(1,997		)	446		(341		)	27,869
Venture capital/private equity	9,963		—			—		519			10,482
Life science	13,606		(2,070		)	203		2,207			13,946
Premium wine	3,523		—			90		86			3,699
Other	3,912		(41		)	6		98			3,975
Total commercial loans	103,413		(5,626		)	987		6,207			104,981
Consumer loans	7,238		—			380		(394		)	7,224
Total allowance for loan losses	$	110,651	$	(5,626	)	$	1,367	$	5,813		$	112,205



Three months ended March 31, 2012 (dollars in thousands)	Beginning Balance December 31, 2011		Charge-offs			Recoveries		(Reduction of)Provision for Loan Losses			Ending Balance March 31, 2012
Commercial loans:
Software	$	38,263	$	(859	)	$	2,759	$	(4,738	)	$	35,425
Hardware	16,810		(3,848		)	105		17,281			30,348
Venture capital/private equity	7,319		—			—		(105		)	7,214
Life science	10,243		(113		)	221		(59		)	10,292
Premium wine	3,914		—			78		(254		)	3,738
Other	5,817		(2,170		)	44		1,111			4,802
Total commercial loans	82,366		(6,990		)	3,207		13,236			91,819
Consumer loans	7,581		—			229		1,293			9,103
Total allowance for loan losses	$	89,947	$	(6,990	)	$	3,436	$	14,529		$	100,922

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of March 31, 2013 and December 31, 2012, broken out by portfolio segment:



	March 31, 2013				December 31, 2012
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial loans:
Software	$	2,087	$	42,923	$	762	$	41,886
Hardware	5,016		22,853		5,251		24,510
Venture capital/private equity	—		10,482		—		9,963
Life science	201		13,745		—		13,606
Premium wine	—		3,699		—		3,523
Other	—		3,975		—		3,912
Total commercial loans	7,304		97,677		6,013		97,400
Consumer loans	424		6,800		248		6,990
Total allowance for loan losses	$	7,728	$	104,477	$	6,261	$	104,390

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 2012 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, 2013 and December 31, 2012:



(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
March 31, 2013:
Commercial loans:
Software	$	3,250,004	$	234,865	$	6,094	$	3,490,963
Hardware	1,084,742		125,773		22,666		1,233,181
Venture capital/private equity	1,334,740		821		—		1,335,561
Life science	916,649		111,172		454		1,028,275
Premium wine	590,448		11,635		4,303		606,386
Other	382,874		16,188		5,294		404,356
Total commercial loans	7,559,457		500,454		38,811		8,098,722
Consumer loans:
Real estate secured loans	700,850		19,556		4,443		724,849
Other consumer loans	91,988		6,178		1,092		99,258
Total consumer loans	792,838		25,734		5,535		824,107
Total gross loans	$	8,352,295	$	526,188	$	44,346	$	8,922,829
December 31, 2012:
Commercial loans:
Software	$	3,050,449	$	240,187	$	3,263	$	3,293,899
Hardware	970,802		136,819		21,863		1,129,484
Venture capital/private equity	1,748,663		1,240		—		1,749,903
Life science	956,276		120,516		—		1,076,792
Premium wine	545,697		9,189		4,398		559,284
Other	360,291		18,608		5,415		384,314
Total commercial loans	7,632,178		526,559		34,939		8,193,676
Consumer loans:
Real estate secured loans	663,911		19,343		2,239		685,493
Other consumer loans	132,818		11,160		1,101		145,079
Total consumer loans	796,729		30,503		3,340		830,572
Total gross loans	$	8,428,907	$	557,062	$	38,279	$	9,024,248

TDRs

As of March 31, 2013 we had 20 TDRs with a total carrying value of $33.9 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 $0.5 million to the clients associated with these TDRs as of March 31, 2013. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at March 31, 2013 and December 31, 2012:



(Dollars in thousands)	March 31, 2013		December 31, 2012
Loans modified in TDRs:
Commercial loans:
Software	$	1,751	$	2,021
Hardware	19,749		20,514
Venture capital/ private equity	821		—
Life science	454		—
Premium wine	2,561		2,593
Other	5,749		5,900
Total commercial loans	31,085		31,028
Consumer loans:
Real estate secured loans	1,753		2,199
Other consumer loans	1,092		1,101
Total consumer loans	2,845		3,300
Total	$	33,930	$	34,328

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, 2013 and 2012:



	Three months ended March 31,
(Dollars in thousands)	2013		2012
Loans modified in TDRs during the period:
Commercial loans:
Software	$	—	$	600
Venture capital/ private equity	821		—
Life science	454		—
Premium wine	—		405
Other	—		2,416
Total commercial loans	1,275		3,421
Consumer loans:
Real estate secured loans	—		249
Other consumer loans	100		36
Total consumer loans	100		285
Total loans modified in TDR’s during the period (1)	$	1,375	$	3,706


(1)	During the three months ended March 31, 2013, we had no partial charge-offs of loans classified as TDRs. There were partial charge-offs of $0.8 million on loans classified as TDRs during the three months ended March 31, 2012.

During the three months ended March 31, 2013, new TDRs of $1.4 million were modified through payment deferrals granted to our clients and no principal or interest was forgiven. During the three months ended March 31, 2012, new TDRs totaling $2.9 million and $0.6 million were modified through payment deferrals and forgiveness of principal, respectively.

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, 2013 and 2012, broken out by portfolio segment and class of financing receivable:



	Three months ended March 31,
(Dollars in thousands)	2013		2012
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software	$	—	$	600
Hardware	125		—
Other	2,750		—
Total commercial loans	2,875		600
Consumer loans:
Real estate secured loans	247		249
Other consumer loans	—		36
Total consumer loans	247		285
Total TDRs modified within the previous 12 months that defaulted in the period	$	3,122	$	885

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 March 31, 2013.