STIFEL FINANCIAL CORP. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , and the accompanying consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q. Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements cover, among other things, statements made about general economic and market conditions (including the impact of the COVID-19 pandemic on these conditions), the investment banking industry, objectives and results, and also may include our belief regarding the effect of various legal proceedings, management expectations, our liquidity and funding sources, counterparty credit risk, or other similar matters. In addition, statements about the potential effects of the COVID-19 pandemic on the Company's businesses and results of operations and financial condition may constitute forward-looking statements. These statements are subject to the risk that the actual effects may differ, possibly materially from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases, beyond the Company's control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on its customers, third-parties, and the Company. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed under "External Factors Impacting Our Business" and "Risk Factors" in Part II, Item 1A in this Quarterly Report on Form 10-Q, as well as the factors identified under "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , as updated in our subsequent reports filed with theSEC . These reports are available at the Company's web site at www.stifel.com and at theSEC web site at www.sec.gov. Because of these and other uncertainties, the Company's actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate its future results. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update them in light of new information or future events, unless it is obligated to do so under federal securities laws.
Unless otherwise indicated, the terms "we," "us," "our" or "our company" in this
report refer to
Executive Summary
We operate as a financial services and bank holding company. We have built a diversified business serving private clients, institutional investors, and investment banking clients located acrossthe United States and inEurope . Our principal activities are: (i) private client services, including securities transaction and financial planning services; (ii) institutional equity and fixed income sales, trading and research, and municipal finance; (iii) investment banking services, including mergers and acquisitions, public offerings, and private placements; and (iv) retail and commercial banking, including personal and commercial lending programs. Our major geographic area of concentration is throughoutthe United States , with a growing presence in theUnited Kingdom andEurope . Our company's principal customers are individual investors, corporations, municipalities, and institutions. Our core philosophy is based upon a tradition of trust, understanding, and studied advice. We attract and retain experienced professionals by fostering a culture of entrepreneurial, long-term thinking. We provide our private, institutional and corporate clients quality, personalized service, with the theory that if we place clients' needs first, both our clients and our company will prosper. Our unwavering client and employee focus have earned us a reputation as one of the leading brokerage and investment banking firms offWall Street . We have grown our business both organically and through opportunistic acquisitions. We plan to maintain our focus on revenue growth with a continued appreciation for the development of quality client relationships. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our capital markets business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we will continue to seek out opportunities that allow us to take advantage of the consolidation among middle-market firms, whereby allowing us to increase market share in ourGlobal Wealth Management andInstitutional Group businesses. Our ability to attract and retain highly skilled and productive associates is critical to the success of our business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to 53
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attract, develop and retain highly skilled associates
On
OnMay 19, 2020 , the Company completed an underwritten registered public offering of$225 million 6.125% Non-Cumulative Perpetual Preferred Stock, Series C ("Series C Preferred), which included the sale of$25.0 million of Series C Preferred pursuant to an over-allotment option.
COVID-19 Pandemic
In the first quarter of 2020, theWorld Health Organization declared the outbreak of a novel strand of the coronavirus ("COVID-19") a pandemic. The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders and limitations on business activity, including closures. These measures are, among other things, severely restricting global economic activity, which is disrupting global supply chains, lowering asset valuations, significantly increasing unemployment and underemployment levels, decreasing liquidity in markets for certain securities and causing significant volatility and disruptions in the financial, energy and commodity markets. These measures have also negatively impacted, and could continue to negatively impact businesses, market participants, our counterparties and clients, and theU.S. and/or global economy for a prolonged period of time. To address the economic impact in theU.S. , in March andApril 2020 , the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Among other measures, the CARES Act created funding for theSmall Business Administration ("SBA") Paycheck Protection Program ("PPP"), which provides loans to small businesses to keep their employees on payroll and make other eligible payments. The original funding for the PPP was fully allocated bymid-April 2020 , with additional funding made available onApril 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act. OnApril 9, 2020 , theBoard of Governors of theFederal Reserve System ("Federal Reserve") took additional steps to bolster the economy by providing additional funding sources for small and midsized businesses as well as for state and local governments as they work through cash flow stresses caused by the COVID-19 pandemic. Additionally, theFederal Reserve has taken other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on theFederal Reserve's discount window, and implementing programs to promote liquidity in certain securities markets.
In response to the pandemic, we have implemented protocols and processes to help protect our associates and clients. These measures include:
• Operating our businesses from remote locations, leveraging our business
continuity plans and capabilities that include having the majority of
associates work from home, and other associates operating using pre-planned
contingency strategies for critical site-based operations. These
capabilities have allowed us to continue to service our clients.
• Providing support to our associates during the pandemic through expanded
access to wellness and healthcare remotely.
• Our information technology group has deployed remote technologies that allow
associates to effectively work remotely. Since March, the technology team
has made a number of upgrades and changes to these systems to ensure optimal
performance.
• Our information security team is focused on protecting data by continuously
reviewing, monitoring, and training associates.
• Participating in the CARES Act and
businesses, including the SBA PPP, and continuing to provide access to the
important financial services to our clients.
In connection with reviewing our financial condition in light of the pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment, and reviewed fair values of financial instruments that are carried at fair value. Based upon our review as ofJune 30, 2020 , no impairments have been recorded and there have been no significant changes in fair value hierarchy classifications.
Results for the three and six months ended
For the three months endedJune 30, 2020 , net revenues increased 11.9% to$895.8 million from$800.8 million during the comparable period in 2019. Net income available to common shareholders decreased 0.7% to$103.0 million , or$1.39 per diluted common share for the three months endedJune 30, 2020 , compared to$103.8 million , or$1.31 per diluted common share during the comparable period in 2019. 54
-------------------------------------------------------------------------------- For the six months endedJune 30, 2020 , net revenues increased 15.1% to a record$1.8 billion compared to$1.6 billion during the comparable period in 2019. Net income available to common shareholders decreased 7.9% to$184.8 million , or$2.44 per diluted common share for the six months endedJune 30, 2020 , compared to$200.7 million , or$2.53 per diluted common share during the comparable period in 2019.
Our revenue growth for the three months ended
Our revenue growth for the six months endedJune 30, 2020 was primarily attributable to an increase in brokerage revenues, increased capital raising revenues, and asset management and service fees, partially offset by lower net interest income and advisory fee revenues.
External Factors Impacting our Business
Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, the level and shape of various yield curves, the volume and value of trading in securities, and the value of our customers' assets under management. The COVID-19 pandemic has severely impacted, and will likely continue to severely impact, global economic conditions, resulting in substantial volatility in the global financial markets, increased unemployment, and operational challenges such as the temporary closures of businesses, sheltering-in-place directives and increased remote work protocols. Governments and central banks around the world have reacted to the economic crisis caused by the pandemic by implementing stimulus and liquidity programs and cutting interest rates, though it is unclear whether these or future actions will be successful in countering the economic disruption. If the pandemic is prolonged or the actions of governments and central banks are unsuccessful, the adverse impact on the global economy will deepen, and our results of operations and financial condition in future quarters will be adversely affected. The operating environment during the quarter continued to be impacted by the COVID-19 pandemic, resulting in a disruption in global economic activity and elevated market volatility, following significant declines in March and April. During the second quarter central banks, along with governments, continued to implement monetary easing measures and provide fiscal stimulus to support the economy. These efforts contributed to higher global equity prices and tighter credit spreads compared with the end of the first quarter of 2020. The resurgence of COVID-19 in many states adds to the uncertainty of the shape of an economic recovery. We seeing lower sequential trading volumes in July and we anticipate lower net interest income as the zero rate environment fully impacts our loan and securities book. We remain cautiously optimistic that the diversity of our business will help us offset some of these headwinds. We expect our asset management revenues to rebound following the S&P's strong performance in the second quarter and our investment banking activity continues to generate solid results. EffectiveJanuary 1, 2020 , we adopted the new accounting standard on current expected credit losses ("CECL"), under which the allowance is measured based on management's best estimate of lifetime expected credit losses. Upon adoption of the new accounting standard, we recorded a$10.4 million , or a 10.7% increase to the allowance for credit losses. In addition, during the six months endedJune 30, 2020 we built$35.3 million of net credit loss reserves, which includes$19.2 million in the second quarter of 2020, reflecting the impact of changes in our company's economic outlook on estimated lifetime losses under the CECL standard due to the COVID-19 pandemic. Our overall financial results continue to be highly and directly correlated to the direction and activity levels ofthe United States equity and fixed income markets. AtJune 30, 2020 , the NASDAQ closed 12.1% higher than itsDecember 31, 2019 closing price. The S&P 500 and Dow Jones Industrial Average closed 4.0% and 9.6% lower than theirDecember 31, 2019 closing prices, respectively. As a participant in the financial services industry, we are subject to complicated and extensive regulation of our business. The recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially intensify the regulation of the financial services industry and may significantly impact us. 55
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RESULTS OF OPERATIONS
Three Months Ended
The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):
As a Percentage of Net Revenues For
Three Months Ended June 30, the Three Months Ended June 30,
%
2020 2019 Change 2020 2019
Revenues:
Commissions $ 177,028 $ 164,981 7.3 19.8 % 20.6 %
Principal transactions 166,017 96,464 72.1 18.5 12.0
Brokerage revenues 343,045 261,445 31.2 38.3 32.6
Investment banking 217,035 179,617 20.8 24.2 22.4
Asset management and service fees 198,939 211,171 (5.8 ) 22.2 26.4
Interest 128,368 187,940 (31.7 ) 14.3 23.5
Other income 21,514 13,505 59.3 2.5 1.7
Total revenues 908,901 853,678 6.5 101.5 106.6
Interest expense 13,084 52,891 (75.3 ) 1.5 6.6
Net revenues 895,817 800,787 11.9 100.0 100.0
Non-interest expenses:
Compensation and benefits 547,174 466,861 17.2 61.1 58.3
Occupancy and equipment rental 66,264 61,055 8.5 7.4 7.6
Communication and office supplies 43,046 35,069 22.7
4.8 4.4
Commissions and floor brokerage 15,177 11,008 37.9 1.7 1.4
Provision for credit losses 19,210 2,353 716.4 2.1 0.3
Other operating expenses 61,986 76,459 (18.9 ) 6.9 9.5
Total non-interest expenses 752,857 652,805 15.3 84.0 81.5
Income before income taxes 142,960 147,982 (3.4 ) 16.0 18.5
Provision for income taxes 35,073 38,225 (8.2 ) 4.0 4.8
Net Income 107,887 109,757 (1.7 ) 12.0 13.7
Net income applicable to
non-controlling interests - 672 n/m - 0.1
Net income applicable to Stifel
Financial Corp. 107,887 109,085 (1.1 ) 12.0 13.6
Preferred dividends 4,843 5,288 (8.4 ) 0.5 0.7
Net income available to common
shareholders $ 103,044 $ 103,797 (0.7 ) 11.5 % 12.9 %
56
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Six months ended
The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):
As a Percentage of Net Revenues For
Six Months Ended June 30, the Six Months Ended June 30,
%
2020 2019 Change 2020 2019
Revenues:
Commissions $ 388,126 $ 320,430 21.1 21.5 % 20.4 %
Principal transactions 304,683 200,496 52.0 16.8 12.8
Brokerage revenues 692,809 520,926 33.0 38.3 33.2
Investment banking 396,503 341,457 16.1 21.9 21.7
Asset management and service fees 436,714 406,438 7.4 24.1 25.9
Interest 289,545 379,011 (23.6 ) 16.0 24.1
Other income 30,721 25,714 19.5 1.8 1.6
Total revenues 1,846,292 1,673,546 10.3 102.1 106.5
Interest expense 37,441 102,339 (63.4 ) 2.1 6.5
Net revenues 1,808,851 1,571,207 15.1 100.0 100.0
Non-interest expenses:
Compensation and benefits 1,124,353 924,975 21.6 62.2 58.9
Occupancy and equipment rental 132,337 119,917 10.4 7.3 7.6
Communication and office supplies 84,170 70,766 18.9 4.7 4.5
Commissions and floor brokerage 30,019 21,964 36.7 1.7 1.4
Provision for credit losses 35,278 4,636 661.0 2.0 0.3
Other operating expenses 144,628 143,158 1.0 7.8 9.1
Total non-interest expenses 1,550,785 1,285,416 20.6 85.7 81.8
Income before income taxes 258,066 285,791 (9.7 ) 14.3 18.2
Provision for income taxes 63,590 76,595 (17.0 ) 3.5 4.9
Net Income 194,476 209,196 (7.0 ) 10.8 13.3
Net income applicable to
non-controlling interests - 904 n/m - 0.1
Net income applicable to Stifel
Financial Corp. 194,476 208,292 (6.6 ) 10.8 13.2
Preferred dividends 9,687 7,632 26.9 0.6 0.5
Net income available to common
shareholders $ 184,789 $ 200,660 (7.9 ) 10.2 % 12.7 %
NET REVENUES
The following table presents consolidated net revenues for the periods indicated (in thousands, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
% %
2020 2019 Change 2020 2019 Change
Net revenues:
Commissions $ 177,028 $ 164,981 7.3 $ 388,126 $ 320,430 21.1
Principal transactions 166,017 96,464 72.1 304,683 200,496 52.0
Brokerage revenues 343,045 261,445 31.2 692,809 520,926 33.0
Advisory fees 97,838 82,911 18.0 173,910 187,801 (7.4 )
Capital raising 119,197 96,706 23.3 222,593 153,656 44.9
Investment banking 217,035 179,617 20.8 396,503 341,457 16.1
Asset management and service fees 198,939 211,171 (5.8 ) 436,714 406,438 7.4
Net interest 115,284 135,049 (14.6 ) 252,104 276,672 (8.9 )
Other income 21,514 13,505 59.3 30,721 25,714 19.5
Total net revenues $ 895,817 $ 800,787 11.9 Commissions - Commission revenues are primarily generated from agency transactions in OTC and listed equity securities, insurance products and options. In addition, commission revenues also include distribution fees for promoting and distributing mutual funds.
