NOTE 7 – Bank Loans

The following table presents the balance and associated percentage of each major loan category in our loan portfolio at June 30, 2015 and December 31, 2014 (in thousands, except percentages):

	June 30, 2015						December 31, 2014
	Balance			Percent			Balance			Percent
Commercial and industrial	$	1,010,810			40.8	%	$	896,853			42.4	%
Consumer ¹		983,359			39.7			758,288			35.8
Residential real estate		448,994			18.1			432,646			20.4
Commercial real estate		20,053			0.8			15,902			0.8
Home equity lines of credit		12,599			0.5			12,945			0.6
		2,475,815			100.0	%		2,116,634			100.0	%
Unamortized loan discount		(29,180	)					(30,533	)
Unamortized loan fees, net of loan fees		(1,819	)					(1,631	)
Loans in process		(567	)					1,681
Allowance for loan losses		(23,923	)					(20,731	)
	$	2,420,326					$	2,065,420

¹	Includes securities-based loans of $ 963.1 million and $732.8 million at June 30, 2015 and December 31, 2014, respectively.

At June 30, 2015 and December 31, 2014, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $1.2 million and $0.6 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $ 5.3 million and $5.3 million, respectively.

At June 30, 2015 and December 31, 2014, we had mortgage loans held for sale of $ 184.0 million and $121.9 million, respectively. For the three months ended June 30, 2015 and 2014, we recognized gains of $ 3.5 million and $1.7 million, respectively, from the sale of originated loans, net of fees and costs. For the six months ended June 30, 2015 and 2014, we recognized gains of $ 6.1 million and $2.9 million, respectively, from the sale of originated loans, net of fees and costs.

The following table details activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2015 (in thousands).

	Three months ended June 30, 2015
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	18,104	$	1,193		$	-		$	-	$	19,297
Consumer		1,392		176			—			—		1,568
Residential real estate		857		114			(69	)		2		904
Commercial real estate		305		(26	)		—			7		286
Home equity lines of credit		269		(4	)		—			—		265
Qualitative		1,640		(37	)		—			—		1,603
	$	22,567	$	1,416		$	(69	)	$	9	$	23,923

	Six months ended June 30, 2015
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	16,609	$	2,688		$	-		$	-	$	19,297
Consumer		1,255		313			—			—		1,568
Residential real estate		787		229			(116	)		4		904
Commercial real estate		232		12			—			42		286
Home equity lines of credit		267		(2	)		—			—		265
Qualitative		1,581		22			—			—		1,603
	$	20,731	$	3,262		$	(116	)	$	46	$	23,923

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2015 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and industrial	$	21	$	19,276	$	19,297	$	-	$	1,010,810	$	1,010,810
Consumer		19		1,549		1,568		20		983,339		983,359
Residential real estate		40		864		904		5,283		443,711		448,994
Commercial real estate		—		286		286		219		19,834		20,053
Home equity lines of credit		149		116		265		323		12,276		12,599
Qualitative		—		1,603		1,603		—		—		—
	$	229	$	23,694	$	23,923	$	5,845	$	2,469,970	$	2,475,815

The following table details activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2014 (in thousands).

	Three months ended June 30, 2014
	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Commercial and industrial	$	11,089	$	2,436		$	-	$	-	$	13,525
Consumer		800		137			—		—		937
Residential real estate		473		90			—		1		564
Commercial real estate		194		45			—		4		243
Home equity lines of credit		290		(10	)		—		—		280
Qualitative		1,285		270			—		—		1,555
	$	14,131	$	2,968		$	-	$	5	$	17,104

	Six months ended June 30, 2014
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	9,832	$	4,161		$	(468	)	$		$	13,525
Consumer		892		49			(4	)				937
Residential real estate		408		154			—			2		564
Commercial real estate		198		17			—			28		243
Home equity lines of credit		174		106			—			—		280
Construction and land		12		(12	)		—			—		—
Qualitative		1,152		403			—			—		1,555
	$	12,668	$	4,878		$	(472	)	$	30	$	17,104

