STIFEL FINANCIAL CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-09305

STIFEL FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Delaware		43-1273600
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

501 N. Broadway, St. Louis, Missouri 63102-2188

(Address of principal executive offices and zip code)

(314) 342-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class/ Trading Symbol	Name of Each Exchange on Which Registered	Shares outstanding - November 1, 2019
Common Stock, $0.15 par value per share (SF)	New York Stock Exchange	68,373,976
Depository Shares, each representing 1/1,000th interest in a share of 6.25% Non-Cumulative Preferred Stock, Series A (SF PRA)	New York Stock Exchange	6,000
Depository Shares, each representing 1/1,000th interest in a share of 6.25% Non-Cumulative Preferred Stock, Series B (SF PRB)	New York Stock Exchange	6,400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“the Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐


Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

STIFEL FINANCIAL CORP.

Form 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements		3
Consolidated Statements of Financial Condition as of September 30, 2019 (unaudited) and December 31, 2018		3
Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and September 30, 2018 (unaudited)		5
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and September 30, 2018 (unaudited) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and September 30, 2018 (unaudited)		6 7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and September 30, 2018 (unaudited)		10
Notes to Consolidated Financial Statements (unaudited)		12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Item 3. Quantitative and Qualitative Disclosures About Market Risk		80
Item 4. Controls and Procedures		84

PART II – OTHER INFORMATION
Item 1. Legal Proceedings		84
Item 1A. Risk Factors		84
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		85
Item 6. Exhibits		86
Signatures		87

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition

	September 30, 2019		December 31, 2018
($ in thousands)	(Unaudited)
Assets
Cash and cash equivalents	$	868,866	$	1,936,560
Cash segregated for regulatory purposes		62,654		132,814
Receivables:
Brokerage clients, net		1,396,132		1,201,477
Brokers, dealers, and clearing organizations		672,557		515,574
Securities purchased under agreements to resell		624,049		699,900
Financial instruments owned, at fair value		1,189,892		1,267,449
Available-for-sale securities, at fair value		3,448,801		3,070,447
Held-to-maturity securities, at amortized cost		2,881,484		4,218,854
Loans:
Held for investment, net		9,101,903		8,517,615
Held for sale, at lower of cost or market		265,330		205,557
Investments, at fair value		74,167		67,982
Fixed assets, net		1,043,322		372,939
Goodwill		1,158,123		1,034,679
Intangible assets, net		116,438		119,655
Loans and advances to financial advisors and other employees, net		488,355		408,436
Deferred tax assets, net		111,108		112,008
Other assets		657,596		637,652
Total assets	$	24,160,777	$	24,519,598

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Financial Condition (continued)

	September 30, 2019			December 31, 2018
($ in thousands, except share and per share amounts)	(Unaudited)
Liabilities
Payables:
Brokerage clients	$	907,140		$	837,379
Brokers, dealers, and clearing organizations		613,788			432,299
Drafts		84,815			104,887
Securities sold under agreements to repurchase		564,892			535,394
Bank deposits		14,836,646			15,863,613
Financial instruments sold, but not yet purchased, at fair value		905,797			947,306
Accrued compensation		350,821			460,347
Accounts payable and accrued expenses		1,012,229			344,152
Federal Home Loan Bank advances		250,000			540,000
Borrowings		150			180,655
Senior notes		1,016,751			1,015,973
Debentures to Stifel Financial Capital Trusts		60,000			60,000
Total liabilities		20,603,029			21,322,005

Commitments and contingent liabilities

Equity
Stifel Financial Corp. shareholders' equity:
Preferred stock - $1 par value; authorized 3,000,000 shares; issued 12,400 and 6,000 shares, respectively		310,000			150,000
Common stock - $0.15 par value; authorized 194,000,000 shares; issued 74,441,094 and 74,441,017 shares, respectively		11,166			11,166
Additional paid-in-capital		1,889,815			1,893,304
Retained earnings		1,603,826			1,366,503
Accumulated other comprehensive loss		(23,594	)		(72,523	)
Treasury stock, at cost, 5,565,470 and 3,639,399 shares, respectively		(289,498	)		(180,857	)
Total Stifel Financial Corp. shareholders’ equity		3,501,715			3,167,593
Non-controlling interests		56,033			30,000
Total equity		3,557,748			3,197,593
Total liabilities and equity	$	24,160,777		$	24,519,598

