NOTE 9 – Bank Loans

The following table presents the balance and associated percentage of each major loan category in our bank loan portfolio at December 31, 2016 and 2015 (in thousands, except percentages):

	December 31, 2016						December 31, 2015
	Balance			Percent			Balance			Percent
Residential real estate	$	2,161,400			38.4	%	$	429,132			13.5	%
Commercial and industrial		1,710,399			30.3			1,216,656			38.2
Securities-based loans		1,614,033			28.6			1,388,953			43.7
Commercial real estate		78,711			1.4			92,623			2.9
Consumer		45,391			0.8			36,846			1.2
Home equity lines of credit		15,008			0.3			12,475			0.4
Construction and land		12,623			0.2			3,899			0.1
Gross bank loans		5,637,565			100.0	%		3,180,584			100.0	%
Unamortized loan premium/(discount), net		858						(5,296	)
Loans in process		(49	)					(419	)
Unamortized loan fees, net		(2,021	)					(1,567	)
Allowance for loan losses		(45,163	)					(29,787	)
Bank loans, net	$	5,591,190					$	3,143,515

At December 31, 2016 and 2015, Stifel Bank had loans outstanding to its executive officers, directors, and their affiliates in the amount of $3.7 million and $2.0 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $5.6 million and $7.2 million, respectively.

At December 31, 2016 and 2015, we had loans held for sale of $228.6 million and $189.9 million, respectively. For the years ended December 31, 2016, 2015, and 2014, we recognized gains of $16.0 million, $12.7 million, and $8.1 million, respectively, from the sale of originated loans, net of fees and costs.

At December 31, 2016 and 2015, residential and commercial real estate loans of $2.3 billion and $207.5 million, respectively, were pledged at the Federal Home Loan Bank as collateral for borrowings.

During the year ended December 31, 2015, the Bank reclassified $227.6 million of residential mortgages to held for sale. During the year ended December 31, 2015, Stifel Bank sold $184.4 million in unpaid principal balance. As these loans carried a significant portion of 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.

The following table details activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016 and 2015 (in thousands).

	Year Ended December 31, 2016
	Beginning Balance		Provision		Charge- offs			Recoveries		Ending Balance
Commercial and industrial	$	24,748	$	10,646	$	(267	)	$	—	$	35,127
Securities-based loans		1,607		1,487		—			—		3,094
Residential real estate		1,241		1,430		(13	)		2		2,660
Commercial real estate		264		1,090		—			9		1,363
Home equity lines of credit		290		81		—			—		371
Construction and land		78		154		—			—		232
Consumer		105		38		(16	)		2		129
Qualitative		1,454		733		—			—		2,187
	$	29,787	$	15,659	$	(296	)	$	13	$	45,163

	Year Ended December 31, 2015
	Beginning Balance		Provision			Charge- offs			Recoveries		Ending Balance
Commercial and industrial	$	16,609	$	8,139		$	—		$	—	$	24,748
Securities-based loans		1,099		508		—			—			1,607
Residential real estate		787		544			(144	)		54		1,241
Home equity lines of credit		267		15		—				8		290
Commercial real estate		232		(30	)	—				62		264
Consumer		156		(58	)	—				7		105
Construction and land	—			78		—			—			78
Qualitative		1,581		(127	)	—			—			1,454
	$	20,731	$	9,069		$	(144	)	$	131	$	29,787

The following table presents the unpaid principal 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

The following table presents the unpaid principal balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 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
Securities-based loans	$	—	$	1,607	$	1,607	$	—	$	1,388,953	$	1,388,953
Commercial and industrial		—		24,748		24,748		—		1,216,656		1,216,656
Residential real estate		24		1,217		1,241		182		428,950		429,132
Commercial real estate		—		264		264		—		92,623		92,623
Consumer		14		91		105		14		36,832		36,846
Home equity lines of credit		149		141		290		323		12,152		12,475
Construction and land		—		78		78		—		3,899		3,899
Qualitative		—		1,454		1,454		—		—		—
	$	187	$	29,600	$	29,787	$	519	$	3,180,065	$	3,180,584

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. Our 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 our company and determined to be impaired. At December 31, 2016, we had $26.9 million of non-accrual loans, net of discounts, which included $9.7 million in troubled debt restructurings, for which there was a specific allowance of $3.4 million. At December 31, 2015, we had $0.9 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. 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 year ended December 31, 2016 and 2015, were insignificant to the consolidated financial statements.

The tables below present loans that were individually evaluated for impairment by portfolio segment at December 31, 2016 and 2015, including the average recorded investment balance (in thousands):

	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

	December 31, 2015
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Consumer	$	944	$	—	$	15	$	15	$	15	$	23
Residential real estate		776		524		182		706		24		752
Home equity lines of credit		342		19		323		342		149		342
Commercial real estate		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Construction and land		—		—		—		—		—		—
Total	$	2,062	$	543	$	520	$	1,063	$	188	$	1,117

The following table presents the aging of the recorded investment in past due loans at December 31, 2016 and 2015, by portfolio segment (in thousands):

	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

	December 31, 2016 *
	Non-accrual		Restructured ⁽¹⁾		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

⁽¹⁾ On non-accrual status.

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

	December 31, 2015
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Securities-based loans	$	—	$	—	$	—	$	1,388,953		1,388,953
Commercial and industrial		—		—		—		1,216,656		1,216,656
Residential real estate		3,310		450		3,760		425,372		429,132
Commercial real estate		—		—		—		92,623		92,623
Consumer		7		7		14		36,832		36,846
Home equity lines of credit		323		19		342		12,133		12,475
Construction and land		—		—		—		3,899		3,899
Total	$	3,640	$	476	$	4,116	$	3,176,468	$	3,180,584

	December 31, 2015 *
	Non-accrual		Restructured		Total
Commercial and industrial	$	—	$	—	$	—
Consumer		15		—		15
Residential real estate		380		326		706
Commercial real estate		—		—		—
Home equity lines of credit		342		—		342
Construction and land		—		—		—
Total	$	737	$	326	$	1,063

* There were no loans past due 90 days and still accruing interest at December 31, 2015.

Credit quality indicators

As of December 31, 2016, 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 December 31, 2016 and 2015, 97.9 % and 97.2% 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. Our 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 we 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.

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.

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

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.

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

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

	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

	December 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
Securities-based loans	$	1,388,939	$	—	$	14	$	—		1,388,953
Commercial and industrial		1,191,030		11,320		14,306	—			1,216,656
Residential real estate		427,950		1,182	—		—			429,132
Commercial real estate		92,623	—		—		—			92,623
Consumer		36,846	—		—		—			36,846
Home equity lines of credit		12,456	—			19	—			12,475
Construction and land		3,899	—		—		—			3,899
Total	$	3,153,743	$	12,502	$	14,339	$	—	$	3,180,584