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 related to 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.

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

Other. Other loans include consumer, credit card, and indirect lending.

The following table presents the balance and associated percentage of each major loan category in our bank loan portfolio at September 30, 2018 and December 31, 2017 (in thousands, except percentages):

	September 30, 2018						December 31, 2017
	Balance			Percent			Balance			Percent
Commercial and industrial	$	3,127,435			37.5	%	$	2,437,938			34.8	%
Residential real estate		2,792,269			33.5			2,593,576			37.0
Securities-based loans		1,836,450			22.0			1,819,206			25.9
Commercial real estate		328,814			3.9			116,258			1.7
Construction and land		120,969			1.4			7,896			0.1
Home equity lines of credit		29,118			0.3			15,039			0.2
Other		109,571			1.4			24,508			0.3
Gross bank loans		8,344,626			100.0	%		7,014,421			100.0	%
Unamortized loan premium/(discount), net		(13,419	)					788
Loans in process		(2,755	)					(856	)
Unamortized loan fees, net		6,237						872
Allowance for loan losses		(80,700	)					(67,466	)
Bank loans, net	$	8,253,989					$	6,947,759

At September 30, 2018 and December 31, 2017, Stifel Bancorp had loans outstanding to its executive officers, directors, and their affiliates in the amount of $4.0 million and $4.0 million, respectively, and loans outstanding to other Stifel Financial Corp. executive officers, directors, and their affiliates in the amount of $25.2 million and $8.4 million, respectively.

At September 30, 2018 and December 31, 2017, we had loans held for sale of $262.1 million and $226.1 million, respectively. For the three months ended September 30, 2018 and 2017, we recognized gains of $2.6 million and $3.2 million, respectively, from the sale of originated loans, net of fees and costs. For the nine months ended September 30, 2018 and 2017, we recognized gains of $7.8 million and $9.4 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 nine months ended September 30, 2018 (in thousands).

	Three Months Ended September 30, 2018
	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Commercial and industrial	$	59,572	$	5,008		$	—	$	—	$	64,580
Residential real estate		9,328		1,165			—		—		10,493
Securities-based loans		1,928		(5	)		—		—		1,923
Commercial real estate		1,672		90			—		—		1,762
Construction and land		303		600			—		—		903
Home equity lines of credit		229		—			—		—		229
Other		13		(3	)		—		1		11
Qualitative		730		69			—		—		799
	$	73,775	$	6,924		$	—	$	1	$	80,700

	Nine Months Ended September 30, 2018
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	54,474	$	10,118		$	(12	)	$	—	$	64,580
Residential real estate		8,430		2,063			—			—		10,493
Securities-based loans		2,088		(165	)		—			—		1,923
Commercial real estate		1,520		242			—			—		1,762
Construction and land		100		803			—			—		903
Home equity lines of credit		162		65			—			2		229
Other		16		(5	)		(2	)		2		11
Qualitative		676		123			—			—		799
	$	67,466	$	13,244		$	(14	)	$	4	$	80,700

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 30, 2018 (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	$	8,677	$	55,903	$	64,580	$	23,630	$	3,103,805	$	3,127,435
Residential real estate		24		10,469		10,493		328		2,791,941		2,792,269
Securities-based loans		—		1,923		1,923		—		1,836,450		1,836,450
Commercial real estate		—		1,762		1,762		—		328,814		328,814
Construction and land		—		903		903		—		120,969		120,969
Home equity lines of credit		—		229		229		231		28,887		29,118
Other		—		11		11		58		109,513		109,571
Qualitative		—		799		799		—		—		—
	$	8,701	$	71,999	$	80,700	$	24,247	$	8,320,379	$	8,344,626

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2017 (in thousands).

	Three Months Ended September 30, 2017
	Beginning Balance		Provision			Charge-offs		Recoveries		Ending Balance
Commercial and industrial	$	40,805	$	6,312		$	—	$	35	$	47,152
Residential real estate		5,569		1,566			—		—		7,135
Securities-based loans		3,600		(288	)		—		—		3,312
Commercial real estate		932		95			—		—		1,027
Home equity lines of credit		283		(13	)		—		1		271
Construction and land		224		9			—		—		233
Other		105		(3	)		—		1		103
Qualitative		2,684		312			—		—		2,996
	$	54,202	$	7,990		$	—	$	37	$	62,229

	Nine Months Ended September 30, 2017
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	35,127	$	12,239		$	(250	)	$	36	$	47,152
Residential real estate		2,660		4,475			—			—		7,135
Securities-based loans		3,094		218			—			—		3,312
Commercial real estate		1,363		2,367			(2,703	)		—		1,027
Home equity lines of credit		371		(102	)		—			2		271
Construction and land		232		1			—			—		233
Other		129		(27	)		—			1		103
Qualitative		2,187		809			—			—		2,996
	$	45,163	$	19,980		$	(2,953	)	$	39	$	62,229