For the three months endedJune 30, 2020 , commission revenues increased 7.3% to$177.0 million from$165.0 million in the comparable period in 2019. For the six months endedJune 30, 2020 , commission revenues increased 21.1% to$388.1 million from$320.4 million in the comparable period in 2019. The increase is primarily attributable to higher trading volumes due to market 57
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volatility as a result of the risks from the COVID-19 pandemic as clients reacted to the significant decline in near-term global economic activity.
Principal transactions - Principal transaction revenues are gains and losses on secondary trading, principally fixed income brokerage revenues.
For the three months endedJune 30, 2020 , principal transactions revenues increased 72.1% to$166.0 million from$96.5 million in the comparable period in 2019. For the six months endedJune 30, 2020 , principal transactions revenues increased 52.0% to$304.7 million from$200.5 million in the comparable period in 2019. The increase is primarily attributable to strong client engagement and market volatility. Investment banking - Investment banking revenues include: (i) capital raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) advisory fees related to corporate debt and equity offerings, municipal debt offerings, merger and acquisitions, private placements and other investment banking advisory fees.
For the three months ended
Advisory fee revenues increased 18.0% to
Capital raising revenues increased 23.3% to$119.2 million for the three months endedJune 30, 2020 from$96.7 million in the comparable period in 2019. For the three months endedJune 30, 2020 , equity capital raising revenues increased 18.7% to$76.2 million from$64.2 million in the comparable period in 2019. The increase in equity capital raising revenues is primarily attributable to an increase in deals compared to the prior year. For the three months endedJune 30, 2020 , fixed income capital raising revenues increased 32.2% to$43.0 million from$32.5 million in the comparable period in 2019. Fixed income capital raising revenues increased from a year ago as clients accessed the market to benefit from the lower rate environment.
For the six months ended
Advisory fee revenues decreased 7.4% to$173.9 million for the six months endedJune 30, 2020 from$187.8 million in the comparable period in 2019. While advisory fee revenues in the second quarter of 2020 improved on a sequential basis, they were negatively impacted by the economic uncertainty related to the COVID-19 pandemic in the first and second quarters of 2020. Capital raising revenues increased 44.9% to$222.6 million for the six months endedJune 30, 2020 from$153.7 million in the comparable period in 2019. For the six months endedJune 30, 2020 , equity capital raising revenues increased 45.4% to$141.0 million from$97.0 million in the comparable period in 2019. For the six months endedJune 30, 2020 , fixed income capital raising revenues increased 44.0% to$81.6 million from$56.7 million in the comparable period in 2019. Asset management and service fees - Asset management and service fee revenues are primarily generated by the investment advisory fees related to asset management services provided for individual and institutional investment portfolios, along with mutual funds. Investment advisory fees are earned on assets held in managed or non-discretionary asset-based programs. Fees from private client investment portfolios and institutional fees are typically based on asset values at the end of the prior period. Asset balances are impacted by both the performance of the market and levels of net new client assets. Rising markets have historically had a positive impact on investment advisory fee revenues as existing accounts increase in value, and individuals and institutions may commit incremental funds in rising markets. For the three months endedJune 30, 2020 , asset management and service fee revenues decreased 5.8% to$198.9 million from$211.2 million in the comparable period in 2019. For the six months endedJune 30, 2020 , asset management and service fee revenues increased 7.4% to$436.7 million from$406.4 million in the comparable period in 2019. See "Asset management and service fees" in the Global Wealth Management segment discussion for information on the changes in asset management and service fees revenues. Other income - For the three months endedJune 30, 2020 , other income increased 59.3% to$21.5 million from$13.5 million during the comparable period in 2019. The increase is primarily attributable to improved investment gains over the comparable period in 2019. For the six months endedJune 30, 2020 , other income increased 19.5% to$30.7 million from$25.7 million during the comparable period in 2019. The increase is primarily attributable to the gain recognized on the sale ofZiegler Capital Management, LLC in the first quarter of 2020, partially offset by investment losses. Other income primarily includes investment gains and losses, rental income, and loan originations fees. 58
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NET INTEREST INCOME
The following tables present average balance data and operating interest revenue
and expense data, as well as related interest yields for the periods indicated
(in thousands, except rates):
Three Months Ended
June 30, 2020 June 30, 2019
Interest Average Interest
Income/ Interest Income/ Average
Average Balance Expense Rate Average Balance Expense Interest Rate
Interest-earning assets:
Interest-bearing cash and
federal funds sold $ 1,673,968 $ 1,018 0.24 % $ 750,388 $ 4,327 2.31 %
Financial instruments owned 761,703 2,859 1.50 % 1,320,481 6,414 1.94 %
Margin balances 981,547 6,364 2.59 % 1,291,522 13,663 4.23 %
Investment portfolio 6,385,600 41,527 2.60 % 6,942,327 61,716 3.56 %
Loans 10,909,420 79,164 2.90 % 9,118,199 95,881 4.21 %
Other interest-bearing assets 476,314 (2,564 ) (2.15 %) 831,587 5,939 2.86 %
Total interest-earning
assets/interest income
3.71 %
Interest-bearing liabilities:
Short-term borrowings $ 11,445 $ 81 2.84 % $ 29,790 $ 235 3.16 %
Stock loan 224,979 (5,671 ) (10.08 %) 538,965 2,808 2.08 %
Senior notes (Stifel
Financial) 1,195,031 13,073 4.38 % 1,016,171 11,122 4.38 %
Stifel Capital Trusts 60,000 408 2.72 % 60,000 532 3.55 %
Deposits 16,676,492 2,277 0.05 % 14,660,716 29,347 0.80 %
FHLB 250,802 682 1.09 % 550,181 2,911 2.12 %
Other interest-bearing
liabilities 894,217 2,234 1.00 % 1,165,434 5,936 2.04 %
Total interest-bearing
liabilities/interest expense
1.17 %
Net interest income/margin $ 115,284 2.18 % $ 135,049 2.67 %
Six Months Ended
June 30, 2020 June 30, 2019
Interest Average Interest
Income/ Interest Income/ Average
Average Balance Expense Rate Average Balance Expense Interest Rate
Interest-earning assets:
Interest-bearing cash and
federal funds sold $ 1,301,669 $ 4,696 0.72 % $ 951,287 $ 12,155 2.56 %
Financial instruments owned 919,168 7,433 1.62 % 1,298,921 12,727 1.96 %
Margin balances 1,106,636 16,495 2.98 % 1,275,006 27,103 4.25 %
Investment portfolio 6,387,493 89,664 2.81 % 7,090,167 127,182 3.59 %
Loans 10,634,627 174,284 3.28 % 9,050,317 189,105 4.18 %
Other interest-bearing assets 542,072 (3,027 ) (1.12 %) 783,941 10,739 2.74 %
Total interest-earning
assets/interest income $ 20,891,665 $ 289,545 2.77 % $ 20,449,639 $ 379,011 3.71 %
Interest-bearing liabilities:
Short-term borrowings $ 51,357 $ 281 1.09 % $ 49,005 $ 764 3.12 %
Stock loan 324,766 (8,602 ) (5.30 %) 511,549 5,437 2.13 %
Senior notes (Stifel
Financial) 1,106,065 24,266 4.39 % 1,016,285 22,244 4.38 %
Stifel Capital Trusts 60,000 967 3.22 % 60,000 1,340 4.47 %
Deposits 16,027,177 11,846 0.15 % 14,969,769 57,413 0.77 %
FHLB 420,676 3,035 1.44 % 506,052 4,589 1.81 %
Other interest-bearing
liabilities 1,018,877 5,648 1.11 % 1,104,781 10,552 1.91 %
Total interest-bearing
liabilities/interest expense $ 19,008,918 37,441 0.39 % $ 18,217,441 102,339 1.12 %
Net interest income/margin $ 252,104 2.41 % $ 276,672 2.71 %
59
-------------------------------------------------------------------------------- Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the three months endedJune 30, 2020 , net interest income decreased to$115.3 million from$135.0 million during the comparable period in 2019. For the six months endedJune 30, 2020 , net interest income decreased to$252.1 million from$276.7 million during the comparable period in 2019. For the three months endedJune 30, 2020 , interest revenue decreased 31.7% to$128.4 million from$187.9 million in the comparable period in 2019, principally as a result of a decrease in interest revenue generated from interest-earning assets ofStifel Bancorp due to lower interest rates. The average interest-earning assets ofStifel Bancorp increased to$18.3 billion during the three months endedJune 30, 2020 compared to$16.4 billion during the comparable period in 2019 at average interest rates of 2.65% and 3.89%, respectively. For the six months endedJune 30, 2020 , interest revenue decreased 23.6% to$289.5 million from$379.0 million in the comparable period in 2019, principally as a result of a decrease in interest revenue generated from interest-earning assets ofStifel Bancorp due to lower interest rates. The average interest-earning assets ofStifel Bancorp decreased to$17.8 billion during the six months endedJune 30, 2020 compared to$16.7 billion during the comparable period in 2019 at average interest rates of 3.00% and 3.88%, respectively. For the three months endedJune 30, 2020 , interest expense decreased 75.3% to$13.1 million from$52.9 million during the comparable period in 2019. For the six months endedJune 30, 2020 , interest expense decreased 63.4% to$37.4 million from$102.3 million in the comparable period in 2019. The decrease is primarily attributable to lower interest rates.
