6. 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. 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 to targeted high-net-worth individuals through SVB Private Bank. 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 secured real estate loans to eligible employees through our Employee Home Ownership Program (“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 $52.3 million and $45.5 million at June 30, 2011 and December 31, 2010, respectively, is presented in the following table:


(Dollars in thousands)	June 30, 2011		December 31, 2010
Commercial loans:
Software	$	2,034,257	$	1,820,385
Hardware		645,967		561,610
Clean technology		237,430		159,502
Venture capital/private equity		1,009,604		1,036,077
Life science		624,944		568,739
Premium wine (1)		128,232		144,972
Other		257,546		303,492

Commercial loans (2)		4,937,980		4,594,777

Real estate secured loans:
Premium wine (1)		341,659		312,255
Consumer loans (3)		462,922		361,704

Real estate secured loans		804,581		673,959

Construction loans		37,871		60,178
Consumer loans		198,214		192,823

Total loans, net of unearned income	$	5,978,646	$	5,521,737

(1)	Included in our premium wine portfolio are gross construction loans of $109.5 million and $119.0 million at June 30, 2011 and December 31, 2010, respectively.

(2)	Included within our commercial loans portfolio are business credit card loans to commercial clients. At June 30, 2011 and December 31, 2010, our business credit card loans portfolio totaled $42.1 million and $32.5 million, respectively.

(3)	Consumer loans secured by real estate at June 30, 2011 and December 31, 2010 were comprised of the following:


(Dollars in thousands)	June 30, 2011		December 31, 2010
Loans for personal residence	$	286,106	$	189,039
Loans to eligible employees		92,782		88,510
Home equity lines of credit		84,034		84,155

Consumer loans secured by real estate	$	462,922	$	361,704

The activity in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010 was as follows:


	Three months ended June 30,						Six months ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Allowance for loan losses, beginning balance	$	82,051		$	68,271		$	82,627		$	72,450
Provision for (reduction of) loan losses		134			7,408			(2,913	)		18,153
Gross loan charge-offs		(4,293	)		(7,133	)		(8,615	)		(28,313	)
Loan recoveries		4,263			3,243			11,056			9,499

Allowance for loan losses, ending balance	$	82,155		$	71,789		$	82,155		$	71,789

Credit Quality

The composition of loans, net of unearned income, broken out by portfolio segment (which we have identified as our commercial and consumer loan categories) and class of financing receivable (which we have identified as our client industry segments of software, hardware, etc.) as of June 30, 2011 and December 31, 2010, is as follows:


(Dollars in thousands)	June 30, 2011		December 31, 2010
Commercial loans:
Software	$	2,061,588	$	1,820,680
Hardware		754,361		641,052
Venture capital/private equity		1,009,653		1,036,201
Life science		645,371		575,944
Premium wine		469,891		457,227
Other		376,646		436,106

Total commercial loans		5,317,510		4,967,210

Consumer loans:
Real estate secured loans		462,922		361,704
Other consumer loans		198,214		192,823

Total consumer loans		661,136		554,527

Total loans, net of unearned income	$	5,978,646	$	5,521,737

The following table summarizes the aging of our gross loans, broken out by portfolio segment and class of financing receivable as of June 30, 2011 and December 31, 2010:


(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

June 30, 2011:
Commercial loans:
Software	$	311	$	1,209	$	1	$	1,521	$	2,080,138	$	1
Hardware		54		—		1		55		755,963		1
Venture capital/private equity		—		—		—		—		1,020,628		—
Life science		165		—		—		165		651,183		—
Premium wine		—		—		—		—		468,351		—
Other		98		—		—		98		375,061		—

Total commercial loans		628		1,209		2		1,839		5,351,324		2

Consumer loans:
Real estate secured loans		—		—		—		—		443,310		—
Other consumer loans		—		48		—		48		198,110		—