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands, except per share amounts)	2019		2018		2019		2018
Revenues:
Commissions	$	163,920	$	158,016	$	484,350	$	490,693
Principal transactions		97,847		83,152		298,343		269,918
Investment banking		198,790		169,012		540,247		506,437
Asset management and service fees		217,628		200,743		624,066		596,112
Interest		178,784		169,760		557,795		461,915
Other income		8,747		6,127		34,461		18,557
Total revenues		865,716		786,810		2,539,262		2,343,632
Interest expense		44,144		48,468		146,483		112,200
Net revenues		821,572		738,342		2,392,779		2,231,432
Non-interest expenses:
Compensation and benefits		486,160		422,324		1,411,135		1,322,387
Occupancy and equipment rental		58,649		54,035		178,566		165,226
Communications and office supplies		36,817		33,330		107,583		103,468
Commissions and floor brokerage		10,542		11,338		32,506		30,798
Other operating expenses		78,650		76,785		226,444		231,122
Total non-interest expenses		670,818		597,812		1,956,234		1,853,001
Income from operations before income tax expense		150,754		140,530		436,545		378,431
Provision for income taxes		40,632		36,672		117,227		98,525
Net income		110,122		103,858		319,318		279,906
Net income applicable to non-controlling interests		708		—		1,612		—
Net income applicable to Stifel Financial Corp.		109,414		103,858		317,706		279,906
Preferred dividends		4,844		2,343		12,476		7,031
Net income available to common shareholders	$	104,570	$	101,515	$	305,230	$	272,875

Earnings per common share:
Basic	$	1.47	$	1.41	$	4.21	$	3.80
Diluted	$	1.34	$	1.25	$	3.87	$	3.35

Cash dividends declared per common share	$	0.15	$	0.12	$	0.45	$	0.36

Weighted-average number of common shares outstanding:
Basic		71,197		71,919		72,512		71,824
Diluted		78,144		81,484		78,826		81,425

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2019			2018			2019			2018
Net income	$	110,122		$	103,858		$	319,318		$	279,906
Other comprehensive income/(loss), net of tax: ^{(1) (5)}
Changes in unrealized gains/(losses) on available-for-sale securities ^{(2) (3)}		16,344			(3,138	)		58,428			(28,065	)
Changes in unrealized gains/(losses) on cash flow hedging instruments⁽⁴⁾		(477	)		(1,523	)		(4,260	)		1,895
Foreign currency translation adjustment		(4,106	)		(1,336	)		(5,239	)		(3,434	)
Total other comprehensive income/(loss), net of tax		11,761			(5,997	)		48,929			(29,604	)
Comprehensive income		121,883			97,861			368,247			250,302
Net income attributable to non-controlling interest		708			—			1,612			—
Comprehensive income applicable to Stifel Financial Corp.	$	121,175		$	97,861		$	366,635		$	250,302

⁽¹⁾	Net of tax expense of $4.4 million and tax benefit of $2.1 million for the three months ended September 30, 2019 and 2018, respectively. Net of tax expense of $18.1 million and tax benefit of $10.4 million for the nine months ended September 30, 2019 and 2018, respectively.

⁽²⁾

Reclassifications to earnings during the three months ended September 30, 2019 were immaterial. Net of reclassifications to earnings of realized losses of $0.2 million for the nine months ended September 30, 2019. There were no reclassifications to earnings during the three and nine months ended September 30, 2018.

⁽³⁾

As part ofthe adoption of ASU 2019-04, in the third quarter of 2019, the Company made a one-time election to transfer a portion of its held-to-maturity securities to available-for-sale. The transfer resulted in a net of tax increase to accumulated other comprehensive income of $17.9 million. See Notes 2 and 6 for additional information on the transfer.

⁽⁴⁾

Amounts are net of reclassifications to earnings of gains of $0.6 million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively. Amounts are net of reclassifications to earnings of gains of $2.9 million and $3.3 million for the nine months ended September 30, 2019 and 2018, respectively.