Decreases in short-term interest rates have had a negative impact on our
results, in particular on our net interest income. The
NON-INTEREST EXPENSES
The following table presents consolidated non-interest expenses for the periods indicated (in thousands, except percentages):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
Non-interest expenses:
Compensation and benefits $ 547,174 $ 466,861 17.2 $ 1,124,353 $ 924,975 21.6
Occupancy and equipment rental 66,264 61,055 8.5 132,337 119,917 10.4
Communications and office supplies 43,046 35,069 22.7 84,170 70,766
18.9
Commissions and floor brokerage 15,177 11,008 37.9 30,019 21,964 36.7
Provision for credit losses 19,210 2,353 716.4 35,278 4,636 661.0
Other operating expenses 61,986 76,459 (18.9 ) 144,628 143,158 1.0
Total non-interest expenses
20.6
Compensation and benefits - Compensation and benefits expenses, which are the
largest component of our expenses, include salaries, bonuses, transition pay,
benefits, amortization of stock-based compensation, employment taxes and other
employee-related costs. A significant portion of compensation expense is
comprised of production-based variable compensation, including discretionary
bonuses, which fluctuates in proportion to the level of business activity,
increasing with higher revenues and operating profits. Other compensation costs,
including base salaries, stock-based compensation amortization, and benefits,
are more fixed in nature.
For the three months ended June 30, 2020 , compensation and benefits expense
increased 17.2% to $547.2 million from $466.9 million during the comparable
period in 2019. For the six months ended June 30, 2020 , compensation and
benefits expense increased 21.6% to $1.1 billion from $925.0 million during the
comparable period in 2019. The increase in compensation and benefits expenses is
primarily attributable to higher volume and revenue-related expense and
investments in our franchise.
Compensation and benefits expense as a percentage of net revenues was 61.1% and
62.2% for the three and six months ended June 30, 2020 , respectively, compared
to 58.3% and 58.9% for the three and six months ended June 30, 2019 ,
respectively.
Occupancy and equipment rental - For the three months ended June 30, 2020 ,
occupancy and equipment rental expense increased 8.5% to $66.3 million from
$61.1 million during the comparable period in 2019. For the six months ended
June 30, 2020 , occupancy and equipment rental expense increased 10.4% to $132.3
million from $119.9 million during the comparable period in 2019. The increase
is primarily attributable to an increase in data processing costs and higher
rent expense as a result of an increase in locations.
60
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Communications and office supplies - Communications expense includes costs for
telecommunication and data communication, primarily for obtaining third-party
market data information. For the three months ended June 30, 2020 ,
communications and office supplies expense increased 22.7% to $43.0 million from
$35.1 million during the comparable period in 2019. For the six months ended
June 30, 2020 , communications and office supplies expense increased 18.9% to
$84.2 million from $70.8 million during the comparable period in 2019. The
increase is primarily attributable to higher communication and quote equipment
expenses and shipping costs.
Commissions and floor brokerage - For the three months ended June 30, 2020 ,
commissions and floor brokerage expense increased 37.9% to $15.2 million from
$11.0 million during the comparable period in 2019. For the six months ended
June 30, 2020 , commissions and floor brokerage expense increased 36.7% to $30.0
million from $22.0 million during the comparable period in 2019. The increase is
primarily attributable to an increase in brokerage trading volumes.
Provision for credit losses - For the three months ended June 30, 2020 ,
provision for credit losses increased 716.4% to $19.2 million from $2.4 million
during the comparable period in 2019. For the six months ended June 30, 2020 ,
provision for credit losses increased 661.0% to $35.3 million from $4.6 million
during the comparable period in 2019. The provision for credit losses was
impacted by growth in the loan portfolio and the impact of accounting for credit
losses under the CECL standard, which was heightened by the impact of COVID-19
on the broader economic environment.
Other operating expenses - Other operating expenses primarily include license
and registration fees, litigation-related expenses, which consist of amounts we
reserve and/or pay out related to legal and regulatory matters, travel and
entertainment, promotional expenses and expenses for professional services.
For the three months ended June 30, 2020 , other operating expenses decreased
18.9% to $62.0 million from $76.5 million during the comparable period in 2019.
The decrease is primarily attributable to decreases in travel costs and
conference expenses, partially offset by increases in taxes and licenses,
professional fees, and insurance expense.
For the six months ended June 30, 2020 , other operating expenses increased 1.0%
to $144.6 million from $143.2 million during the comparable period in 2019. The
increase is primarily attributable to higher taxes and licenses, professional
fees, insurance expense, higher investment banking gross-up costs, which is
attributable to an increase in investment banking revenues, and higher net
provisions for regulatory matters, partially offset by decreases in travel costs
and conference expenses.
Provision for income taxes - For the three and six months ended June 30, 2020 ,
our provision for income taxes was $35.1 million and $63.6 million , representing
an effective tax rate of 24.5% and 24.6%, respectively, compared to $38.2
million and $76.6 million for the comparable periods in 2019, representing an
effective tax rate of 25.9% and 26.9%, respectively.
SEGMENT ANALYSIS
Our reportable segments include Global Wealth Management,
Our Global Wealth Management segment consists of two businesses, thePrivate Client Group andStifel Bancorp, Inc. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughoutthe United States . These branches provide securities brokerage services, including the sale of equities, mutual funds, fixed income products, and insurance, as well as offering banking products to their private clients through our bank subsidiaries, which provide residential, consumer, and commercial lending, as well asFederal Depository Insurance Corporation ("FDIC")-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.The Institutional Group segment includes institutional sales and trading. It provides securities brokerage, trading, and research services to institutions with an emphasis on the sale of equity and fixed income products. This segment also includes the management of and participation in underwritings for both corporate and public finance (exclusive of sales credits generated through the private client group, which are included in the Global Wealth Management segment), merger and acquisition, and financial advisory services.
The Other segment includes interest income from stock borrow activities, unallocated interest expense, interest income and gains and losses from investments held, amortization of stock-based awards, and all unallocated overhead cost associated with the execution of orders; processing of securities transactions; custody of client securities; receipt, identification, and delivery of funds and securities; compliance with regulatory and legal requirements; internal financial accounting and controls; and general administration and acquisition charges.
We evaluate the performance of our segments and allocate resources to them based
on various factors, including prospects for growth, return on investment, and
return on revenues.
61
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Results of Operations - Global Wealth Management
Three Months Ended
The following table presents consolidated financial information for the Global Wealth Management segment for the periods indicated (in thousands, except percentages):
As a Percentage of Net Revenues For
Three Months Ended June 30, the Three Months Ended June 30,
%
2020 2019 Change 2020 2019
Revenues:
Commissions $ 116,156 $ 120,284 (3.4 ) 23.0 % 22.6 %
Principal transactions 42,967 42,104 2.0 8.5 7.9
Brokerage revenues 159,123 162,388 (2.0 ) 31.5 30.5
Asset management and service fees 198,921 211,156 (5.8 ) 39.3 39.7
Investment banking 8,016 10,559 (24.1 ) 1.6 2.0
Interest 129,071 175,202 (26.3 ) 25.5 32.9
Other income 18,158 10,731 69.2 3.6 2.0
Total revenues 513,289 570,036 (10.0 ) 101.5 107.1
Interest expense 7,507 37,603 (80.0 ) 1.5 7.1
Net revenues 505,782 532,433 (5.0 ) 100.0 100.0
Non-interest expenses:
Compensation and benefits 258,291 262,321 (1.5 ) 51.1 49.3
Occupancy and equipment rental 30,194 31,801 (5.1 ) 6.0 6.0
Communication and office supplies 15,033 14,247 5.5
3.0 2.7
Commissions and floor brokerage 5,836 5,249 11.2 1.2 1.0
Provision for credit losses 19,210 2,353 716.4 3.8 0.4
Other operating expenses 20,893 24,110 (13.3 ) 4.0 4.5
Total non-interest expenses 349,457 340,081 2.8 69.1 63.9
Income before income taxes $ 156,325 $ 192,352 (18.7 ) 30.9 % 36.1 %
June 30,
2020 2019
Branch offices 389 377
Financial advisors 2,138 2,097
Independent contractors 94 96
Total financial advisors 2,232 2,193
62--------------------------------------------------------------------------------
Six months ended
The following table presents consolidated financial information for the Global Wealth Management segment for the periods indicated (in thousands, except percentages):
As a Percentage of Net Revenues For
Six Months Ended June 30, the Six Months Ended June 30,
%
2020 2019 Change 2020 2019
Revenues:
Commissions $ 253,053 $ 230,211 9.9 23.2 % 22.1 %
Principal transactions 85,949 85,371 0.7 7.9 8.2
Brokerage revenues 339,002 315,582 7.4 31.1 30.3
Asset management and service fees 436,681 406,409 7.4 40.1 39.0
Investment banking 18,349 18,782 (2.3 ) 1.7 1.8
Interest 285,221 354,784 (19.6 ) 26.2 34.0
Other income 34,460 19,376 77.8 3.2 1.8
Total revenues 1,113,713 1,114,933 (0.1 ) 102.3 106.9
Interest expense 24,975 71,890 (65.3 ) 2.3 6.9
Net revenues 1,088,738 1,043,043 4.4 100.0 100.0
Non-interest expenses:
Compensation and benefits 556,661 509,794 9.2 51.1 48.9
Occupancy and equipment rental 60,446 60,238 0.3 5.6 5.8
Communication and office supplies 30,353 28,740 5.6 2.8 2.8
Commissions and floor brokerage 11,086 10,046 10.4 1.0 1.0
Provision for credit losses 35,278 4,636 661.0 3.2 0.4
Other operating expenses 44,422 42,747 3.9 4.1 4.0
Total non-interest expenses 738,246 656,201 12.5 67.8 62.9
Income before income taxes $ 350,492 $ 386,842 (9.4 ) 32.2 % 37.1 %
NET REVENUES
For the three months ended June 30, 2020 , Global Wealth Management net revenues
decreased 5.0% to $505.8 million from $532.4 million for the comparable period
in 2019. The decrease in net revenues over the comparable period in 2019 is
primarily attributable to decreases in net interest income, asset management and
service fee revenues, and investment banking, partially offset by increases in
other income and principal transaction revenues.
For the six months ended June 30, 2020 , Global Wealth Management net revenues
increased 4.4% to $1.1 billion from $1.0 billion for the comparable period in
2019. The increase in net revenues over the comparable period in 2019 is
primarily attributable to the growth in asset management and service fee
revenues and higher brokerage revenues, partially offset by a decrease in net
interest income.
Commissions - For the three months ended June 30, 2020 , commission revenues
decreased 3.4% to $116.2 million from $120.3 million in the comparable period in
2019. For the six months ended June 30, 2020 , commission revenues increased 9.9%
to $253.1 million from $230.2 million in the comparable period in 2019.
Principal transactions - For the three months ended June 30, 2020 , principal
transactions revenues increased 2.0% to $43.0 million from $42.1 million in the
comparable period in 2019. For the six months ended June 30, 2020 , principal
transactions revenues increased 0.7% to $85.9 million from $85.4 million in the
comparable period in 2019.