Total consumer loans		—		48		—		48		641,420		—

Total gross loans excluding impaired loans		628		1,257		2		1,887		5,992,744		2

Impaired loans		1,955		6		1,371		3,332		33,003		—

Total gross loans	$	2,583	$	1,263	$	1,373	$	5,219	$	6,025,747	$	2


December 31, 2010:
Commercial loans:
Software	$	674	$	239	$	17	$	930	$	1,834,897	$	17
Hardware		89		819		27		935		642,786		27
Venture capital/private equity		—		—		—		—		1,046,696		—
Life science		157		—		—		157		578,208		—
Premium wine		—		—		—		—		451,006		—
Other		—		—		—		—		438,345		—

Total commercial loans		920		1,058		44		2,022		4,991,938		44

Consumer loans:
Real estate secured loans		—		—		—		—		341,048		—
Other consumer loans		—		—		—		—		192,771		—

Total consumer loans		—		—		—		—		533,819		—

Total gross loans excluding impaired loans		920		1,058		44		2,022		5,525,757		44

Impaired loans		323		913		7,805		9,041		30,385		—

Total gross loans	$	1,243	$	1,971	$	7,849	$	11,063	$	5,556,142	$	44

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, 2011 and December 31, 2010:


(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, 2011:
Commercial loans:
Software	$	2,339	$	—	$	2,339	$	2,778
Hardware		6,543		—		6,543		7,022
Life science		898		140		1,038		1,202
Premium wine		73		1,279		1,352		1,444
Other		3,433		2,149		5,582		8,123

Total commercial loans		13,286		3,568		16,854		20,569

Consumer loans:
Real estate secured loans		19,481		—		19,481		21,959

Total consumer loans		19,481		—		19,481		21,959

Total	$	32,767	$	3,568	$	36,335	$	42,528


December 31, 2010:
Commercial loans:
Software	$	2,958	$	334	$	3,292	$	3,581
Hardware		3,517		307		3,824		3,931
Life science		2,050		1,362		3,412		4,433
Premium wine		2,995		3,167		6,162		7,129
Other		1,158		1,019		2,177		2,338

Total commercial loans		12,678		6,189		18,867		21,412

Consumer loans:
Real estate secured loans		20,559		—		20,559		22,419

Total consumer loans		20,559		—		20,559		22,419

Total	$	33,237	$	6,189	$	39,426	$	43,831

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during the three and six months ended June 30, 2011 and 2010, respectively:


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2011		2010		2011		2010
Average impaired loans:
Commercial loans:
Software	$	2,620	$	7,213	$	2,697	$	6,990
Hardware		6,662		10,490		5,594		11,988
Life science		1,170		9,364		1,834		7,599
Premium wine		1,396		74		2,540		132
Other		3,588		2,242		2,878		2,362

Total commercial loans		15,436		29,383		15,543		29,071

Consumer loans:
Real estate secured loans		19,557		21,471		19,841		21,339
Other consumer loans		—		42		—		228

Total consumer loans		19,557		21,513		19,841		21,567

Total average impaired loans	$	34,993	$	50,896	$	35,384	$	50,638

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


Three months ended June 30, 2011 (dollars in thousands)	Beginning Balance March 31, 2011		Charge-offs			Recoveries		Provision for (Reduction of)			Ending Balance June 30, 2011
Commercial loans:
Software	$	30,479	$	(518	)	$	2,639	$	(727	)	$	31,873
Hardware		15,840		—			32		170			16,042
Venture capital/private equity		7,432		—			—		875			8,307
Life science		8,097		(471	)		505		(906	)		7,225
Premium wine		4,504		(449	)		590		(636	)		4,009
Other		6,433		(2,855	)		337		1,954			5,869

