Bank Loans

6 Months Ended

Jun. 30, 2020

NOTE 7 – Bank Loans

Our loan portfolio consists primarily of the following 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.

Real Estate. Real estate loans include residential real estate non-conforming loans, residential real estate conforming loans, commercial real estate, 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.

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 and credit card lending.

The following table presents the balance and associated percentage of each major loan category in our bank loan portfolio at June 30, 2020 and December 31, 2019 (in thousands, except percentages):

	June 30, 2020						December 31, 2019
	Balance			Percent			Balance			Percent
Commercial and industrial	$	4,149,307			39.2	%	$	3,438,953			35.3	%
Residential real estate		3,710,657			35.1			3,309,548			33.9
Securities-based loans		1,716,786			16.2			2,098,211			21.5
Commercial real estate		406,788			3.8			428,549			4.4
Construction and land		472,216			4.5			398,839			4.1
Home equity lines of credit		62,699			0.6			51,205			0.5
Other		55,844			0.6			27,311			0.3
Gross bank loans		10,574,297			100.0	%		9,752,616			100.0	%
Unamortized loan discount, net		(8,184	)					(6,588	)
Loans in process		(2,920	)					(27,717	)
Unamortized loan fees, net		941						1,310
Allowance for loan losses		(115,821	)					(95,579	)
Loans held for investment, net	$	10,448,313					$	9,624,042

At June 30, 2020 and December 31, 2019, Stifel Bancorp had loans outstanding to its executive officers and directors and executive officers and directors of certain affiliated entities in the amount of $21.0 million and $24.5 million, respectively.

At June 30, 2020 and December 31, 2019, we had loans held for sale of $474.9 million and $389.7 million, respectively. For the three months ended June 30, 2020 and 2019, we recognized gains of $10.5 million and $2.3 million, respectively, from the sale of originated loans, net of fees and costs. For the six months ended June 30, 2020 and 2019, we recognized gains of $13.0 million and $3.2 million, respectively, from the sale of originated loans, net of fees and costs.

Effective January 1, 2020, we adopted the new accounting standard for credit losses that requires evaluation of our loan portfolio for any expected losses with recognition of an allowance for credit losses, when applicable. For more information, see Note 1 – Nature of Operations, Basis of Presentation, and Summary of Significant Accounting Policies.

Accrued interest receivable for loans and loans held for sale at June 30, 2020 was $19.9 million and is reported in other assets on the consolidated statement of financial condition.

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2020 (in thousands).

	Three Months Ended June 30, 2020
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	59,962	$	5,691		$	(150	)	$	—	$	65,503
Residential real estate		19,985		4,058			—			—		24,043
Construction and land		10,953		2,122			—			—		13,075
Commercial real estate		8,165		2,482			—			—		10,647
Securities-based loans		2,915		(1,108	)		—			—		1,807
Home equity lines of credit		539		(40	)		—			—		499
Other		283		(37	)		—			1		247
	$	102,802	$	13,168		$	(150	)	$	1	$	115,821

	Six Months Ended June 30, 2020
	Beginning Balance		CECL Adoption			Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	69,949	$	(19,940	)	$	15,646		$	(152	)	$	—	$	65,503
Residential real estate		14,253		3,499			6,291			—			—		24,043
Construction and land		4,613		2,674			5,788			—			—		13,075
Commercial real estate		3,564		791			6,292			—			—		10,647
Securities-based loans		2,361		1,346			(1,900	)		—			—		1,807
Home equity lines of credit		442		39			17			—			1		499
Other		194		58			12			(18	)		1		247
Unallocated		203		(203	)		—			—			—		—
	$	95,579	$	(11,736	)	$	32,146		$	(170	)	$	2	$	115,821

The provision for unfunded lending commitments was $6.0 million and $3.1 million for the three and six months ended June 30, 2020, respectively and are included in the provision for credit losses on the consolidated statement of operations. The expected credit losses for unfunded lending commitments, including standby letters of credit and binding unfunded loan commitments, are reported on the consolidated statement of financial condition in accounts payable and accrued expenses.

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at June 30, 2020 (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	$	8,158	$	57,345	$	65,503	$	12,940	$	4,136,367	$	4,149,307
Residential real estate		24		24,019		24,043		1,410		3,709,247		3,710,657
Securities-based loans		—		1,807		1,807		—		1,716,786		1,716,786
Commercial real estate		—		10,647		10,647		—		406,788		406,788
Construction and land		—		13,075		13,075		—		472,216		472,216
Home equity lines of credit		—		499		499		—		62,699		62,699
Other		—		247		247		—		55,844		55,844
	$	8,182	$	107,639	$	115,821	$	14,350	$	10,559,947	$	10,574,297

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2019 (in thousands).