Brokerage revenues - For the three months ended June 30, 2020 , brokerage
revenues decreased 2.0% to $159.1 million from $162.4 million in the comparable
period in 2019. For the six months ended June 30, 2020 , brokerage revenues
increased 7.4% to $339.0 million from $315.6 million in the comparable period in
2019.
Asset management and service fees - For the three months ended June 30, 2020 ,
asset management and service fees decreased 5.8% to $198.9 million from $211.2
million in the comparable period in 2019. The decrease from the comparative
period in 2019 is primarily attributable to lower asset values at the beginning
of the second quarter of 2020, partially offset by fee-based asset flows.
For the six months ended June 30, 2020 , asset management and service fees
increased 7.4% to $436.7 million from $406.4 million in the comparable period in
2019. The increase is primarily due to higher asset levels and strong fee-based
asset flows at the end of fiscal
63
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2019 and our continued expansion in the asset management business, partially
offset lower fee-based revenues during the second quarter of 2020 as a result of
lower asset values at the end of March 2020 .
Client asset metrics as of the periods indicated (in thousands, except number of accounts and percentages):
6/30/20 6/30/19 % Change 3/31/20 % Change
Client assets $ 306,235,000 $ 305,233,000 0.3 $ 276,627,000 10.7
Fee-based client assets $ 106,218,000 $ 103,824,000 2.3 $ 93,633,000 13.4
Number of client 1,038,000 998,000 4.0 1,031,000 0.7
accounts
Number of fee-based 11.6 1.7
client accounts 241,000 216,000 237,000
The value of our client assets and fee-based client assets at June 30, 2020 have
rebounded from the end of the first quarter of 2020 when macroeconomic concerns
resulting from the challenging operating environment lead to decreased global
equity prices, wider credit spreads, and uncertainty in the economic outlook
drove asset values down.
Investment banking - Investment banking, which represents sales credits for
investment banking underwritings, decreased 24.1% to $8.0 million for the three
months ended June 30, 2020 from $10.6 million during the comparable period in
2019. For the six months ended June 30, 2020 , investment banking revenues
decreased 2.3% to $18.3 million from $18.8 million during the comparable period
in 2019. See "Investment banking" in the Institutional Group segment discussion
for information on the changes in net revenues.
Interest revenue - For the three months ended June 30, 2020 , interest revenue
decreased 26.3% to $129.1 million from $175.2 million in the comparable period
in 2019. For the six months ended June 30, 2020 , interest revenue decreased
19.6% to $285.2 million from $354.8 million during the comparable period in
2019. The decrease is primarily due lower interest rates. See "Net Interest
Income - Stifel Bancorp " below for a further discussion of the changes in net
interest revenues.
Other income - For the three months ended June 30, 2020 , other income increased
69.2% to $18.2 million from $10.7 million in the comparable period in 2019. The
increase is primarily attributable to improved investment gains. For the six
months ended June 30, 2020 , other income increased 77.8% to $34.5 million from
$19.4 million during the comparable period in 2019. The increase is primarily
attributable to the gain recognized on the sale of Ziegler Capital Management,
LLC in the first quarter of 2020, partially offset by investment losses.
Interest expense - For the three months ended June 30, 2020 , interest expense
decreased 80.0% to $7.5 million from $37.6 million during the comparable period
in 2019. For the six months ended June 30, 2020 , interest expense decreased
65.3% to $25.0 million from $71.9 million during the comparable period in 2019.
The decrease in interest expense is primarily attributable to lower interest
rates over the comparable period in 2019.
64--------------------------------------------------------------------------------
NET INTEREST INCOME - STIFEL BANCORP
The following tables present average balance data and operating interest revenue and expense data forStifel Bancorp , as well as related interest yields for the periods indicated (in thousands, except rates): Three Months Ended June 30, 2020 Three Months Ended June 30, 2019 Interest Interest Income/ Average Income/ Average Average Balance Expense Interest Rate Average Balance Expense Interest Rate Assets: Interest-bearing cash and federal funds sold$ 961,133 $ 304 0.13 %$ 330,647 $ 1,777 2.15 % U.S. government agencies 5,341 27 2.01 - - - State and municipal securities (tax-exempt) (1) 12,229 67 2.18 48,033 222 1.85 Mortgage-backed securities 877,153 4,582 2.09 1,470,928 8,574 2.33 Corporate fixed income securities 648,867 4,202 2.59 914,987 6,901 3.02 Asset-backed securities 4,842,010 32,649 2.70 4,508,379 46,019 4.08Federal Home Loan Bank ("FHLB") and other capital stock 46,653 287 2.46 57,164 626 4.38 Loans (2) Securities-based loans 1,789,160 9,940 2.22 1,916,286 20,178 4.21 Commercial and industrial 4,095,392 31,786 3.10 3,337,438 41,302 4.95 Residential real estate 3,589,185 25,591 2.85 2,953,666 22,535 3.05 Commercial real estate 402,586 4,002 3.98 354,344 4,985 5.63 Home equity lines of credit 59,547 408 2.74 47,079 590 5.01 Construction and land 448,707 3,948 3.52 198,452 2,760 5.56 Other 38,098 234 2.46 132,360 1,737 5.25 Loans held for sale 486,745 3,255 2.68 178,574 1,794 4.02
Total interest-earning assets (3)
2.65 %$ 16,448,337 $ 160,000 3.89 % Cash and due from banks 12,056 82,092 Other non interest-earning assets 251,700 431,538 Total assets$ 18,566,562 $ 16,961,967 Liabilities and stockholder's equity: Deposits: Money market$ 15,837,251 $ 912 0.02 %$ 12,227,563 $ 15,385 0.50 % Time deposits 199,055 1,115 2.24 1,462,430 8,884 2.43 Demand deposits 580,732 182 0.13 726,475 3,500 1.93 Savings 59,454 68 0.46 244,248 1,578 2.58 FHLB advances 250,802 682 1.09 550,181 2,911 2.12 Other borrowings 1,491 25 6.59 1,664 28 6.73 Total interest-bearing liabilities (3) 16,928,785 2,984 0.07 % 15,212,561 32,286 0.85 % Non-interest-bearing liabilities 259,158 115,681 Other non-interest bearing liabilities 96,094 299,069 Total liabilities 17,284,037 15,627,311 Stockholder's equity 1,282,525 1,334,656 Total liabilities and stockholder's equity$ 18,566,562 $ 16,961,967 Net interest income/spread$ 118,298 2.58 %$ 127,714 3.04 % Net interest margin 2.59 % 3.11 %
(1) Due to immaterial amount of income recognized on tax-exempt securities,
yields were not calculated on a tax equivalent basis.
(2) Loans on non-accrual status are included in average balances.
(3) See Net Interest Income table included in "Results of Operations" for
additional information on our company's average balances and operating
interest and expenses.
65
-------------------------------------------------------------------------------- The following tables present average balance data and operating interest revenue and expense data forStifel Bancorp , as well as related interest yields for the periods indicated (in thousands, except rates): Six Months Ended June 30, 2020 Six Months Ended June 30, 2019 Interest Interest Income/ Average Income/ Average Average Balance Expense Interest Rate Average Balance Expense Interest Rate Assets: Interest-bearing cash and federal funds sold $ 708,090$ 1,529 0.43 % $ 527,655$ 6,331 2.40 % U.S. government agencies 5,343 48 1.79 - - - State and municipal securities (tax-exempt) (1) 15,327 165 2.15 49,085 521 2.12 Mortgage-backed securities 985,675 10,546 2.14 1,503,332 17,586 2.34 Corporate fixed income securities 690,896 9,252 2.68 934,635 14,075 3.01 Asset-backed securities 4,690,252 69,653 2.97 4,603,115 95,000 4.13Federal Home Loan Bank ("FHLB") and other capital stock 53,151 886 3.33 54,725 1,730 6.32 Loans (2) Securities-based loans 1,926,470 26,403 2.74 1,858,207 39,284 4.23 Commercial and industrial 3,827,865 69,762 3.64 3,376,950 82,133 4.86 Residential real estate 3,502,626 50,898 2.91 2,936,996 45,013 3.07 Commercial real estate 423,806 9,808 4.63 345,489 9,694 5.61 Home equity lines of credit 56,944 996 3.50 44,395 1,111 5.01 Construction and land 432,581 8,664 4.01 175,471 4,883 5.57 Other 33,693 509 3.02 128,722 3,365 5.23 Loans held for sale 430,642 7,244 3.36 184,087 3,622 3.94
Total interest-earning assets (3)
3.00 %$ 16,722,864 $ 324,348 3.88 % Cash and due from banks 13,815 46,271 Other non interest-earning assets 273,561 406,588 Total assets$ 18,070,737 $ 17,175,723 Liabilities and stockholder's equity: Deposits: Money market$ 14,783,166 $ 4,341 0.06 %$ 12,662,137 $ 31,914 0.50 % Time deposits 324,459 3,752 2.31 1,469,661 17,382 2.37 Demand deposits 864,680 3,507 0.81 664,632 5,908 1.78 Savings 54,872 246 0.90 173,339 2,209 2.55 FHLB advances 420,676 3,035 1.44 506,052 4,589 1.81 Other borrowings 1,534 53 6.84 1,707 68 7.97 Total interest-bearing liabilities (3) 16,449,387 14,934 0.18 % 15,477,528 62,070 0.80 % Non-interest-bearing liabilities 232,761 141,137 Other non-interest bearing liabilities 100,750 246,506 Total liabilities 16,782,898 15,865,171 Stockholder's equity 1,287,839 1,310,552 Total liabilities and stockholder's equity$ 18,070,737 $ 17,175,723 Net interest income/spread$ 251,429 2.82 %$ 262,278 3.08 % Net interest margin 2.83 % 3.14 %
(1) Due to immaterial amount of income recognized on tax-exempt securities,
yields were not calculated on a tax equivalent basis.
(2) Loans on non-accrual status are included in average balances.
(3) See Net Interest Income table included in "Results of Operations" for
additional information on our company's average balances and operating
interest and expenses.