Total commercial loans		72,785		(4,293	)		4,103		730			73,325

Consumer loans		9,266		—			160		(596	)		8,830

Total allowance for loan losses	$	82,051	$	(4,293	)	$	4,263	$	134		$	82,155


Six months ended June 30, 2011 (dollars in thousands)	Beginning Balance December 31, 2010		Charge-offs			Recoveries		(Reduction of) Provision for			Ending Balance June 30, 2011
Commercial loans:
Software	$	29,288	$	(1,622	)	$	7,920	$	(3,713	)	$	31,873
Hardware		14,688		(15	)		312		1,057			16,042
Venture capital/private equity		8,241		—			—		66			8,307
Life science		9,077		(3,662	)		1,128		682			7,225
Premium wine		5,492		(449	)		730		(1,764	)		4,009
Other		5,318		(2,867	)		407		3,011			5,869

Total commercial loans		72,104		(8,615	)		10,497		(661	)		73,325

Consumer loans		10,523		—			559		(2,252	)		8,830

Total allowance for loan losses	$	82,627	$	(8,615	)	$	11,056	$	(2,913	)	$	82,155

The following table summarizes the allowance for loan losses individually and collectively evaluated for impairment as of June 30, 2011 and December 31, 2010, broken out by portfolio segment:


	June 30, 2011				December 31, 2010
(Dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial loans:
Software	$	1,083	$	30,790	$	986	$	28,302
Hardware		2,713		13,329		1,348		13,340
Venture capital/private equity		—		8,307		—		8,241
Life science		58		7,167		346		8,731
Premium wine		73		3,936		438		5,054
Other		343		5,526		122		5,196

Total commercial loans		4,270		69,055		3,240		68,864

Consumer loans		1,978		6,852		3,696		6,827

Total allowance for loan losses	$	6,248	$	75,907	$	6,936	$	75,691

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 loans that are performing loans, however, we consider them as demonstrating higher risk which requires more frequent review of the individual exposures. These loans 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 2010 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, 2011 and December 31, 2010:


(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
June 30, 2011:
Commercial loans:
Software	$	1,875,198	$	206,461	$	2,339	$	2,083,998
Hardware		647,219		108,799		6,543		762,561
Venture capital/private equity		1,018,711		1,917		—		1,020,628
Life science		568,069		83,279		1,038		652,386
Premium wine		425,555		42,796		1,352		469,703
Other		353,076		22,083		5,582		380,741

Total commercial loans		4,887,828		465,335		16,854		5,370,017

Consumer loans:
Real estate secured loans		435,863		7,447		19,481		462,791
Other consumer loans		185,829		12,329		—		198,158

Total consumer loans		621,692		19,776		19,481		660,949

Total gross loans	$	5,509,520	$	485,111	$	36,335	$	6,030,966


December 31, 2010:
Commercial loans:
Software	$	1,717,309	$	118,518	$	3,292	$	1,839,119
Hardware		575,401		68,320		3,824		647,545
Venture capital/private equity		1,031,373		15,323		—		1,046,696
Life science		520,596		57,769		3,412		581,777
Premium wine		400,519		50,487		6,162		457,168
Other		415,381		22,964		2,177		440,522

Total commercial loans		4,660,579		333,381		18,867		5,012,827

Consumer loans:
Real estate secured loans		337,087		3,961		20,559		361,607
Other consumer loans		181,561		11,210		—		192,771

Total consumer loans		518,648		15,171		20,559		554,378

Total gross loans	$	5,179,227	$	348,552	$	39,426	$	5,567,205

Troubled Debt Restructurings

Included in the $36.3 million of impaired loans at June 30, 2011 are loans modified in troubled debt restructurings (“TDRs”), where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. At June 30, 2011, all TDRs were included as part of our impaired loan balances. In order for these loan balances to return to accrual status, the borrower must demonstrate a sustained period of timely payments and the ultimate collectability of all amounts contractually due is not in doubt. There were no commitments available for funding to any of the clients associated with these TDRs as of June 30, 2011. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables as of June 30, 2011:


(Dollars in thousands)	June 30, 2011
Loans modified in TDRs:
Commercial loans:
Software	$	2,248
Hardware		6,543
Life science		140
Premium wine		73
Other		2,148

Total commercial loans		11,152

Consumer loans:
Real estate secured loans		18,802

Total consumer loans		18,802

Total	$	29,954