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. 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 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 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 $59.5 million and $60.2 million at March 31, 2012 and December 31, 2011, respectively, is presented in the following table:


(Dollars in thousands)	March 31, 2012		December 31, 2011
Commercial loans:
Software	$	2,511,989	$	2,492,849
Hardware		1,054,510		952,303
Venture capital/private equity		1,123,847		1,117,419
Life science		863,961		863,737
Premium wine (1)		120,113		130,245
Other		349,316		342,147

Commercial loans		6,023,736		5,898,700

Real estate secured loans:
Premium wine (1)		360,315		345,988
Consumer loans (2)		542,471		534,001

Real estate secured loans		902,786		879,989

Construction loans		29,970		30,256
Consumer loans		164,797		161,137

Total loans, net of unearned income (3)	$	7,121,289	$	6,970,082

(1)	Included in our premium wine portfolio are gross construction loans of $136.4 million and $110.8 million at March 31, 2012 and December 31, 2011, respectively.

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


(Dollars in thousands)	March 31, 2012		December 31, 2011
Loans for personal residence	$	354,321	$	350,359
Loans to eligible employees		101,574		99,704
Home equity lines of credit		86,576		83,938

Consumer loans secured by real estate	$	542,471	$	534,001

(3)	Included within our total loan portfolio are credit card loans of $56.0 million and $49.7 million at March 31, 2012 and December 31, 2011, respectively.

Credit Quality

The composition of loans, net of unearned income, broken out by portfolio segment and class of financing receivable as of March 31, 2012 and December 31, 2011, is as follows:


(Dollars in thousands)	March 31, 2012		December 31, 2011
Commercial loans:
Software	$	2,511,989	$	2,492,849
Hardware		1,054,510		952,303
Venture capital/private equity		1,123,847		1,117,419
Life science		863,961		863,737
Premium wine		480,428		476,233
Other		379,286		372,403

Total commercial loans		6,414,021		6,274,944

Consumer loans:
Real estate secured loans		542,471		534,001
Other consumer loans		164,797		161,137

Total consumer loans		707,268		695,138

Total loans, net of unearned income	$	7,121,289	$	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 March 31, 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

March 31, 2012:
Commercial loans:
Software	$	750	$	121	$	-	$	871	$	2,533,923	$	-
Hardware		4,549		7		-		4,556		1,033,955		-
Venture capital/private equity		2,843		-		-		2,843		1,131,788		-
Life science		13,717		171		-		13,888		858,318		-
Premium wine		-		-		-		-		479,039		-
Other		5,958		7		-		5,965		372,773		-

Total commercial loans		27,817		306		-		28,123		6,409,796		-

Consumer loans:
Real estate secured loans		-		-		-		-		539,398		-
Other consumer loans		-		-		-		-		161,765		-

Total consumer loans		-		-		-		-		701,163		-

Total gross loans excluding impaired loans		27,817		306		-		28,123		7,110,959		-

Impaired loans		36		138		6,637		6,811		34,886		-

Total gross loans	$	27,853	$	444	$	6,637	$	34,934	$	7,145,845	$	-


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 March 31, 2012 and December 31, 2011:

		Total carrying value		Total carrying value		Total carrying value		Total carrying value
(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, 2012:
Commercial loans:
Software	$	1,445	$	123	$	1,568	$	2,821
Hardware		25,583		648		26,231		29,063
Life science		-		138		138		139
Premium wine		2,505		1,264		3,769		3,935
Other		2,415		1,591		4,006		7,734

Total commercial loans		31,948		3,764		35,712		43,692

Consumer loans:
Real estate secured loans		2,674		330		3,004		7,476
Other consumer loans		2,981		-		2,981		3,109

Total consumer loans		5,655		330		5,985		10,585

Total	$	37,603	$	4,094	$	41,697	$	54,277


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 months ended March 31, 2012 and 2011:


	Three months ended March 31,

(Dollars in thousands)	2012		2011
Average impaired loans:
Commercial loans:
Software	$	1,536	$	2,775
Hardware		12,262		4,526
Life science		146		2,498
Premium wine		3,383		3,684
Other		4,644		2,167

Total commercial loans		21,971		15,650

Consumer loans:
Real estate secured loans		12,847		20,125
Other consumer loans		3,019		-

Total consumer loans		15,866		20,125

Total average impaired loans	$	37,837	$	35,775

The following tables summarize the activity relating to our allowance for loan losses for the three months ended March 31, 2012 and 2011, broken out by portfolio segment:


