8.	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 real estate secured 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 $60.2 million and $45.5 million at December 31, 2011 and 2010, respectively, is presented in the following table:


	December 31,
(Dollars in thousands)	2011		2010
Commercial loans:
Software	$	2,492,849	$	1,820,680
Hardware		952,303		641,052
Venture capital/private equity		1,117,419		1,036,201
Life science		863,737		575,944
Premium wine (1)		130,245		144,972
Other		342,147		375,928

Commercial loans		5,898,700		4,594,777

Real estate secured loans:
Premium wine (1)		345,988		312,255
Consumer loans (2)		534,001		361,704

Real estate secured loans		879,989		673,959

Construction loans		30,256		60,178
Consumer loans		161,137		192,823

Total loans, net of unearned income (3)	$	6,970,082	$	5,521,737

(1)	Included in our premium wine portfolio are gross construction loans of $110.8 million and $119.0 million at December 31, 2011 and 2010, respectively.

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


	December 31,
(Dollars in thousands)	2011		2010
Loans for personal residences	$	350,359	$	189,039
Loans to eligible employees		99,704		88,510
Home equity lines of credit		83,938		84,155

Consumer loans secured by real estate	$	534,001	$	361,704

(3)	Included within our total loan portfolio are credit card loans of $49.7 million and $32.5 million at December 31, 2011 and 2010, respectively.

Credit Quality

The composition of loans, net of unearned income, broken out by portfolio segment and class of financing receivable as of December 31, 2011 and 2010 is as follows:


	December 31,
(Dollars in thousands)	2011		2010
Commercial loans:
Software	$	2,492,849	$	1,820,680
Hardware		952,303		641,052
Venture capital/private equity		1,117,419		1,036,201
Life science		863,737		575,944
Premium wine		476,233		457,227
Other		372,403		436,106

Total commercial loans		6,274,944		4,967,210

Consumer loans:
Real estate secured loans		534,001		361,704
Other consumer loans		161,137		192,823

Total consumer loans		695,138		554,527

Total loans, net of unearned income	$	6,970,082	$	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 December 31, 2011 and 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
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	$	—

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 December 31, 2011 and 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
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

December 31, 2010:
Commercial loans:
Software	$	2,958	$	334	$	3,292	$	5,332
Hardware		3,517		307		3,824		3,931
Life science		2,050		1,362		3,412		4,369
Premium wine		2,995		3,167		6,162		7,129
Other		1,158		1,019		2,177		2,790

Total commercial loans		12,678		6,189		18,867		23,551

Consumer loans:
Real estate secured loans		20,559		—		20,559		23,430

Total consumer loans		20,559		—		20,559		23,430

Total	$	33,237	$	6,189	$	39,426	$	46,981

The following table summarizes our average impaired loans, broken out by portfolio segment and class of financing receivable during 2011 and 2010:


	Year ended December 31,
(Dollars in thousands)	2011		2010
Average impaired loans:
Commercial loans:
Software	$	2,575	$	6,153
Hardware		5,854		9,485
Life science		1,228		5,772
Premium wine		2,566		1,461
Other		4,751		2,279

Total commercial loans		16,974		25,150

Consumer loans:
Real estate secured loans		19,179		21,055
Other consumer loans		1,076		117

Total consumer loans		20,255		21,172

Total average impaired loans	$	37,229	$	46,322

The following table summarizes the activity in the allowance for loan losses during 2011 and 2010, broken out by portfolio segment and class of financing receivable:


Year ended December 31, 2011 (dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision (Reduction of)			Ending Balance
Commercial loans:
Software	$	29,288	$	(10,252	)	$	11,659	$	7,568		$	38,263
Hardware		14,688		(4,828	)		455		6,495			16,810
Venture capital/private equity		8,241		—			—		(922	)		7,319
Life science		9,077		(4,201	)		6,644		(1,277	)		10,243
Premium wine		5,492		(449	)		1,223		(2,352	)		3,914
Other		5,318		(3,954	)		471		3,982			5,817

Total commercial loans		72,104		(23,684	)		20,452		13,494			82,366

Consumer loans		10,523		(220	)		4,671		(7,393	)		7,581

Total allowance for loan losses	$	82,627	$	(23,904	)	$	25,123	$	6,101		$	89,947



Year ended December 31, 2010 (dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision		Ending Balance
Commercial loans:
Software	$	24,209	$	(16,230	)	$	5,838	$	15,471	$	29,288
Hardware		16,194		(10,568	)		5,715		3,347		14,688
Venture capital/private equity		5,664		—			—		2,577		8,241
Life science		9,651		(17,629	)		3,738		13,317		9,077
Premium wine		4,652		(1,457	)		222		2,075		5,492
Other		3,877		(4,866	)		737		5,570		5,318

Total commercial loans		64,247		(50,750	)		16,250		42,357		72,104

Consumer loans		8,203		(489	)		538		2,271		10,523

Total allowance for loan losses	$	72,450	$	(51,239	)	$	16,788	$	44,628	$	82,627

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


	December 31, 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	$	526	$	37,737	$	986	$	28,302
Hardware		1,261		15,549		1,348		13,340
Venture capital/private equity		—		7,319		—		8,241
Life science		—		10,243		346		8,731
Premium wine		—		3,914		438		5,054
Other		1,180		4,637		122		5,196

Total commercial loans		2,967		79,399		3,240		68,864

Consumer loans		740		6,841		3,696		6,827

Total allowance for loan losses	$	3,707	$	86,240	$	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 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. (For further description of nonaccrual loans, refer to Note 2—“Summary of Significant Accounting Policies.”); these loans are deemed “Impaired”. 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 December 31, 2011 and 2010:


(Dollars in thousands)	Pass		Performing (Criticized)		Impaired		Total
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


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

As of December 31, 2011, we had TDRs of $34.3 million where concessions have been granted to borrowers experiencing financial difficulties, in an attempt to maximize collection. Substantially all of these 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 may not be in doubt. There were unfunded commitments available for funding of $1.1 million to the clients associated with these TDRs as of December 31, 2011. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables as of December 31, 2011:


(Dollars in thousands)	December 31, 2011
Loans modified in TDRs:
Commercial loans:
Software	$	1,142
Hardware		5,183
Premium wine		1,949
Other		4,934

Total commercial loans		13,208

Consumer loans:
Real estate secured loans		17,934
Other consumer loans		3,133

Total consumer loans		21,067

Total	$	34,275

During 2011 all new TDRs were modified through payment deferrals granted to our clients, however no principal or interest was forgiven. 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 2011.


(Dollars in thousands)	Year ended December 31, 2011
Loans modified in TDRs during the period:
Commercial loans:
Software	$	615
Hardware		4,018
Premium wine		1,949
Other		3,884

Total commercial loans (1)		10,466

Consumer loans:
Other consumer loans		3,133

Total consumer loans		3,133

Total loans modified in TDR’s during the period	$	13,599

(1)	During 2011, we had partial charge-offs of $2.8 million on loans classified as TDRs.

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


(Dollars in thousands)	Year ended December 31, 2011
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Hardware	$	1,885
Premium wine		1,949

Total commercial loans		3,834

Consumer loans:
Other consumer loans		3,133

Total consumer loans		3,133

Total TDRs modified within the previous 12 months that defaulted in the period	$	6,967

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 December 31, 2011.