66
-------------------------------------------------------------------------------- The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the three and six month periods endedJune 30, 2020 compared to the three and six month periods endedJune 30, 2019 (in thousands): Three Months Ended June 30, 2020 Compared to Three Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Months Ended June 30, 2019 Increase/(decrease) due to: Increase/(decrease) due to: Volume Rate Total Volume Rate Total Interest income: Interest-bearing cash and federal funds sold$ 13,346 $ (14,819 ) $ (1,473 ) $ 4,698 $ (9,500 ) $ (4,802 ) U.S. government agencies 14 13 27 24 24 48 State and municipal securities (tax-exempt) (1) (204 ) 49 (155 ) (375 ) 19 (356 ) Mortgage-backed securities (3,175 ) (817 ) (3,992 ) (5,641 ) (1,399 ) (7,040 ) Corporate fixed income securities (1,816 ) (883 ) (2,699 ) (3,386 ) (1,437 ) (4,823 ) Asset-backed securities 3,728 (17,098 ) (13,370 ) 1,835 (27,182 ) (25,347 ) FHLB and other capital stock (100 ) (239 ) (339 ) (48 ) (796 ) (844 ) Loans Securities-based loans (1,260 ) (8,978 ) (10,238 ) 1,503 (14,384 ) (12,881 ) Commercial and industrial 14,830 (24,346 ) (9,516 ) 14,101 (26,472 ) (12,371 ) Residential real estate 4,393 (1,337 ) 3,056 8,054 (2,169 ) 5,885 Commercial real estate 852 (1,835 ) (983 ) 502 (388 ) 114 Home equity lines of credit 256 (438 ) (182 ) 1,773 (1,888 ) (115 ) Construction and land 1,676 (488 ) 1,188 4,675 (894 ) 3,781 Other (861 ) (642 ) (1,503 ) (1,817 ) (1,039 ) (2,856 ) Loans held for sale 1,812 (351 ) 1,461 5,162 (1,540 ) 3,622$ 33,491 $ (72,209 ) $ (38,718 ) $ 31,060 $ (89,045 ) $ (57,985 ) Interest expense: Deposits: Money market$ 6,484 $ (20,957 ) $ (14,473 ) $ 6,451 $ (34,024 ) $ (27,573 ) Time deposits (7,128 ) (641 ) (7,769 ) (13,251 ) (379 ) (13,630 ) Demand deposits (586 ) (2,732 ) (3,318 ) 2,977 (5,378 ) (2,401 ) Savings (723 ) (787 ) (1,510 ) (1,007 ) (956 ) (1,963 ) FHLB advances (1,177 ) (1,052 ) (2,229 ) (702 ) (852 ) (1,554 ) Other borrowings (2 ) (1 ) (3 ) (6 ) (9 ) (15 )$ (3,132 ) $ (26,170 ) $ (29,302 ) $ (5,538 ) $ (41,598 ) $ (47,136 ) Increases and decreases in interest revenue and interest expense result from changes in average balances (volume) of interest-earning bank assets and liabilities, as well as changes in average interest rates. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately. Net interest income - Net interest income is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest income is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. For the three months endedJune 30, 2020 , interest revenue of$121.3 million was generated from average interest-earning assets of$18.3 billion at an average interest rate of 2.65%. Interest revenue of$160.0 million for the comparable period in 2019 was generated from average interest-earning assets of$16.4 billion at an average interest rate of 3.89%. For the six months endedJune 30, 2020 , interest revenue of$266.4 million was generated from average interest-earning assets of$17.8 billion at an average interest rate of 3.00%. Interest revenue of$324.3 million for the comparable period in 2019 was generated from average interest-earning assets of$16.7 billion at an average interest rate of 3.88%. Interest expense represents interest on customer money market accounts, interest on time deposits,Federal Home Loan Bank advances, and other interest expense. The average balance of interest-bearing liabilities during the three months endedJune 30, 2020 was$16.9 billion at an average interest rate of 0.07%. The average balance of interest-bearing liabilities for the comparable period in 2019 was$15.2 billion at an average interest rate of 0.85%. The average balance of interest-bearing liabilities during the six months 67 -------------------------------------------------------------------------------- endedJune 30, 2020 was$16.4 billion at an average interest rate of 0.18%. The average balance of interest-bearing liabilities for the comparable period in 2019 was$15.5 billion at an average interest rate of 0.80%.
Decreases in short-term interest rates have had a negative impact on our
results, in particular on our net interest income. The
See "Net Interest Income -
NON-INTEREST EXPENSES
For the three months endedJune 30, 2020 , Global Wealth Management non-interest expenses increased 2.8% to$349.5 million from$340.1 million for the comparable period in 2019. For the six months endedJune 30, 2020 , Global Wealth Management non-interest expenses increased 12.5% to$738.2 million from$656.2 million for the comparable period in 2019. Compensation and benefits - For the three months endedJune 30, 2020 , compensation and benefits expense decreased 1.5% to$258.3 million from$262.3 million during the comparable period in 2019. For the six months endedJune 30, 2020 , compensation and benefits expense increased 9.2% to$556.7 million from$509.8 million during the comparable period in 2019. The increase over the comparable period in 2019 is principally due to increased variable compensation. Compensation and benefits expense as a percentage of net revenues was 51.1% and 51.1% for the three and six months endedJune 30, 2020 , respectively, compared to 49.3% and 48.9% for the comparable periods in 2019, respectively. Occupancy and equipment rental - For the three months endedJune 30, 2020 , occupancy and equipment rental expense decreased 5.1% to$30.2 million from$31.8 million during the comparable period in 2019. The decrease is primarily attributable to decreases in data processing and furniture and equipment costs, partially offset by an increase in rent expense. For the six months endedJune 30, 2020 , occupancy and equipment rental expense increased 0.3% to$60.4 million from$60.2 million during the comparable period in 2019. Communications and office supplies - For the three months endedJune 30, 2020 , communications and office supplies expense increased 5.5% to$15.0 million from$14.2 million during the comparable period in 2019. For the six months endedJune 30, 2020 , communications and office supplies expense increased 5.6% to$30.4 million from$28.7 million during the comparable period in 2019. The increase is primarily attributable to an increase in shipping costs and higher communication and quote equipment expenses. Commissions and floor brokerage - For the three months endedJune 30, 2020 , commissions and floor brokerage expense increased 11.2% to$5.8 million from$5.2 million during the comparable period in 2019. For the six months endedJune 30, 2020 , commissions and floor brokerage expense increased 10.4% to$11.1 million from$10.0 million during the comparable period in 2019. The increase is primarily attributable to higher trading and clearing expenses. Provision for credit losses - For the three months endedJune 30, 2020 , provision for credit losses increased 716.4% to$19.2 million from$2.4 million during the comparable period in 2019. For the six months endedJune 30, 2020 , provision for credit losses increased 661.0% to$35.3 million from$4.6 million during the comparable period in 2019. The provision for credit losses was impacted by growth in the loan portfolio and the impact of accounting for credit losses under the CECL standard, which was heightened by the impact of COVID-19 on the broader economic environment. Other operating expenses - For the three months endedJune 30, 2020 , other operating expenses decreased 13.3% to$20.9 million from$24.1 million during the comparable period in 2019. The decrease is primarily attributable to lower travel and conference expenses, partially offset by increases in settlement costs, insurance expense, and professional fees. For the six months endedJune 30, 2020 , other operating expenses increased 3.9% to$44.4 million from$42.7 million during the comparable period in 2019. The increase is primarily attributable to increases in settlement costs, professional fees, and insurance expense, partially offset by lower travel and conference expenses.
INCOME BEFORE INCOME TAXES
For the three months ended
For the three months endedJune 30, 2020 , profit margins (income before income taxes as a percent of net revenues) have decreased to 30.9% from 36.1% during the comparable period in 2019. For the six months endedJune 30, 2020 , profit margins decreased to 32.2% from 37.1% during the comparable period in 2019. 68
--------------------------------------------------------------------------------
Results of Operations -
Three Months Ended
The following table presents consolidated financial information for the
As a Percentage of Net Revenues For
Three Months Ended June 30, the Three Months Ended June 30,
%
2020 2019 Change 2020 2019
Revenues:
Commissions $ 60,875 $ 44,697 36.2 15.3 % 16.5 %
Principal transactions 123,049 54,360 126.4 30.9 20.1
Brokerage revenues 183,924 99,057 85.7 46.2 36.6
Advisory fees 97,838 82,905 18.0 24.6 30.6
Capital raising 111,181 86,153 29.1 27.9 31.8
Investment banking 209,019 169,058 23.6 52.5 62.4
Interest 3,539 6,360 (44.4 ) 0.9 2.4
Other income 4,065 2,726 49.1 1.0 1.0
Total revenues 400,547 277,201 44.5 100.6 102.4
Interest expense 2,451 6,599 (62.9 ) 0.6 2.4
Net revenues 398,096 270,602 47.1 100.0 100.0
Non-interest expenses:
Compensation and benefits 241,420 155,779 55.0 60.6 57.6
Occupancy and equipment rental 16,008 13,494 18.6 4.0 5.0
Communication and office supplies 23,001 16,935 35.8
5.8 6.3
Commissions and floor brokerage 9,341 5,758 62.2 2.3 2.1
Other operating expenses 25,277 39,334 (35.7 ) 6.4 14.5
Total non-interest expenses 315,047 231,300 36.2 79.1 85.5
Income before income taxes $ 83,049 $ 39,302 111.3 20.9 % 14.5 %
69
--------------------------------------------------------------------------------
Six months ended
The following table presents consolidated financial information for the
As a Percentage of Net Revenues For
Six Months Ended June 30, the Six Months Ended June 30,
%
2020 2019 Change 2020 2019
Revenues:
Commissions $ 135,073 $ 90,219 49.7 18.5 % 17.0 %
Principal transactions 218,734 115,125 90.0 29.9 21.6
Brokerage revenues 353,807 205,344 72.3 48.4 38.6
Advisory fees 173,891 187,800 (7.4 ) 23.8 35.3
Capital raising 204,263 134,875 51.4 28.0 25.4
Investment banking 378,154 322,675 17.2 51.8 60.7
Interest 8,552 12,233 (30.1 ) 1.2 2.3
Other income (3,405 ) 4,295 (179.3 ) (0.5 ) 0.8
Total revenues 737,108 544,547 35.4 100.9 102.4
Interest expense 6,774 12,659 (46.5 ) 0.9 2.4
Net revenues 730,334 531,888 37.3 100.0 100.0
Non-interest expenses:
Compensation and benefits 447,408 315,190 41.9 61.3 59.3
Occupancy and equipment rental 32,698 25,860 26.4 4.5 4.9
Communication and office supplies 44,305 34,749 27.5
6.1 6.5
Commissions and floor brokerage 18,933 11,917 58.9 2.6 2.2
Other operating expenses 62,201 72,666 (14.4 ) 8.4 13.7
Total non-interest expenses 605,545 460,382 31.5 82.9 86.6
Income before income taxes $ 124,789 $ 71,506 74.5 17.1 % 13.4 %
NET REVENUES
For the three months ended
For the six months endedJune 30, 2020 ,Institutional Group net revenues increased 37.3% to$730.3 million from$531.9 million during the comparable period in 2019. The increase in net revenues was primarily attributable to an increase in brokerage revenues and capital raising revenues, partially offset by a decrease in advisory fees and other income.