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2014 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and industrial	$	33	$	13,492	$	13,525	—		$	750,071	$	750,071
Consumer	—			937		937	—			624,700		624,700
Residential real estate		237		327		564		412		411,027		411,439
Commercial real estate	—			243		243		238		15,817		16,055
Home equity lines of credit	—			280		280		323		14,078		14,401
Qualitative	—			1,555		1,555	—		—		—
	$	270	$	16,834	$	17,104	$	973	$	1,815,693	$	1,816,666

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2014 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and industrial	$	—	$	16,609	$	16,609	$	—	$	896,853	$	896,853
Consumer		13		1,242		1,255		13		758,275		758,288
Residential real estate		87		700		787		378		432,268		432,646
Commercial real estate		23		209		232		228		15,674		15,902
Home equity lines of credit		149		118		267		323		12,622		12,945
Qualitative		—		1,581		1,581		—		—		—
	$	272	$	20,459	$	20,731	$	942	$	2,115,692	$	2,116,634

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

There are two components of the allowance for loan losses: the inherent allowance component and the specific allowance component.

The inherent allowance component of the allowance for loan losses is used to estimate the probable losses inherent in the loan portfolio and includes non-homogeneous loans that have not been identified as impaired and portfolios of smaller balance homogeneous loans. The Company maintains methodologies by loan product for calculating an allowance for loan losses that estimates the inherent losses in the loan portfolio. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered in the calculations. The allowance for loan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probable losses inherent in the portfolio.

The specific allowance component of the allowance for loan losses is used to estimate probable losses for non-homogeneous exposures, including loans modified in a Troubled Debt Restructuring (“TDR”), which have been specifically identified for impairment analysis by the Company and determined to be impaired. At June 30, 2015, we had $4.0 million of non-accrual loans, net of discounts, which included $0.4 million in troubled debt restructurings, for which there was a specific allowance of $0.2 million. At December 31, 2014, we had $4.9 million of non-accrual loans, net of discounts, which included $1.0 million in troubled debt restructurings, for which there was a specific allowance of $0.3 million. The gross interest income related to impaired loans, which would have been recorded had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the three and six months ended June 30, 2015 and 2014, were insignificant to the consolidated financial statements.

The tables below present loans that were individually evaluated for impairment by portfolio segment at June 30, 2015 and December 31, 2014, included the average recorded investment balance (in thousands):

	June 30, 2015
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—
Consumer		20		8		11		19		11		21
Residential real estate		6,081		5,106		213		5,319		37		5,337
Commercial real estate		219	—			219		219		22		223
Home equity lines of credit		323	—			323		323		148		323
Total	$	6,643	$	5,114	$	766	$	5,880	$	218	$	5,904

	December 31, 2014
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	—	$	—	$	—	$	—	$	—	$	—
Consumer		13		—		13		13		13		15
Residential real estate		5,006		3,944		377		4,321		87		4,646
Commercial real estate		228		—		228		228		23		235
Home equity lines of credit		323		—		323		323		149		323
Total	$	5,570	$	3,944	$	941	$	4,885	$	272	$	5,219

The following table presents the aging of the recorded investment in past due loans at June 30, 2015 and December 31, 2014 by portfolio segment (in thousands):

	As of June 30, 2015
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	—	$	—	$	1,010,810	$	1,010,810
Consumer		18		9		27		983,332		983,359
Residential real estate		6,020		5,149		11,169		437,825		448,994
Commercial real estate	—		—		—			20,053		20,053
Home equity lines of credit	—		—		—			12,599		12,599
Total	$	6,038	$	5,158	$	11,196	$	2,464,619	$	2,475,815

	As of June 30, 2015 *
	Non-accrual		Restructured		Total
Commercial and industrial	$	—	$	—	$	—
Consumer		19	—			19
Residential real estate		4,571		748		5,319
Commercial real estate		219	—			219
Home equity lines of credit		323	—			323
Total	$	5,132	$	748	$	5,880

*	There were no loans past due 90 days and still accruing interest at June 30, 2015.