Three months ended March 31, 2012 (dollars in thousands)	Beginning Balance December 31, 2011		Charge-offs		Recoveries		Provision for (Reduction of)		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


Three months ended March 31, 2011 (dollars in thousands)	Beginning Balance December 31, 2010		Charge-offs		Recoveries		Provision for (Reduction of)		Ending Balance March 31, 2011
Commercial loans:
Software	$	29,288	$	(1,104)	$	5,281	$	(2,986)	$	30,479
Hardware		14,688		(15)		280		887		15,840
Venture capital/private equity		8,241		-		-		(809)		7,432
Life science		9,077		(3,191)		623		1,588		8,097
Premium wine		5,492		-		140		(1,128)		4,504
Other		5,318		(12)		70		1,057		6,433

Total commercial loans		72,104		(4,322)		6,394		(1,391)		72,785

Consumer loans		10,523		-		399		(1,656)		9,266

Total allowance for loan losses	$	82,627	$	(4,322)	$	6,793	$	(3,047)	$	82,051

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


	March 31, 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	$	682	$	34,743	$	526	$	37,737
Hardware		15,120		15,228		1,261		15,549
Venture capital/private equity		-		7,214		-		7,319
Life science		-		10,292		-		10,243
Premium wine		543		3,195		-		3,914
Other		486		4,316		1,180		4,637

Total commercial loans		16,831		74,988		2,967		79,399

Consumer loans		1,538		7,565		740		6,841

Total allowance for loan losses	$	18,369	$	82,553	$	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. (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); 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 March 31, 2012 and December 31, 2011:


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

March 31, 2012:
Commercial loans:
Software	$	2,304,838	$	229,956	$	1,568	$	2,536,362
Hardware		931,590		106,921		26,231		1,064,742
Venture capital/private equity		1,128,482		6,149		-		1,134,631
Life science		737,956		134,250		138		872,344
Premium wine		460,232		18,807		3,769		482,808
Other		328,452		50,286		4,006		382,744

Total commercial loans		5,891,550		546,369		35,712		6,473,631

Consumer loans:
Real estate secured loans		515,071		24,327		3,004		542,402
Other consumer loans		155,879		5,886		2,981		164,746

Total consumer loans		670,950		30,213		5,985		707,148

Total gross loans	$	6,562,500	$	576,582	$	41,697	$	7,180,779


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 March 31, 2012 we had TDRs of $16.0 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 $1.6 million to the clients associated with these TDRs as of March 31, 2012. The following table summarizes our loans modified in TDRs, broken out by portfolio segment and class of financing receivables at March 31, 2012 and December 31, 2011:


(Dollars in thousands)	March 31, 2012		December 31, 2011
Loans modified in TDRs:
Commercial loans:
Software	$	1,568	$	1,142
Hardware		2,972		5,183
Premium wine		2,310		1,949
Other		3,466		4,934

Total commercial loans		10,316		13,208

Consumer loans:
Real estate secured loans		2,673		17,934
Other consumer loans		2,981		3,133

Total consumer loans		5,654		21,067

Total	$	15,970	$	34,275

During the three months ended March 31, 2012 new TDRs were primarily modified through payment deferrals granted to our clients, however one new TDR totaling $0.6 million was modified through forgiveness of principal. During the three months ended March 31, 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 the three months ended March 31, 2012 and 2011.


	Three months ended March 31,
(Dollars in thousands)	2012		2011
Loans modified in TDRs during the period:
Commercial loans:
Software	$	600	$	651
Hardware		-		3,237
Premium wine		405		-
Other		2,416		-

Total commercial loans (1)		3,421		3,888

Consumer loans:
Real estate secured loans		249		-
Other consumer loans		36		-

Total consumer loans		285		-

Total loans modified in TDR’s during the period	$	3,706	$	3,888

(1)	During the three months ended March 31, 2012, we had partial charge-offs of $0.8 million on loans classified as TDRs. There were no partial charge-offs on loans classified as TDRs during the three months ended March 31, 2011.

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


	Three months ended March 31,
(Dollars in thousands)	2012		2011
TDRs modified within the previous 12 months that defaulted during the period:
Commercial loans:
Software	$	600	$	-
Life science		-		241
Premium wine		-		206

Total commercial loans		600		447

Consumer loans:
Real estate secured loans		249		-
Other consumer loans		36		-

Total consumer loans		285		-

Total TDRs modified within the previous 12 months that defaulted in the period	$	885	$	447

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, 2012.