	Three Months Ended June 30, 2019
	Beginning Balance		Provision		Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	68,566	$	743	$	(46	)	$	—	$	69,263
Residential real estate		11,585		457		—			—		12,042
Securities-based loans		2,227		84		—			—		2,311
Commercial real estate		2,421		57		—			—		2,478
Construction and land		1,724		678		—			—		2,402
Home equity lines of credit		372		49		—			—		421
Other		146		40		(8	)		1		179
Unallocated		1,131		245		—			—		1,376
	$	88,172	$	2,353	$	(54	)	$	1	$	90,472

	Six Months Ended June 30, 2019
	Beginning Balance		Provision		Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	68,367	$	954	$	(58	)	$	—	$	69,263
Residential real estate		11,228		727		—			87		12,042
Securities-based loans		1,978		333		—			—		2,311
Commercial real estate		1,778		700		—			—		2,478
Construction and land		1,241		1,161		—			—		2,402
Home equity lines of credit		310		110		—			1		421
Other		88		118		(52	)		25		179
Unallocated		843		533		—			—		1,376
	$	85,833	$	4,636	$	(110	)	$	113	$	90,472

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2019 (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	$	8,158	$	61,791	$	69,949	$	12,991	$	3,425,962	$	3,438,953
Residential real estate		24		14,229		14,253		1,412		3,308,136		3,309,548
Securities-based loans		—		2,361		2,361		—		2,098,211		2,098,211
Commercial real estate		—		3,564		3,564		—		428,549		428,549
Construction and land		—		4,613		4,613		—		398,839		398,839
Home equity lines of credit		—		442		442		184		51,021		51,205
Other		—		194		194		—		27,311		27,311
Unallocated		—		203		203		—		—		—
	$	8,182	$	87,397	$	95,579	$	14,587	$	9,738,029	$	9,752,616

At June 30, 2020, we had $14.4 million of impaired loans, net of discounts, which included $0.2 million in troubled debt restructurings. The specific allowance on impaired loans at June 30, 2020 was $8.2 million. At December 31, 2019, we had $14.6 million of impaired loans, net of discounts, which included $0.2 million in troubled debt restructurings. The specific allowance on impaired loans at December 31, 2019 was $8.2 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 three and six months ended June 30, 2020 and 2019, were insignificant to the consolidated financial statements.

In March 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which among other things, provided optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs). Under the CARES Act, TDR relief is available to banks for loan modifications related to the adverse effects of the

coronavirus (COVID-19) pandemic granted to borrowers that were current as of December 31, 2019. TDR relief applies to COVID-related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. We elected to apply the TDR relief provided by the CARES Act in the second quarter of 2020.

The tables below present loans that were individually evaluated for impairment by portfolio segment at June 30, 2020 and December 31, 2019, including the average recorded investment balance for the year to date period presented (in thousands):

	June 30, 2020
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	12,940	$	—	$	12,940	$	12,940	$	8,158	$	12,940
Residential real estate		1,410		1,249		161		1,410		24		1,411
Home equity lines of credit		—		—		—		—		—		61
Other		150		—		—		—		—		—
Total	$	14,500	$	1,249	$	13,101	$	14,350	$	8,182	$	14,412

	December 31, 2019
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	12,991	$	51	$	12,940	$	12,991	$	8,158	$	14,172
Residential real estate		1,412		1,412		—		1,412		24		1,231
Home equity lines of credit		184		184		—		184		—		184
Other		150		—		—		—		—		—
Total	$	14,737	$	1,647	$	12,940	$	14,587	$	8,182	$	15,587

The following tables present the aging of the recorded investment in past due loans at June 30, 2020 and December 31, 2019 by portfolio segment (in thousands):

	As of June 30, 2020
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	12,940	$	12,940	$	4,136,367	$	4,149,307
Residential real estate		17,714		1,249		18,963		3,691,694		3,710,657
Securities-based loans		—		—		—		1,716,786		1,716,786
Commercial real estate		—		—		—		406,788		406,788
Construction and land		—		—		—		472,216		472,216
Home equity lines of credit		101		—		101		62,598		62,699
Other		—		—		—		55,844		55,844
Total	$	17,815	$	14,189	$	32,004	$	10,542,293	$	10,574,297

	As of June 30, 2020*
	Non-Accrual		Restructured		Nonperforming loans with no allowance		Total
Commercial and industrial	$	12,940	$	—	$	—	$	12,940
Residential real estate		—		161		1,249		1,410
Total	$	12,940	$	161	$	1,249	$	14,350

*	There were no loans past due 90 days and still accruing interest at June 30, 2020.

