NOTE 7 – Bank Loans

Our loan portfolio consists primarily of the following segments:

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 for 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.

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.

Securities-based loans. Securities-based loans allow 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, including the liquidity and trading volume of the collateral, position concentration and other borrower specific factors such as personal guarantees.

Consumer. Consumer loans allow customers to purchase non-investment goods and services.

Construction and land. Short-term loans used to finance the development of a real estate project.

The following table presents the balance and associated percentage of each major loan category in our bank loan portfolio at March 31, 2017 and December 31, 2016 (in thousands, except percentages):

	March 31, 2017						December 31, 2016
	Balance			Percent			Balance			Percent
Residential real estate	$	2,214,356			37.4	%	$	2,161,400			38.4	%
Commercial and industrial		1,830,865			30.9			1,710,399			30.3
Securities-based loans		1,728,516			29.2			1,614,033			28.6
Commercial real estate		78,522			1.3			78,711			1.4
Consumer		42,856			0.7			45,391			0.8
Home equity lines of credit		14,578			0.3			15,008			0.3
Construction and land		13,931			0.2			12,623			0.2
Gross bank loans		5,923,624			100.0	%		5,637,565			100.0	%
Unamortized loan premium/(discount), net		1,039						858
Unamortized loan fees, net of loan fees		(892	)					(49	)
Loans in process		(7,925	)					(2,021	)
Allowance for loan losses		(51,298	)					(45,163	)
Bank loans, net	$	5,864,548					$	5,591,190

At March 31, 2017 and December 31, 2016, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $3.8 million and $3.7 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $5.6 million and $5.6 million, respectively.

At March 31, 2017 and December 31, 2016, we had loans held for sale of $206.7 million and $228.6 million, respectively. For the three months ended March 31, 2017 and 2016, we recognized gains of $2.9 million and $2.7 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 months ended March 31, 2017 (in thousands).

	Three Months Ended March 31, 2017
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	35,127	$	3,662		$	—		$	—	$	38,789
Securities-based loans		3,094		299			—			—		3,393
Consumer		129		(22	)		—			—		107
Residential real estate		2,660		1,530			—			—		4,190
Commercial real estate		1,363		255			—			—		1,618
Home equity lines of credit		371		(85	)		(1	)		—		285
Construction and land		232		205			—			—		437
Qualitative		2,187		292			—			—		2,479
	$	45,163	$	6,136		$	(1	)	$	—	$	51,298

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2017 (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
Residential real estate	$	24	$	4,166	$	4,190	$	176	$	2,214,180	$	2,214,356
Commercial and industrial		2,453		36,336		38,789		18,010		1,812,855		1,830,865
Securities-based loans		—		3,393		3,393		—		1,728,516		1,728,516
Commercial real estate		972		646		1,618		9,522		69,000		78,522
Consumer		5		102		107		5		42,851		42,856
Home equity lines of credit		148		137		285		323		14,255		14,578
Construction and land		—		437		437		—		13,931		13,931
Qualitative		—		2,479		2,479		—		—		—
	$	3,602	$	47,696	$	51,298	$	28,036	$	5,895,588	$	5,923,624

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 (in thousands).

	Three Months Ended March 31, 2016
	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Commercial and industrial	$	24,748	$	2,952		$	—	$	—	$	27,700
Securities-based loans		1,607		(2	)		—		—		1,605
Residential real estate		1,241		88			—		1		1,330
Commercial real estate		264		1,022			—		3		1,289
Home equity lines of credit		290		(23	)		—		—		267
Construction and land		78		40			—		—		118
Consumer		105		(21	)		—		—		84
Qualitative		1,454		203			—		—		1,657
	$	29,787	$	4,259		$	—	$	4	$	34,050

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at March 31, 2016 (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
Securities-based loans	$	—	$	1,605	$	1,605	$	—	$	1,345,719	$	1,345,719
Commercial and industrial		1,215		26,485		27,700		12,148		1,283,170		1,295,318
Residential real estate		24		1,306		1,330		704		729,979		730,683
Commercial real estate		981		308		1,289		9,809		73,464		83,273
Consumer		14		70		84		18		31,018		31,036
Home equity lines of credit		149		118		267		323		12,188		12,511
Construction and land		—		118		118		—		6,969		6,969
Qualitative		—		1,657		1,657		—		—		—
	$	2,383	$	31,667	$	34,050	$	23,002	$	3,482,507	$	3,505,509

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2016 (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
Residential real estate	$	24	$	2,636	$	2,660	$	178	$	2,161,222	$	2,161,400
Commercial and industrial		2,392		32,735		35,127		16,815		1,693,584		1,710,399
Securities-based loans		—		3,094		3,094		—		1,614,033		1,614,033
Commercial real estate		722		641		1,363		9,522		69,189		78,711
Consumer		6		123		129		6		45,385		45,391
Home equity lines of credit		231		140		371		413		14,595		15,008
Construction and land		—		232		232		—		12,623		12,623
Qualitative		—		2,187		2,187		—		—		—
	$	3,375	$	41,788	$	45,163	$	26,934	$	5,610,631	$	5,637,565

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. 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 March 31, 2017, we had $28.0 million of impaired loans, net of discounts, which included $9.7 million in troubled debt restructurings, for which there was a specific allowance of $3.6 million. At December 31, 2016, we had $26.9 million of impaired loans, net of discounts, which included $9.7 million in troubled debt restructurings, for which there was a specific allowance of $3.4 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 months ended March 31, 2017 and 2016, were insignificant to the consolidated financial statements.