Commissions - For the three months ended
Principal transactions - For the three months endedJune 30, 2020 , principal transactions revenues increased 126.4% to$123.0 million from$54.4 million in the comparable period in 2019. For the six months endedJune 30, 2020 , principal transaction revenues increased 90.0% to$218.7 million from$115.1 million in the comparable period in 2019. Brokerage revenues - For the three months endedJune 30, 2020 , institutional brokerage revenues increased 85.7% to$183.9 million from$99.1 million in the comparable period in 2019. For the six months endedJune 30, 2020 , institutional brokerage revenues increased 72.3% to$353.8 million from$205.3 million in the comparable period in 2019. Brokerage revenues were impacted by higher trading volumes due to market volatility as a result of the risks from the COVID-19 pandemic as clients reacted to the significant decline in near-term global economic activity. In addition, brokerage revenues were negatively impacted by the continued migration from active to passive management strategies. For the three months endedJune 30, 2020 , fixed income institutional brokerage revenues increased 106.8% to$120.7 million from$58.4 million in the comparable period in 2019. For the six months endedJune 30, 2020 , fixed income brokerage revenues increased 75.2% to$220.4 million from$125.8 million in the comparable period in 2019. The increase is primarily attributable to strong client engagement and market volatility. 70 -------------------------------------------------------------------------------- For the three months endedJune 30, 2020 , equity institutional brokerage revenues increased 55.4% to$63.2 million from$40.7 million during the comparable period in 2019. For the six months endedJune 30, 2020 , equity brokerage revenues increased 67.7% to$133.4 million from$79.6 million during the comparable period in 2019. The increase is primarily attributable to higher trading volumes due to market volatility, partially offset by a continued migration from active to passive management strategies. Investment banking - For the three months endedJune 30, 2020 , investment banking revenues increased 23.6% to$209.0 million from$169.1 million during the comparable period in 2019. The increase is primarily attributable to increases in fixed income and equity capital raising revenues and advisory fees. For the six months endedJune 30, 2020 , investment banking revenues increased 17.2% to$378.2 million from$322.7 million during the comparable period in 2019. The increase is primarily attributable to an increase in fixed income and equity capital raising revenues, partially offset by a decrease in advisory fees. For the three months endedJune 30, 2020 , advisory fee revenues increased 18.0% to$97.8 million from$82.9 million in the comparable period in 2019. The increase is primarily attributable to the closing of some larger fee transactions during the second quarter of 2020 and the growth in our fund placement business. For the six months endedJune 30, 2020 , advisory fees decreased 7.4% to$173.9 million from$187.8 million in the comparable period in 2019. While advisory fee revenues in the second quarter of 2020 improved on a sequential basis, they were negatively impacted by the economic uncertainty related to the COVID-19 pandemic in the first quarter of 2020. For the three months endedJune 30, 2020 , capital raising revenues increased 29.1% to$111.2 million from$86.2 million in the comparable period in 2019. For the six months endedJune 30, 2020 , capital raising revenues increased 51.4% to$204.3 million from$134.9 million in the comparable period in 2019. For the three months endedJune 30, 2020 , fixed income capital raising revenues increased 77.4% to$47.9 million from$27.0 million during the comparable period in 2019. For the six months endedJune 30, 2020 , fixed income capital raising revenues increased 68.8% to$80.8 million from$47.9 million during the comparable period in 2019. The increase is primarily attributable to an increase in the municipal bond origination business. Fixed income capital raising revenues increased from a year ago as clients accessed the market to benefit from the lower rate environment and to raise additional liquidity. For the three months endedJune 30, 2020 , equity capital raising revenues increased 7.0% to$63.3 million from$59.2 million during the comparable period in 2019. For the six months endedJune 30, 2020 , equity capital raising revenues increased 41.9% to$123.5 million from$87.0 million during the comparable period in 2019. The increase in equity capital raising revenues increase is primarily attributable to an increase in deals compared to the prior year. Interest - For the three months endedJune 30, 2020 , interest decreased 44.4% to$3.5 million from$6.4 million in the comparable period in 2019. For the six months endedJune 30, 2020 , interest decreased 30.1% to$8.6 million from$12.2 million during the comparable period in 2019. The decrease is primarily attributable to lower interest rates and lower inventory levels. Other income - For the three months endedJune 30, 2020 , other income increased 49.1% to$4.1 million from$2.7 million in the comparable period in 2019. For the six months endedJune 30, 2020 , other income decreased 179.3% to a loss of$3.4 million from$4.3 million during the comparable period in 2019. Interest expense - For the three months endedJune 30, 2020 , interest expense decreased 62.9% to$2.5 million from$6.6 million in the comparable period in 2019. For the six months endedJune 30, 2020 , interest expense decreased 46.5% to$6.8 million from$12.7 million in the comparable period in 2019. The decrease is primarily attributable to lower interest rates and a decrease in inventory levels. NON-INTEREST EXPENSES
For the three months ended
Compensation and benefits - For the three months endedJune 30, 2020 , compensation and benefits expense increased 55.0% to$241.4 million from$155.8 million during the comparable period in 2019. For the six months endedJune 30, 2020 , compensation and benefits expense increased 41.9% to$447.4 million from$315.2 million during the comparable period in 2019. Compensation and benefits expense as a percentage of net revenues was 60.6% and 61.3% for the three and six months endedJune 30, 2020 , respectively, compared to 57.6% and 59.3% for comparable periods in 2019, respectively. 71 -------------------------------------------------------------------------------- Occupancy and equipment rental - For the three months endedJune 30, 2020 , occupancy and equipment rental expense increased 18.6% to$16.0 million from$13.5 million during the comparable period in 2019. For the six months endedJune 30, 2020 , occupancy and equipment rental expense increased 26.4% to$32.7 million from$25.9 million during the comparable period in 2019. The increase is primarily attributable to higher rent expense. Communications and office supplies - For the three months endedJune 30, 2020 , communications and office supplies expense increased 35.8% to$23.0 million from$16.9 million during the comparable period in 2019. For the six months endedJune 30, 2020 , communications and office supplies expense increased 27.5% to$44.3 million from$34.7 million during the comparable period in 2019. The increase is primarily attributable to higher communication and quote equipment expenses. Commissions and floor brokerage - For the three months endedJune 30, 2020 , commissions and floor brokerage expense increased 62.2% to$9.3 million from$5.8 million during the comparable period in 2019. For the six months endedJune 30, 2020 , commissions and floor brokerage expense increased 58.9% to$18.9 million from$11.9 million during the comparable period in 2019. The increase is primarily attributable to higher volumes. Other operating expenses - For the three months endedJune 30, 2020 , other operating expenses decreased 35.7% to$25.3 million from$39.3 million during the comparable period in 2019. For the six months endedJune 30, 2020 , other operating expenses decreased 14.4% to$62.2 million from$72.7 million during the comparable period in 2019. The decrease was primarily attributable to a decrease in conference and travel costs, partially offset by an increase in settlement and legal costs.
INCOME BEFORE INCOME TAXES
For the three months endedJune 30, 2020 , income before income taxes for theInstitutional Group segment increased 111.3% to$83.0 million from$39.3 million during the comparable period in 2019. For the six months endedJune 30, 2020 , income before income taxes for theInstitutional Group segment increased 74.5% to$124.8 million from$71.5 million during the comparable period in 2019. Profit margins (income before income taxes as a percentage of net revenues) have increased to 20.9% for the three months endedJune 30, 2020 from 14.5% during the comparable period in 2019 as a result of higher revenues, partially offset by an increase in expenses. Profit margins (income before income taxes as a percentage of net revenues) have increased to 17.1% for the six months endedJune 30, 2020 from 13.4% during the comparable period in 2019 as a result of higher revenues, partially offset by an increase in expenses.
Results of Operations - Other Segment
Three and Six months ended
The following table presents consolidated financial information for the Other segment for the periods presented (in thousands, except percentages):
Three Months Ended June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
Net revenues $ (8,061 ) $ (2,248 ) (258.6 ) $ (10,221 ) $ (3,724 ) (174.5 )
Non-interest expenses:
Compensation and benefits 47,462 48,760 (2.7 ) 120,283 99,991 20.3
Other operating expenses 40,891 32,664 25.2 86,711 68,842 26.0
Total non-interest expenses 88,353 81,424 8.5
206,994 168,833 22.6
Loss before income taxes
The other segment includes expenses related to the Company's acquisition strategy and the investments made in the Company's infrastructure and control environment.
The expenses relating to the Company's acquisition strategy, which are included
in the other segment, consists of stock-based compensation and operating costs
from our various acquisitions. The following shows the expenses that are part of
the other segment related to acquisitions.
Three Months Ended June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
Non-interest expenses:
Compensation and benefits $ 9,710 $ 3,304 193.9 $ 16,137 $ 7,236 123.0
Other operating expenses 6,548 6,924 (5.4 ) 13,453 11,182 20.3
Total non-interest expenses $ 16,258 $ 10,228 59.0 % $ 29,590 $ 18,418 60.7 %
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The expenses not associated with acquisition-related activities in the other segment are as follows:
Three Months Ended June 30 ,
Six Months Ended
2020 2019 % Change 2020 2019 % Change
Non-interest expenses:
Compensation and benefits $ 37,752 $ 45,456 (16.9 ) $ 104,146 $ 92,755 12.3
Other operating expenses 34,343 25,740 33.4 73,258 57,660 27.1
Total non-interest expenses $ 72,095 $ 71,196 1.3 % $ 177,404 $ 150,415 17.9 %
Non-interest expenses for the three months ended June 30, 2020 increased 1.3%
from the comparable period in 2019. The increase consisted of a 16.9% decrease
in compensation and benefits and a 33.4% increase in other operating expenses.
Non-interest expenses for the six months ended June 30, 2020 increased 17.9%
from the comparable period in 2019. The increase consisted of a 12.3% increase
in compensation and benefits and a 27.1% increase in other operating expenses.
Analysis of Financial Condition
Our company's consolidated statements of financial condition consist primarily of cash and cash equivalents, receivables, financial instruments owned, bank loans, investments, goodwill, loans and advances to financial advisors, bank deposits, and payables. As ofJune 30, 2020 , our total assets increased 4.1% to$25.6 billion from$24.6 billion atDecember 31, 2019 . Our broker-dealer subsidiary's gross assets and liabilities, including financial instruments owned, stock loan/borrow, receivables and payables from/to brokers, dealers, and clearing organizations and clients, fluctuate with our business levels and overall market conditions. As ofJune 30, 2020 , our liabilities were comprised primarily of deposits of$16.3 billion atStifel Bancorp , senior notes, net of debt issuance costs, of$1.4 billion ,Federal Home Loan Bank advances of$323.0 million , payables to customers of$982.5 million at our broker-dealer subsidiaries, accounts payable and accrued expenses of$1.1 billion , accrued employee compensation of$375.9 million , and trust preferred securities of$60.0 million . To meet our obligations to clients and operating needs, we had$1.8 billion in cash and cash equivalents atJune 30, 2020 . We also had highly liquid assets consisting of held-to-maturity securities of$3.1 billion , available-for-sale securities of$3.2 billion , client brokerage receivables of$1.0 billion , and financial instruments of$846.2 million .
Cash Flow
Cash, cash equivalents, and restricted cash increased$649.2 million to$1.8 billion atJune 30, 2020 , from$1.1 billion atDecember 31, 2019 . Operating activities provided cash of$900.0 million . Investing activities used cash of$1.1 billion due to investment securities purchases, the growth of the loan portfolio, and fixed asset purchases, partially offset by proceeds from the sale and maturity of securities in our investment portfolio and the proceeds received from the sale of ZCM. Financing activities provided cash of$795.9 million principally due to an increase in bank deposits and proceeds received from the issuance of senior notes and preferred stock, partially offset by a decrease in securities loaned, share repurchases, and dividends paid on our common and preferred stock.
Liquidity and Capital Resources
The Company's senior management establishes the liquidity and capital policies of our company. The Company's senior management reviews business performance relative to these policies, monitors the availability of alternative sources of financing, and oversees the liquidity and interest rate sensitivity of our company's asset and liability position. Our assets, consisting mainly of cash or assets readily convertible into cash, are our principal source of liquidity. The liquid nature of these assets provides for flexibility in managing and financing the projected operating needs of the business. These assets are financed primarily by our equity capital, corporate debt, debentures to trusts, client credit balances, short-term bank loans, proceeds from securities lending, and other payables. We currently finance our client accounts and firm trading positions through ordinary course borrowings at floating interest rates from various banks on a demand basis, securities lending, and repurchase agreements, with company-owned and client securities pledged as collateral. Changes in securities market volumes, related client borrowing demands, underwriting activity, and levels of securities inventory affect the amount of our financing requirements. Our bank assets consist principally of available-for-sale and held-to-maturity securities, retained loans, and cash and cash equivalents.Stifel Bancorp's current liquidity needs are generally met through deposits from brokerage clients and equity capital. We monitor the liquidity of our bank subsidiaries daily to ensure their ability to meet customer deposit withdrawals, maintain reserve requirements, and support asset growth. 73
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As of
December 31, Average
June 30, 2020 2019 Conversion
Cash and cash equivalents $ 1,791,755 $ 1,142,596
Receivables from brokers, dealers, and
clearing organizations 583,458 627,790 5 days
Securities purchased under agreements to
resell 446,766 385,008 1 day
Financial instruments owned at fair value 836,432 963,606 3 days
Available-for-sale securities at fair value 3,172,489 3,254,737 3 days
Held-to-maturity securities at amortized
cost 3,085,790 2,856,219 4 days
Investments 34,390 49,980 10 days
Total cash and assets readily convertible to
cash $ 9,951,080 $ 9,279,936 As of
June 30, 2020 December 31, 2019
Contractual Contingent Contractual Contingent
Cash and cash equivalents $ 126,994 $ - $ 98,250 $ -
Financial instruments owned at
fair value 219,888 219,888 391,634 391,634
Investment portfolio (AFS &
HTM) - 1,370,368 - 1,617,688
$ 346,882 $ 1,590,256 $ 489,884 $ 2,009,322
Capital Management
We have an ongoing authorization from the Board of Directors to repurchase our
common stock in the open market or in negotiated transactions. In January 2020 ,
the Board of Directors approved the increase of an additional 4.9 million
shares, bringing the authorized share repurchase amount to 10.0 million shares.