⁽⁵⁾	The adoption of ASU 2018-02 on January 1, 2018 resulted in a reclassification of $3.0 million to retained earnings related to cash flow hedges and investment portfolio risk.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Three Months Ended September 30,
($ in thousands, except per share amounts)	2019			2018
Preferred stock, par value $1.00 per share:
Balance, beginning of period	$	310,000		$	150,000
Other		—			—
Balance, end of period		310,000			150,000
Common stock, par value $0.15 per share:
Balance, beginning of period		11,166			10,869
Common stock issued for acquisitions		—			297
Balance, end of period		11,166			11,166
Additional paid-in-capital:
Balance, beginning of period		1,867,209			1,736,853
Unit amortization, net of forfeitures		26,300			27,752
Common stock issued under employee plans and related tax benefits		(3,708	)		(3,516	)
Issuance of common stock for acquisitions		—			110,374
Dividends declared to equity-award holders		—			1,724
Other		14			45
Balance, end of period		1,889,815			1,873,232
Retained earnings:
Balance, beginning of period		1,512,702			1,175,151
Net income		110,122			103,858
Dividends declared:
Common		(12,572	)		(10,524	)
Preferred		(4,844	)		(2,343	)
Common stock issued under employee plans and related tax benefits		(478	)		(664	)
Cumulative adjustments for accounting changes ⁽¹⁾		(395	)		—
Other		(709	)		58
Balance, end of period		1,603,826			1,265,536
Accumulated other comprehensive loss:
Balance, beginning of period		(35,355	)		(53,393	)
Unrealized gains/(losses) on securities, net of tax		16,344			(3,138	)
Unrealized losses on cash flow hedging activities, net of tax		(477	)		(1,523	)
Foreign currency translation adjustment, net of tax		(4,106	)		(1,335	)
Balance, end of period		(23,594	)		(59,389	)
Treasury stock, at cost:
Balance, beginning of period		(236,596	)		(65,118	)
Common stock issued under employee plans		2,566			2,773
Common stock repurchased		(55,468	)		(16,631	)
Balance, end of period		(289,498	)		(78,976	)
Total Stifel Financial Corp. Shareholders' Equity		3,501,715			3,161,569
Non-controlling interests:
Balance, beginning of period		56,296			—
Net income applicable to non-controlling interests		708			—
Distributions to non-controlling interest holders		(971	)		—
Balance, end of period		56,033			—
Total Shareholders' Equity	$	3,557,748		$	3,161,569

⁽¹⁾ Cumulative adjustments for accounting changes relate to the adoption of certain accounting updates during 2019. See Note 2 to the consolidated financial statements for further information.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Shareholders’ Equity (continued)

(Unaudited)

	Nine Months Ended September 30,
($ in thousands, except per share amounts)	2019			2018
Preferred stock, par value $1.00 per share:
Balance, beginning of period	$	150,000		$	150,000
Issuance of preferred stock		160,000			—
Balance, end of period		310,000			150,000
Common stock, par value $0.15 per share:
Balance, beginning of period		11,166			10,746
Common stock issued under employee plans		—			123
Common stock issued for acquisitions		—			297
Balance, end of period		11,166			11,166
Additional paid-in-capital:
Balance, beginning of period		1,893,304			1,733,348
Unit amortization, net of forfeitures		86,388			77,350
Common stock issued under employee plans and related tax benefits		(84,902	)		(52,922	)
Issuance of preferred stock		(5,012	)		—
Issuance of common stock for acquisitions		—			110,374
Dividends declared to equity-award holders		—			5,074
Other		37			8
Balance, end of period		1,889,815			1,873,232
Retained earnings:
Balance, beginning of period		1,366,503			1,033,526
Net income		319,318			279,906
Dividends declared:
Common		(38,249	)		(31,097	)
Preferred		(12,476	)		(7,031	)
Common stock issued under employee plans and related tax benefits		(18,770	)		(9,774	)
Cumulative adjustments for accounting changes ⁽¹⁾		(11,204	)		(1,124	)
Other		(1,296	)		1,130
Balance, end of period		1,603,826			1,265,536
Accumulated other comprehensive loss:
Balance, beginning of period		(72,523	)		(26,736	)
Unrealized gains/(losses) on securities, net of tax		58,428			(28,065	)
Unrealized gains/(losses) on cash flow hedging activities, net of tax		(4,260	)		1,895
Foreign currency translation adjustment, net of tax		(5,239	)		(3,433	)
Adjustments for accounting changes ⁽¹⁾		—			(3,050	)
Balance, end of period		(23,594	)		(59,389	)
Treasury stock, at cost:
Balance, beginning of period		(180,857	)		(39,308	)
Common stock issued under employee plans		71,793			22,846
Common stock repurchased		(180,434	)		(62,514	)
Balance, end of period		(289,498	)		(78,976	)
Total Stifel Financial Corp. Shareholders' Equity		3,501,715			3,161,569
Non-controlling interests:
Balance, beginning of period		30,000			—
Net income applicable to non-controlling interests		1,612			—
Capital contributions from non-controlling interest holders		26,800			—
Distributions to non-controlling interest holders		(2,379	)		—
Balance, end of period		56,033			—
Total Shareholders' Equity	$	3,557,748		$	3,161,569