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 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	$	8,406	$	8,430	$	171	$	2,593,405	$	2,593,576
Commercial and industrial		9,059		45,415		54,474		28,856		2,409,082		2,437,938
Securities-based loans		—		2,088		2,088		—		1,819,206		1,819,206
Commercial real estate		—		1,520		1,520		—		116,258		116,258
Home equity lines of credit		20		142		162		184		14,855		15,039
Construction and land		—		100		100		—		7,896		7,896
Other		2		14		16		2		24,506		24,508
Qualitative		—		676		676		—		—		—
	$	9,105	$	58,361	$	67,466	$	29,213	$	6,985,208	$	7,014,421

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 September 30, 2018, we had $24.2 million of impaired loans, net of discounts, which included $9.1 million in troubled debt restructurings. The specific allowance on impaired loans at September 30, 2018 was $8.7 million. At December 31, 2017, we had $29.2 million of impaired loans, net of discounts, which included $9.1 million in troubled debt restructurings. The specific allowance on impaired loans at December 31, 2017 was $9.1 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, 2018 and 2017, were insignificant to the consolidated financial statements.

The tables below present loans that were individually evaluated for impairment by portfolio segment at September 30, 2018 and December 31, 2017, including the average recorded investment balance for the year to date period presented (in thousands):

	September 30, 2018
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	23,630	$	196	$	23,434	$	23,630	$	8,677	$	23,783
Residential real estate		353		80		248		328		24		355
Home equity lines of credit		231		184		47		231		—		236
Other		731		26		32		58		—		60
Total	$	24,945	$	486	$	23,761	$	24,247	$	8,701	$	24,434

	December 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	$	28,856	$	5,211	$	23,645	$	28,856	$	9,059	$	30,277
Home equity lines of credit		184		—		184		184		20		300
Residential real estate		171		—		171		171		24		174
Other		677		—		2		2		2		5
Total	$	29,888	$	5,211	$	24,002	$	29,213	$	9,105	$	30,756

The following table presents the aging of the recorded investment in past due loans at September 30, 2018 and December 31, 2017 by portfolio segment (in thousands):

	As of September 30, 2018
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	14,656	$	14,656	$	3,112,779	$	3,127,435
Residential real estate		3,745		184		3,929		2,788,340		2,792,269
Securities-based loans		—		—		—		1,836,450		1,836,450
Commercial real estate		—		—		—		328,814		328,814
Construction and land		—		—		—		120,969		120,969
Home equity lines of credit		47		—		47		29,071		29,118
Other		—		67		67		109,504		109,571
Total	$	3,792	$	14,907	$	18,699	$	8,325,927	$	8,344,626

	As of September 30, 2018*
	Non-Accrual		Restructured		Total
Commercial and industrial	$	14,694	$	8,936	$	23,630
Residential real estate		159		169		328
Home equity lines of credit		231		—		231
Other		58		—		58
Total	$	15,142	$	9,105	$	24,247

*	There were no loans past due 90 days and still accruing interest at September 30, 2018.

	As of December 31, 2017
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Residential real estate	$	7,892	$	—	$	7,892	$	2,585,684	$	2,593,576
Commercial and industrial		11,883		—		11,883		2,426,055		2,437,938
Securities-based loans		—		—		—		1,819,206		1,819,206
Commercial real estate		—		—		—		116,258		116,258
Home equity lines of credit		184		—		184		14,855		15,039
Construction and land		—		—		—		7,896		7,896
Other		2		—		2		24,506		24,508
Total	$	19,961	$	—	$	19,961	$	6,994,460	$	7,014,421

	As of December 31, 2017*
	Non-Accrual		Restructured		Total
Commercial and industrial	$	19,904	$	8,952	$	28,856
Home equity lines of credit		184		—		184
Residential real estate		—		171		171
Other		2		—		2
Total	$	20,090	$	9,123	$	29,213

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

Credit quality indicators

Loans meet the definition of Pass when they are performing and 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 portfolio. 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, 2018 and December 31, 2017, 98.6% 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. 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 September 30, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	3,069,237	$	34,488	$	23,710	$	—	$	3,127,435
Residential real estate		2,791,627		394		248		—		2,792,269
Securities-based loans		1,836,450		—		—		—		1,836,450
Commercial real estate		328,814		—		—		—		328,814
Construction and land		120,969		—		—		—		120,969
Home equity lines of credit		28,887		—		231		—		29,118
Other		109,513		—		47		11		109,571
Total	$	8,285,497	$	34,882	$	24,236	$	11	$	8,344,626

	As of December 31, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
Residential real estate	$	2,593,096	$	309	$	171	$	—	$	2,593,576
Commercial and industrial		2,385,152		22,443		30,343		—		2,437,938
Securities-based loans		1,819,206		—		—		—		1,819,206
Commercial real estate		116,258		—		—		—		116,258
Home equity lines of credit		14,855		—		184		—		15,039
Construction and land		7,896		—		—		—		7,896
Other		24,506		—		2		—		24,508
Total	$	6,960,969	$	22,752	$	30,700	$	—	$	7,014,421