At June 30, 2020 , the maximum number of shares that may yet be purchased under
this plan was 8.9 million. We utilize the share repurchase program to manage our
equity capital relative to the growth of our business and help to meet
obligations under our employee benefit plans. Share repurchases during the three
months ended June 30, 2020 were immaterial.
Liquidity Risk Management
Our businesses are diverse, and our liquidity needs are determined by many
factors, including market movements, collateral requirements, and client
commitments, all of which can change dramatically in a difficult funding
environment. During a liquidity crisis, credit-sensitive funding, including
unsecured debt and some types of secured financing agreements, may be
unavailable, and the terms (e.g., interest rates, collateral provisions, and
tenor) or availability of other types of secured financing may change. We manage
liquidity risk by diversifying our funding sources across products and among
individual counterparties within those products. These liquidity risk management
practices have allowed us to effectively manage the market stress that began in
the first quarter of 2020 from the COVID-19 pandemic. For more information on
the effects of the pandemic, see Executive Summary - COVID-19 Pandemic on page
56.
As a holding company, whereby all of our operations are conducted through our
subsidiaries, our cash flow and our ability to service our debt, including the
notes, depend upon the earnings of our subsidiaries. Our subsidiaries are
separate and distinct legal entities. Our subsidiaries have no obligation to pay
any amounts due on the notes or to provide us with funds to pay our obligations,
whether by dividends, distributions, loans, or other payments.
Our liquidity requirements may change in the event we need to raise more funds
than anticipated to increase inventory positions, support more rapid expansion,
develop new or enhanced services and products, acquire technologies, respond to
acquisition opportunities, expand our recruiting efforts, or respond to other
unanticipated liquidity requirements. We primarily rely on financing activities
and distributions from our subsidiaries for funds to implement our business and
growth strategies and repurchase our shares. Net capital rules, restrictions
under our borrowing arrangements of our subsidiaries, as well as the earnings,
financial condition, and cash requirements of our subsidiaries, may each limit
distributions to us from our subsidiaries.
The availability of outside financing, including access to the capital markets
and bank lending, depends on a variety of factors, such as market conditions,
the general availability of credit, the volume of trading activities, the
overall availability of credit to the financial services sector, and our credit
rating. Our cost and availability of funding may be adversely affected by
illiquid credit markets and
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wider credit spreads. As a result of any future concerns about the stability of
the markets generally and the strength of counterparties specifically, lenders
may from time to time curtail, or even cease to provide, funding to borrowers.
Our liquidity management policies are designed to mitigate the potential risk
that we may be unable to access adequate financing to service our financial
obligations without material business impact. The principal elements of our
liquidity management framework are: (a) daily monitoring of our liquidity needs
at the holding company and significant subsidiary level, (b) stress testing the
liquidity positions of Stifel and our bank subsidiaries, and (c) diversification
of our funding sources.
Monitoring of liquidity - Senior management establishes our liquidity and
capital policies. These policies include senior management's review of short-
and long-term cash flow forecasts, review of monthly capital expenditures, the
monitoring of the availability of alternative sources of financing, and the
daily monitoring of liquidity in our significant subsidiaries. Our decisions on
the allocation of capital to our business units consider, among other factors,
projected profitability and cash flow, risk, and impact on future liquidity
needs. Our treasury department assists in evaluating, monitoring, and
controlling the impact that our business activities have on our financial
condition, liquidity, and capital structure as well as maintains our
relationships with various lenders. The objectives of these policies are to
support the successful execution of our business strategies while ensuring
ongoing and sufficient liquidity.
Liquidity stress testing (Firm-wide) -A liquidity stress test model is
maintained by the Company that measures liquidity outflows across multiple
scenarios at the major operating subsidiaries and details the corresponding
impact to our holding company and the overall consolidated firm. Liquidity
stress tests are utilized to ensure that current exposures are consistent with
the Company's established liquidity risk tolerance and, more specifically, to
identify and quantify sources of potential liquidity strain. Further, the stress
tests are utilized to analyze possible impacts on the Company's cash flows, and
liquidity position. The outflows are modeled over a 30-day liquidity stress
timeframe and include the impact of idiosyncratic and macro-economic stress
events.
The assumptions utilized in the Company's liquidity stress tests include, but are not limited to, the following:
• No government support
• No access to equity and unsecured debt markets within the stress horizon
• Higher haircuts and significantly lower availability of secured funding
• Additional collateral that would be required by trading counter-parties,
certain exchanges, and clearing organizations related to credit rating
downgrades
• Client cash withdrawals and inability to accept new deposits
• Increased demand from customers on the funding of loans and lines of credit
At
Liquidity stress testing (Stifel Bancorp ) - Our bank subsidiaries perform three primary stress tests on their liquidity position. These stress tests are based on the following company-specific stresses: (1) the amount of deposit run-off that they could withstand over a one-month period of time based on their on-balance sheet liquidity and available credit, (2) the ability to fund operations if all available credit were to be drawn immediately, with no additional available credit, and (3) the ability to fund operations under a regulatory prompt corrective action. The goal of these stress tests is to determine their ability to fund continuing operations under significant pressures on both assets and liabilities. Under all stress tests, our bank subsidiaries consider cash and highly liquid investments as available to meet liquidity needs. In their analysis, our bank subsidiaries consider agency mortgage-backed securities, corporate bonds, and commercial mortgage-backed securities as highly liquid. In addition to being able to be readily financed at modest haircut levels, our bank subsidiaries estimate that each of the individual securities within each of the asset classes described above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. AtJune 30, 2020 , available cash and highly liquid investments comprised approximately 20% ofStifel Bancorp's assets, which was well in excess of its internal target. In addition to these stress tests, management performs a daily liquidity review. The daily analysis provides management with all major fluctuations in liquidity. The analysis also tracks the proportion of deposits thatStifel Bancorp is sweeping from its affiliated broker-dealer, Stifel. On a monthly basis, liquidity key performance indicators and compliance with liquidity policy limits are reported to the Board of Directors. Our banking subsidiaries have not violated any internal liquidity policy limits. 75
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Funding Sources
The Company pursues a strategy of diversification of secured and unsecured funding sources (by product and by investor) and attempts to ensure that the tenor of the Company's liabilities equals or exceeds the expected holding period of the assets being financed. The Company funds its balance sheet through diverse sources. These sources may include the Company's equity capital, long-term debt, repurchase agreements, securities lending, deposits, committed and uncommitted credit facilities,Federal Home Loan Bank advances, and federal funds agreements.
Cash and Cash Equivalents - We held
Securities Available-for-Sale - We held$3.2 billion in available-for-sale investment securities atJune 30, 2020 , compared to$3.3 billion atDecember 31, 2019 . As ofJune 30, 2020 , the weighted-average life of the investment securities portfolio was approximately 0.9 years. These investment securities provide increased liquidity and flexibility to support our company's funding requirements. We monitor the available-for-sale investment portfolio for other-than-temporary impairment based on a number of criteria, including the size of the unrealized loss position, the duration for which the security has been in a loss position, credit rating, the nature of the investments, and current market conditions. For debt securities, we also consider any intent to sell the security and the likelihood we will be required to sell the security before its anticipated recovery. We continually monitor the ratings of our security holdings and conduct regular reviews of our credit-sensitive assets. Deposits - Deposits have become one of our largest funding sources. Deposits provide a stable, low-cost source of funds that we utilize to fund loan and asset growth and to diversify funding sources. We have continued to expand our deposit-gathering efforts through our existing private client network and through expansion. These channels offer a broad set of deposit products that include demand deposits, money market deposits, and certificates of deposit ("CDs"). As ofJune 30, 2020 , we had$16.3 billion in deposits compared to$15.3 billion atDecember 31, 2019 . Our core deposits are comprised of non-interest-bearing deposits, money market deposit accounts, savings accounts, and CDs. Short-term borrowings - Our short-term financing is generally obtained through short-term bank line financing on an uncommitted, secured basis, securities lending arrangements, repurchase agreements, advances from theFederal Home Loan Bank , term loans, and committed bank line financing on an unsecured basis. We borrow from various banks on a demand basis with company-owned and customer securities pledged as collateral. The value of customer-owned securities used as collateral is not reflected in the consolidated statements of financial condition. We also have unsecured, committed bank lines available. Our uncommitted secured lines of credit atJune 30, 2020 , totaled$835.0 million with four banks and are dependent on having appropriate collateral, as determined by the bank agreements, to secure an advance under the line. The availability of our uncommitted lines is subject to approval by the individual banks each time an advance is requested and may be denied. Our peak daily borrowing on our uncommitted secured lines was$490.0 million during the six months endedJune 30, 2020 . There are no compensating balance requirements under these arrangements. Any borrowings on secured lines of credit are generally utilized to finance certain fixed income securities. AtJune 30, 2020 , we had no outstanding balances on our uncommitted secured lines of credit. The Federal Home Loan advances of$323.0 million as ofJune 30, 2020 are floating-rate advances. The weighted average interest rates during the three and six months endedJune 30, 2020 on these advances is 1.09% and 1.44%, respectively. The advances are secured byStifel Bancorp's residential mortgage loan portfolio and investment portfolio. The interest rates reset on a daily basis.Stifel Bancorp has the option to prepay these advances without penalty on the interest reset date. Unsecured borrowings - OnMarch 5, 2019 , we amended our existing Credit Agreement, which now expires inMarch 2024 . The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to LIBOR plus 1.75%, as defined. We can draw upon this line as long as certain restrictive covenants are maintained. Under our amended and restatement Credit Agreement, we are required to maintain compliance with a minimum consolidated tangible net worth covenant, as defined, and a maximum consolidated total capitalization ratio covenant, as defined. In addition, Stifel, our broker-dealer subsidiary, is required to maintain compliance with a minimum regulatory excess net capital percentage covenant, as defined, and our bank subsidiaries are required to maintain their status as well-capitalized, as defined. Our revolving credit facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to similar obligations, certain events of bankruptcy and insolvency, and judgment defaults. AtJune 30, 2020 , we had no advances on the$200.0 million revolving credit facility and were in compliance with all covenants and currently do not expect any covenant violations due to the impacts of the COVID-19 pandemic. 76 -------------------------------------------------------------------------------- Stifel, our broker-dealer subsidiary, has a 364-day Credit Agreement ("Stifel Credit Facility") with a maturity date ofJune 2021 in which the lenders are a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to$300.0 million at variable rates of interest. AtJune 30, 2020 , we had no advances on the Stifel Credit Facility and were in compliance with all covenants and currently do not expect any covenant violations due to the impacts of the COVID-19 pandemic. Federal Home Loan Bank Advances and other secured financing -Stifel Bancorp has borrowing capacity with theFederal Home Loan Bank of$2.9 billion atJune 30, 2020 and$59.5 million in federal funds agreements, for the purpose of purchasing short-term funds should additional liquidity be needed. AtJune 30, 2020 , outstanding FHLB advances were$323.0 million .Stifel Bancorp is eligible to participate in the Fed's discount window program; however,Stifel Bancorp does not view borrowings from the Fed as a primary means of funding. The credit available in this program is subject to periodic review, may be terminated or reduced at the discretion of the Fed, and is secured by securities.Stifel Bancorp has borrowing capacity of$1.1 billion with the Fed's discount window atJune 30, 2020 .Stifel Bancorp receives overnight funds from excess cash held in Stifel brokerage accounts, which are deposited into a money market account. These balances totaled$15.3 billion atJune 30, 2020 . Public Offering of Senior Notes - OnJuly 15, 2014 , we sold in a registered underwritten public offering,$300.0 million in aggregate principal amount of 4.25% senior notes dueJuly 2024 (the "2014 Notes"). Interest on the 2014 Notes is payable semi-annually in arrears. We may redeem the 2014 Notes in whole or in part, at our option, at a redemption price equal to 100% of their principal amount, plus a "make-whole" premium and accrued and unpaid interest, if any, to the date of redemption. InJuly 2014 , we received a BBB- rating on the 2014 Notes. OnDecember 1, 2015 , we sold in a registered underwritten public offering,$300.0 million in aggregate principal amount of 3.50% senior notes dueDecember 2020 (the "December 2015 Notes"). Interest on theDecember 2015 Notes is payable semi-annually in arrears in December and June. We may redeem theDecember 2015 Notes in whole or in part, at our option, at a redemption price equal to 100% of their principal amount, plus a "make-whole" premium and accrued and unpaid interest, if any, to the date of redemption. InDecember 2015 , we received a BBB- rating on the 2015 Notes.