The tables below present loans that were individually evaluated for impairment by portfolio segment at March 31, 2017 and December 31, 2016, including the average recorded investment balance (in thousands):

	March 31, 2017
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	18,010	$	—	$	18,010	$	18,010	$	2,453	$	17,885
Consumer		701		—		5		5		5		9
Residential real estate		176		—		176		176		24		177
Commercial real estate		10,503		—		9,522		9,522		972		9,522
Home equity lines of credit		323		—		323		323		148		323
Construction and land		—		—		—		—		—		—
Total	$	29,713	$	—	$	28,036	$	28,036	$	3,602	$	27,916

	December 31, 2016
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	16,815		—	$	16,815	$	16,815	$	2,392	$	22,559
Commercial real estate		10,503		—		9,522		9,522		722		9,080
Consumer		833		—		6		6		6		9
Home equity lines of credit		413		—		413		413		231		413
Residential real estate		178		—		178		178		24		181
Construction and land		—		—		—		—		—		—
Total	$	28,742	$	—	$	26,934	$	26,934	$	3,375	$	32,242

The following table presents the aging of the recorded investment in past due loans at March 31, 2017 and December 31, 2016 by portfolio segment (in thousands):

	As of March 31, 2017
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Residential real estate	$	761	$	—	$	761	$	2,213,595	$	2,214,356
Commercial and industrial		—		—		—		1,830,865		1,830,865
Securities-based loans		—		—		—		1,728,516		1,728,516
Commercial real estate		4,000		9,522		13,522		65,000		78,522
Consumer		—		2		2		42,854		42,856
Home equity lines of credit		—		184		184		14,394		14,578
Construction and land		—		—		—		13,931		13,931
Total	$	4,761	$	9,708	$	14,469	$	5,909,155	$	5,923,624

	As of March 31, 2017 *
	Non-Accrual		Restructured ⁽¹⁾		Total
Commercial and industrial	$	18,010	$	—	$	18,010
Commercial real estate		—		9,522		9,522
Home equity lines of credit		323		—		323
Residential real estate		—		176		176
Consumer		5		—		5
Construction and land		—		—		—
Total	$	18,338	$	9,698	$	28,036

⁽¹⁾	On non-accrual status.

*	There were no loans past due 90 days and still accruing interest at March 31, 2017.

	As of December 31, 2016
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Residential real estate	$	1,923	$	—	$	1,923	$	2,159,477	$	2,161,400
Commercial and industrial		—		—		—		1,710,399		1,710,399
Securities-based loans		—		—		—		1,614,033		1,614,033
Commercial real estate		9,522		—		9,522		69,189		78,711
Consumer		—		2		2		45,389		45,391
Home equity lines of credit		78		196		274		14,734		15,008
Construction and land		—		—		—		12,623		12,623
Total	$	11,523	$	198	$	11,721	$	5,625,844	$	5,637,565

	As of December 31, 2016*
	Non-Accrual		Restructured		Total
Commercial and industrial	$	16,815	$	—	$	16,815
Commercial real estate		—		9,522		9,522
Home equity lines of credit		413		—		413
Residential real estate		—		178		178
Consumer		6		—		6
Construction and land		—		—		—
Total	$	17,234	$	9,700	$	26,934

*	There were no loans past due 90 days and still accruing interest at December 31, 2016.

Credit quality indicators

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 March 31, 2017 and December 31, 2016, 98.4 % and 97.9% 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.

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

	As of March 31, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
Residential real estate	$	2,214,180	$	—	$	176	$	—	$	2,214,356
Commercial and industrial		1,790,574		8,632		19,681		11,978		1,830,865
Securities-based loans		1,728,516		—		—		—		1,728,516
Commercial real estate		69,000		—		9,522		—		78,522
Consumer		42,851		—		5		—		42,856
Home equity lines of credit		14,255		—		323		—		14,578
Construction and land		13,931		—		—		—		13,931
Total	$	5,873,307	$	8,632	$	29,707	$	11,978	$	5,923,624

	As of December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
Residential real estate	$	2,161,223	$	—	$	177	$	—	$	2,161,400
Commercial and industrial		1,652,211		27,905		30,283		—		1,710,399
Securities-based loans		1,614,033		—		—		—		1,614,033
Commercial real estate		69,189		—		9,522		—		78,711
Consumer		45,385		—		6		—		45,391
Home equity lines of credit		14,595		—		413		—		15,008
Construction and land		12,623		—		—		—		12,623
Total	$	5,569,259	$	27,905	$	40,401	$	—	$	5,637,565