	As of December 31, 2014
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	—	$	—	$	896,853	$	896,853
Consumer		28		14		42		758,246		758,288
Residential real estate		6,603		4,834		11,437		421,209		432,646
Commercial real estate		—		—		—		15,902		15,902
Home equity lines of credit		—		—		—		12,945		12,945
Total	$	6,631	$	4,848	$	11,479	$	2,105,155	$	2,116,634

	As of December 31, 2014 *
	Non-accrual		Restructured		Total
Commercial and industrial	$	—	$	—	$	—
Consumer		13		—		13
Residential real estate		4,321		504		4,825
Commercial real estate		228		—		228
Home equity lines of credit		323		—		323
Total	$	4,885	$	504	$	5,389

*	There were no loans past due 90 days and still accruing interest at December 31, 2014.

Credit quality indicators

As of June 30, 2015, bank loans were primarily extended to non-investment grade borrowers. Substantially all of these loans align with the U.S. Federal bank regulatory agencies’ definition of Pass. Loans meet the definition of Pass when they are performing and/or do not demonstrate adverse characteristics that are likely to result in a credit loss. A loan is determined to be impaired when principal or interest becomes 90 days past due or when collection becomes uncertain. At the time a loan is determined to be impaired, the accrual of interest and amortization of deferred loan origination fees is discontinued (“non-accrual status”), and any accrued and unpaid interest income is reversed.

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency ratios are an indicator, among other considerations, of credit risk within our loan portfolios. The level of nonperforming assets represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as charge-off rates and our internal risk ratings of the loan portfolio. In general, we are a secured lender. At June 30, 2015 and December 31, 2014, 96.8 % and 95.8% of our loan portfolio was collateralized, respectively. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. The Company uses the following definitions for risk ratings:

Pass. A credit exposure rated pass has a continued expectation of timely repayment, all obligations of the borrower are current, and the obligor complies with material terms and conditions of the lending agreement.

Special Mention. Extensions of credit that have potential weakness that deserve management’s close attention, and if left uncorrected may, at some future date, result in the deterioration of the repayment prospects or collateral position.

Substandard. Obligor has a well-defined weakness that jeopardizes the repayment of the debt and has a high probability of payment default with the distinct possibility that the Company will sustain some loss if noted deficiencies are not corrected.

Doubtful. Inherent weakness in the exposure makes the collection or repayment in full, based on existing facts, conditions and circumstances, highly improbable, and the amount of loss is uncertain.

Doubtful loans are considered impaired. Substandard loans are regularly reviewed for impairment. When a loan is impaired the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or as a practical expedient the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.

Portfolio segments:

Commercial and industrial (C&I). C&I loans primarily include commercial and industrial lending used for general corporate purposes, working capital and liquidity, and “event-driven." “Event-driven” loans support client merger, acquisition or recapitalization activities. C&I lending is structured as revolving lines of credit, letter of credit facilities, term loans and bridge loans. Risk factors considered in determining the allowance for corporate loans include the borrower’s financial strength, seniority of the loan, collateral type, leverage, volatility of collateral value, debt cushion, and covenants.

Consumer. Consumer loans primarily include securities-based lending that allows clients to borrow money against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities or refinancing margin debt. The majority of consumer loans are structured as revolving lines of credit and letter of credit facilities and are primarily offered through Stifel’s Pledged Asset ("SPA") program. The allowance methodology for securities-based lending considers the collateral type underlying the loan.

Real Estate. Real estate loans include commercial real estate, residential real estate non-conforming loans, residential real estate conforming loans and home equity lines of credit. The allowance methodology real estate loans considers several factors, including, but not limited to, loan-to-value ratio, FICO score, home price index, delinquency status, credit limits, and utilization rates.

Based on the most recent analysis performed, the risk category of our loan portfolio was as follows: (in thousands):

	As of June 30, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	1,009,282	$	—	$	1,528	$	—	$	1,010,810
Consumer		983,338	—			21	—			983,359
Residential real estate		443,661	—			5,333	—			448,994
Commercial real estate		19,834	—			219	—			20,053
Home equity lines of credit		12,276	—			323	—			12,599
Total	$	2,468,391	$	—	$	7,424	$	—	$	2,475,815

	As of December 31, 2014
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	896,853	$	—	$	—	$	—	$	896,853
Consumer		758,246		28		14		—		758,288
Residential real estate		421,209		6,603		4,834		—		432,646
Commercial real estate		15,902		—		—		—		15,902
Home equity lines of credit		12,945		—		—		—		12,945
Total	$	2,105,155	$	6,631	$	4,848	$	—	$	2,116,634