NOTE 9 – Bank Loans

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

	September 30, 2015						December 31, 2014
	Balance			Percent			Balance			Percent
Commercial and industrial	$	1,121,643			45.9	%	$	896,853			42.4	%
Consumer ¹		1,026,197			42.0			758,288			35.8
Residential real estate		260,958			10.7			432,646			20.4
Commercial real estate		19,811			0.8			15,902			0.8
Home equity lines of credit		11,260			0.5			12,945			0.6
Construction and land		2,474			0.1
Gross bank loans		2,442,343			100.0	%		2,116,634			100.0	%
Unamortized loan discount		(994	)					(30,533	)
Unamortized loan fees, net of loan fees		(1,841	)					(1,631	)
Loans in process		(2,402	)					1,681
Allowance for loan losses		(27,707	)					(20,731	)
Bank loans, net	$	2,409,399					$	2,065,420

¹	Includes securities-based loans of $ 1.0 billion and $732.8 million at September 30, 2015 and December 31, 2014, respectively.

At September 30, 2015 and December 31, 2014, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $1.9 million and $0.6 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $9.6 million and $5.3 million, respectively.

At September 30, 2015 and December 31, 2014, we had mortgage loans held for sale of $179.6 million and $121.9 million, respectively. For the three months ended September 30, 2015 and 2014, we recognized gains of $3.3 million and $2.2 million, respectively, from the sale of originated loans, net of fees and costs. For the nine months ended September 30, 2015 and 2014, we recognized gains of $9.4 million and $5.8 million, respectively, from the sale of originated loans, net of fees and costs.

During the three months ended September 30, 2015, the Bank reclassified $227.6 million of residential mortgages to held for sale. In September 2015, Stifel Bank sold $184.4 million in unpaid principal balance. As these loans carried a significant portion on the unamortized loan discount at the time of sale, we recognized a $14.7 million gain which is reflected in other income on the consolidated statements of operations. At September 30, 2015, $33.9 million remains in held for sale.

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

	Three Months Ended September 30, 2015
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	19,297	$	3,117		$	—		$	—	$	22,414
Consumer		1,568		39			—			6		1,613
Residential real estate		904		197			(27	)		48		1,122
Commercial real estate		286		(36	)		—			14		264
Home equity lines of credit		265		(20	)		—			8		253
Construction & Land		—		47			—			—		47
Qualitative		1,603		391			—			—		1,994
	$	23,923	$	3,735		$	(27	)	$	76	$	27,707

	Nine Months Ended September 30, 2015
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	16,609	$	5,805		$	—		$	—	$	22,414
Consumer		1,255		352			—			6		1,613
Residential real estate		787		425			(142	)		52		1,122
Commercial real estate		232		(24	)		—			56		264
Home equity lines of credit		267		(22	)		—			8		253
Construction & Land		—		47			—			—		47
Qualitative		1,581		413			—			—		1,994
	$	20,731	$	6,996		$	(142	)	$	122	$	27,707

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 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	$	—	$	22,414	$	22,414	$	—	$	1,121,643	$	1,121,643
Consumer		21		1,592		1,613		21		1,026,176		1,026,197
Residential real estate		24		1,098		1,122		945		260,013		260,958
Commercial real estate		—		264		264		—		19,811		19,811
Home equity lines of credit		149		104		253		323		10,937		11,260
Construction & Land		—		47		47		—		2,474		2,474
Qualitative		—		1,994		1,994		—		—		—
	$	194	$	27,513	$	27,707	$	1,289	$	2,441,054	$	2,442,343

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

	Three Months Ended September 30, 2014
	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Commercial and industrial	$	13,557	$	2,346		$	—	$	—	$	15,903
Consumer		937		64			—		—		1,001
Residential real estate		713		(41	)		—		2		674
Commercial real estate		210		10			—		19		239
Home equity lines of credit		131		143			—		—		274
Construction & Land		—		—			—		—		—
Qualitative		1,555		(650	)		—		—		905
	$	17,103	$	1,872		$	—	$	21	$	18,996

	Nine Months Ended September 30, 2014
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	9,832	$	6,539		$	(468	)	$	—	$	15,903
Consumer		892		113			(4	)		—		1,001
Residential real estate		408		261			—			5		674
Commercial real estate		198		(5	)		—			46		239
Home equity lines of credit		174		100			—			—		274
Construction and land		12		(12	)		—			—		—
Qualitative		1,152		(247	)		—			—		905
	$	12,668	$	6,749		$	(472	)	$	51	$	18,996

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 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	$	—	$	15,903	$	15,903	$	—	$	833,988	$	833,988
Consumer		—		1,001		1,001	—			638,810		638,810
Residential real estate		87		587		674		378		418,428		418,806
Commercial real estate		30		209		239		235		15,736		15,971
Home equity lines of credit		149		125		274		323		13,453		13,776
Construction and land		—		—		—		—		—		—
Qualitative		—		905		905		—		—	—
	$	266	$	18,730	$	18,996	$	936	$	1,920,415	$	1,921,351

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
Construction and land		—		—		—		—		—		—
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 September 30, 2015, we had $0.6 million of non-accrual loans, net of discounts, which included $0.2 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 nine months ended September 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 September 30, 2015 and December 31, 2014, included the average recorded investment balance (in thousands):

	September 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		23	—			21		21		2		24
Residential real estate		378		145		206		351		24		381
Commercial real estate	—		—		—		—		—		—
Home equity lines of credit		323	—			323		323		148		323
Construction and land	—		—		—		—		—		—
Total	$	724	$	145	$	550	$	695	$	174	$	728

	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
Construction and land		—		—		—		—		—		—
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 September 30, 2015 and December 31, 2014 by portfolio segment (in thousands):

	As of September 30, 2015
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	—	$	—	$	1,121,643	$	1,121,643
Consumer		9		12		21		1,026,176		1,026,197
Residential real estate		2,103		23		2,126		258,832		260,958
Commercial real estate	—		—		—			19,811		19,811
Home equity lines of credit	—		—		—			11,260		11,260
Construction and land	—		—		—			2,474		2,474
Total	$	2,112	$	35	$	2,147	$	2,440,196	$	2,442,343

	As of September 30, 2015 *
	Non-accrual		Restructured		Total
Commercial and industrial	$	—	$	—	$	—
Consumer		21	—			21
Residential real estate		23		328		351
Commercial real estate	—		—		—
Home equity lines of credit		323	—			323
Construction and land	—		—		—
Total	$	367	$	328	$	695

*	There were no loans past due 90 days and still accruing interest at September 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
Construction and land		—		—		—		—		—
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
Construction and land		—		—		—
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 September 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 September 30, 2015 and December 31, 2014, 96.4 % 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 September 30, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	1,108,067	$	12,052	$	1,524	$	—	$	1,121,643
Consumer		1,026,176	—			21	—			1,026,197
Residential real estate		260,935	—			23	—			260,958
Commercial real estate		19,811	—		—		—			19,811
Home equity lines of credit		11,260	—		—		—			11,260
Construction and land		2,474	—		—		—			2,474
Total	$	2,428,723	$	12,052	$	1,568	$	—	$	2,442,343

	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
Construction and land		—		—		—		—		—
Total	$	2,105,155	$	6,631	$	4,848	$	—	$	2,116,634