On
OnOctober 4, 2017 , we completed the pricing of a registered underwritten public offering of$200.0 million in aggregate principal amount of 5.20% senior notes dueOctober 2047 . Interest on the senior notes is payable quarterly in arrears in January, April, July, and October. On or afterOctober 15, 2022 , we may redeem some or all of the senior notes at any time at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued interest thereon to the redemption date. OnOctober 27, 2017 , we completed the sale of an additional$25.0 million aggregate principal amount of Notes pursuant to the over-allotment option. InOctober 2017 , we received a BBB- rating on the 2017 Notes. OnMay 20, 2020 , we sold in a registered underwritten public offering,$400.0 million in aggregate principal amount of 4.00% senior notes dueMay 2030 . Interest on these senior notes is payable semi-annually in arrears in May and November. We may redeem the notes in whole or in part, at our option, at a redemption price equal to the greater of a) 100% of their principal amount or b) discounted present value atTreasury rate plus 50 basis points prior toFebruary 15, 2030 , and on or afterFebruary 15, 2030 , at 100% of their principal amount, and accrued and unpaid interest, if any, to the date of redemption. InMay 2020 , we received a BBB- rating on the notes.
Preferred Stock Offerings - In
InFebruary 2019 , the Company completed an underwritten registered public offering of$150 million 6.25% Non-Cumulative Perpetual Preferred Stock, Series B ("Series B Preferred"). InMarch 2019 , we completed a public offering of an additional$10.0 million of Series B Preferred, pursuant to the over-allotment option. OnMay 19, 2020 , the Company completed an underwritten registered public offering of$225 million 6.125% Non-Cumulative Perpetual Preferred Stock, Series C ("Series C Preferred), which included the sale of$25.0 million of Series C Preferred pursuant to an over-allotment option.
Credit Rating
We believe our current rating depends upon a number of factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trends and volatility, balance sheet composition, liquidity and liquidity management, our
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capital structure, our overall risk management, business diversification, and
our market share and competitive position in the markets in which we operate.
Deteriorations in any of these factors could impact our credit rating. A
reduction in our credit rating could adversely affect our liquidity and
competitive position, increase our incremental borrowing costs, limit our access
to the capital markets, or trigger our obligations under certain financial
agreements. As such, we may not be able to successfully obtain additional
outside financing to fund our operations on favorable terms, or at all.
We believe our existing assets, most of which are liquid in nature, together with the funds from operations, available informal short-term credit arrangements, and our ability to raise additional capital will provide sufficient resources to meet our present and anticipated financing needs.
Use of Capital Resources
We have paid$70.5 million in the form of upfront notes to financial advisors for transition pay during the six months endedJune 30, 2020 . As we continue to take advantage of the opportunities created by market displacement and as competition for skilled professionals in the industry increases, we may decide to devote more significant resources to attracting and retaining qualified personnel. We utilize transition pay, principally in the form of upfront demand notes, to aid financial advisors,who have elected to join our firm, to supplement their lost compensation while transitioning their customers' accounts to the Stifel platform. The initial value of the notes is determined primarily by the financial advisors' trailing production and assets under management. These notes are generally forgiven over a five- to ten-year period based on production. The future estimated amortization expense of the upfront notes, assuming current-year production levels and static growth for the remaining six months in 2020, and the years endedDecember 31, 2021 , 2022, 2023, 2024, and thereafter are$74.2 million ,$94.1 million ,$83.7 million ,$74.0 million ,$61.7 million , and$155.6 million , respectively. These estimates could change if we continue to grow our business through expansion or experience increased production levels. We maintain an incentive stock plan and a wealth accumulation plan that provides for the granting of stock options, stock appreciation rights, restricted stock, performance awards, stock units, and debentures (collectively, "deferred awards") to our associates. Historically, we have granted stock units to our associates as part of our retention program. A restricted stock unit or restricted stock award represents the right to receive a share of common stock from our company at a designated time in the future without cash payment by the employee and is issued in lieu of cash incentive, principally for deferred compensation and employee retention plans. The restricted stock units or restricted stock awards generally vest over the next one to ten years after issuance and are distributed at predetermined future payable dates once vesting occurs. AtJune 30, 2020 , the total number of restricted stock units, PRSUs, and restricted stock awards outstanding was 14.5 million, of which 12.6 million were unvested. AtJune 30, 2020 , there was unrecognized compensation cost for deferred awards of approximately$553.5 million , which is expected to be recognized over a weighted-average period of 2.7 years. The future estimated compensation expense of the deferred awards, assuming current year forfeiture levels and static growth for the remaining six months in 2020, and the years endedDecember 31, 2021 , 2022, 2023, 2024, and thereafter are$79.0 million ,$141.9 million ,$126.1 million ,$94.1 million ,$65.4 million , and$47.0 million , respectively. These estimates could change if our forfeitures change from historical levels. Net Capital Requirements - We operate in a highly regulated environment and are subject to capital requirements, which may limit distributions to our company from our subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. These subsidiaries have historically operated in excess of minimum net capital requirements. However, if distributions were to be limited in the future due to the failure of our subsidiaries to comply with the net capital rules or a change in the net capital rules, it could have a material and adverse effect to our company by limiting our operations that require intensive use of capital, such as underwriting or trading activities, or limit our ability to implement our business and growth strategies, pay interest on and repay the principal of our debt, and/or repurchase our common stock. Our non-broker-dealer subsidiaries,Stifel Bank & Trust ,Stifel Bank ,Stifel Trust Company, N.A. , andStifel Trust Company Delaware, N.A. , are also subject to various regulatory capital requirements administered by the federal banking agencies. Our broker-dealer subsidiaries, our bank subsidiaries, andStifel Trust have consistently operated in excess of their capital adequacy requirements. Our Canadian subsidiary,Stifel Nicolaus Canada Inc. ("SNC"), is subject to the regulatory supervision and requirements of IIROC. AtJune 30, 2020 , Stifel had net capital of$449.4 million , which was 37.0% of aggregate debit items and$425.2 million in excess of its minimum required net capital. AtJune 30, 2020 , all of our other broker-dealer subsidiaries' net capital exceeded the minimum net capital required under theSEC rule. AtJune 30, 2020 , SNEL's capital and reserves were in excess of the financial resources requirement under the rules of theFCA . AtJune 30, 2020 , our banking subsidiaries were considered well capitalized under the regulatory framework for prompt corrective action. AtJune 30, 2020 , SNC's net capital and reserves were in excess of the financial 78
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resources requirement under the rules of the IIROC. See Note 16 of the Notes to Consolidated Financial Statements for details of our regulatory capital requirements.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance withU.S. generally accepted accounting principles and pursuant to the rules and regulations of theSEC , we make assumptions, judgments, and estimates that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments, and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments, and estimates involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules that require us to make assumptions, judgments, and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments, and estimates relative to our critical accounting policies and estimates have not differed materially from actual results. For more information, see Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as well as Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q. Except as noted below under Allowance for Credit Losses, there have not been any material updates to our critical accounting policies and estimates as disclosed in the MD&A of the Company's Annual Report on Form 10-K.
Allowance for Credit Losses
OnJanuary 1, 2020 , we adopted the new accounting standard that requires the measurement of the allowance for credit losses, which includes the allowance for loan and lease losses and the reserve for unfunded lending commitments, to be based on management's best estimate of lifetime expected credit losses inherent in the Company's relevant financial assets. We regularly review the loan portfolio and have established an allowance for loan losses for inherent losses estimated to have occurred in the loan portfolio through a provision for loan losses charged to income. For loans, the expected credit loss is typically estimated using quantitative methods that consider a variety of factors such as historical loss experience derived from proxy data, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. The life of the loan for closed-ended products is based on the contractual maturity of the loan adjusted for any expected prepayments. The contractual maturity includes any extension options that are at the sole discretion of the borrower. For open-ended products (e.g., lines of credit), the expected credit loss is determined based on the maximum repayment term associated with future draws from credit lines. In its loss forecasting framework, we incorporate forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, real estate prices, gross domestic product levels, corporate bond spreads and long-term interest rate forecasts. As any one economic outlook is inherently uncertain, we leverage multiple scenarios. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends. Also included in the allowance for credit losses are qualitative reserves to cover losses that are expected but, in our company's assessment, may not be adequately represented in the quantitative methods or the economic assumptions described above. For example, factors that we consider include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements, among others. Further, we consider the inherent uncertainty in quantitative models that are built on historical data. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for credit losses can also be impacted by unanticipated changes in asset quality of the portfolio. In addition, while we have incorporated our estimated impact of COVID-19 into our allowance for credit losses, the ultimate impact of COVID-19 is still unknown, including how long economic activities will be impacted and what effect the unprecedented levels of government fiscal and monetary actions will have on the economy and our credit losses. As described above, the process to determine the allowance for credit losses requires numerous estimates and assumptions, some of which require a high degree of judgment and are often interrelated. Changes in the estimates and assumptions can result in significant 79
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changes in the allowance for credit losses. Our process for determining the allowance for credit losses is further discussed in Note 1 of the Notes to Consolidated Financial Statements.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our consolidated financial statements.
Off-Balance Sheet Arrangements
Information concerning our off-balance sheet arrangements is included in Note 21 of the Notes to Consolidated Financial Statements. Such information is hereby incorporated by reference. Contractual Obligations
Our contractual obligations have not materially changed from those reported in
our Annual Report on Form 10-K for the year ended
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