	As of December 31, 2019
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	12,940	$	12,940	$	3,426,013	$	3,438,953
Residential real estate		10,476		1,249		11,725		3,297,823		3,309,548
Securities-based loans		—		—		—		2,098,211		2,098,211
Commercial real estate		—		—		—		428,549		428,549
Construction and land		—		—		—		398,839		398,839
Home equity lines of credit		83		184		267		50,938		51,205
Other		5		—		5		27,306		27,311
Total	$	10,564	$	14,373	$	24,937	$	9,727,679	$	9,752,616

	As of December 31, 2019*
	Non-Accrual		Restructured		Total
Commercial and industrial	$	12,940	$	—	$	12,940
Residential real estate		1,249		163		1,412
Home equity lines of credit		184		—		184
Total	$	14,373	$	163	$	14,536

*	There were no loans past due 90 days and still accruing interest at December 31, 2019.

Credit quality indicators

As of June 30, 2020, 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 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 June 30, 2020 and December 31, 2019, 98.1% and 98.3% 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.

Substandard loans are regularly reviewed for impairment. Doubtful loans are considered impaired. 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 June 30, 2020
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	3,926,827	$	158,513	$	51,027	$	12,940	$	4,149,307
Residential real estate		3,709,274		134		—		1,249		3,710,657
Securities-based loans		1,716,786		—		—		—		1,716,786
Commercial real estate		405,471		1,173		144		—		406,788
Construction and land		438,555		33,661		—		—		472,216
Home equity lines of credit		61,831		868		—		—		62,699
Other		55,844		—		—		—		55,844
Total	$	10,314,588	$	194,349	$	51,171	$	14,189	$	10,574,297

	As of December 31, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	3,365,800	$	48,241	$	11,972	$	12,940	$	3,438,953
Residential real estate		3,307,719		417		1,412		—		3,309,548
Securities-based loans		2,098,211		—		—		—		2,098,211
Commercial real estate		427,963		586		—		—		428,549
Construction and land		398,839		—		—		—		398,839
Home equity lines of credit		51,021		—		184		—		51,205
Other		27,311		—		—		—		27,311
Total	$	9,676,864	$	49,244	$	13,568	$	12,940	$	9,752,616

	Term Loans Amortized Cost Basis by Origination Year – June 30, 2020
	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and industrial:
Pass	$	368,449	$	68,674	$	2,422,517	$	8,699	$	21,647	$	35,096	$	1,001,745	$	3,926,827
Special Mention		—		—		156,946		—		—		—		1,567		158,513
Substandard		—		—		41,977		—		—		28		9,022		51,027
Doubtful		—		—		—		12,940		—		—		—		12,940
	$	368,449	$	68,674	$	2,621,440	$	21,639	$	21,647	$	35,124	$	1,012,334	$	4,149,307
Residential real estate:
Pass	$	893,802	$	1,037,080	$	444,563	$	355,418	$	324,468	$	653,943	$	—	$	3,709,274
Special Mention		—		—		—		—		—		134		—		134
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		149		—		1,100		—		1,249
	$	893,802	$	1,037,080	$	444,563	$	355,567	$	324,468	$	655,177	$	—	$	3,710,657
Securities-based loans:
Pass	$	15,217	$	102,590	$	1,614	$	140	$	300	$	22,993	$	1,573,932	$	1,716,786
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
	$	15,217	$	102,590	$	1,614	$	140	$	300	$	22,993	$	1,573,932	$	1,716,786
Commercial real estate:
Pass	$	74,126	$	154,844	$	44,272	$	54,879	$	19,175	$	57,186	$	989	$	405,471
Special Mention		—		—		—		—		1,173		—		—		1,173
Substandard		—		—		144		—		—		—		—		144
Doubtful		—		—		—		—		—		—		—		—
	$	74,126	$	154,844	$	44,416	$	54,879	$	20,348	$	57,186	$	989	$	406,788
Construction and land:
Pass	$	25,968	$	205,501	$	123,863	$	65,126	$	7,484	$	1,542	$	9,071	$	438,555
Special Mention		—		—		33,661		—		—		—		—		33,661
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
	$	25,968	$	205,501	$	157,524	$	65,126	$	7,484	$	1,542	$	9,071	$	472,216
Home equity lines of credit:
Pass	$	—	$	—	$	—	$	—	$	—	$	—	$	61,831	$	61,831
Special Mention		—		—		—		—		—		—		868		868
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
	$	—	$	—	$	—	$	—	$	—	$	—	$	62,699	$	62,699
Other:
Pass	$	—	$	—	$	6	$	—	$	1,006	$	51	$	54,781	$	55,844
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
	$	—	$	—	$	6	$	—	$	1,006	$	51	$	54,781	$	55,844