⁽¹⁾

Cumulative adjustments for accounting changes relate to the adoption of certain accounting updates during 2019 and 2018. See Note 2 to the consolidated financial statements for further information. The 2018 adjustments are described further in Note 2 to the consolidated financial statements in our 2018 Form 10-K.

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
($ in thousands)	2019			2018
Cash Flows From Operating Activities:
Net income	$	319,318		$	279,906
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization		28,930			20,503
Amortization of loans and advances to financial advisors and other employees		69,286			61,783
Amortization of premium on investment portfolio		26,687			18,714
Provision for loan losses and allowance for loans and advances to financial advisors and other employees		5,837			13,980
Amortization of intangible assets		10,960			8,741
Deferred income taxes		(13,573	)		718
Stock-based compensation		78,329			75,382
(Gains)/losses on sale of investments		(1,279	)		10,442
Other, net		(32,062	)		(86,576	)
Decrease/(increase) in operating assets, net of assets acquired:
Receivables:
Brokerage clients		(194,655	)		(82,568	)
Brokers, dealers, and clearing organizations		(156,658	)		(187,013	)
Securities purchased under agreements to resell		75,851			(110,141	)
Financial instruments owned, including those pledged		110,240			(19,048	)
Loans originated as held for sale		(1,293,650	)		(1,099,187	)
Proceeds from mortgages held for sale		1,255,823			1,051,789
Loans and advances to financial advisors and other employees		(147,144	)		(67,872	)
Other assets		(41,002	)		31,543
Increase/(decrease) in operating liabilities, net of liabilities assumed:
Payables:
Brokerage clients		69,761			(200,461	)
Brokers, dealers, and clearing organizations		56,711			180,463
Drafts		(20,072	)		(15,404	)
Financial instruments sold, but not yet purchased		(41,565	)		132,511
Other liabilities and accrued expenses		(132,768	)		(66,290	)
Net cash provided by/(used in) operating activities	$	33,305		$	(48,085	)

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Consolidated Statements of Cash Flows (continued)

(Unaudited)

	Nine Months Ended September 30,
($ in thousands)	2019			2018
Cash Flows From Investing Activities:
Proceeds from:
Principal paydowns, sales, calls, and maturities of available-for-sale securities	$	1,034,741		$	763,982
Calls and principal paydowns of held-to-maturity securities		456,804			443,295
Sale of other real estate owned		7,300			—
Sale or maturity of investments		4,263			24,345
Increase in bank loans, net		(592,547	)		(810,798	)
Payments for:
Purchase of fixed assets		(116,307	)		(18,271	)
Purchase of available-for-sale securities		(239,155	)		(331,657	)
Purchase of held-to-maturity securities		(243,335	)		(1,313,587	)
Purchase of investments		(9,100	)		(7,578	)
Acquisitions, net of cash received		(136,196	)		599
Net cash provided by/(used in) investing activities		166,468			(1,249,670	)
Cash Flows From Financing Activities:
Repayments of borrowings, net		(62,810	)		(257,197	)
(Repayments of)/proceeds from Federal Home Loan Bank advances, net		(290,000	)		309,050
Payment of contingent consideration		(6,925	)		(11,909	)
Increase in securities sold under agreements to repurchase		5,189			261,780
(Decrease)/increase in bank deposits, net		(1,026,967	)		590,000
Increase in securities loaned		124,707			471,367
Tax payments related to shares withheld for stock-based compensation plans		(30,425	)		(39,815	)
Proceeds from preferred stock issuance, net		154,988			—
Proceeds from non-controlling interests		26,800			—
Proceeds from stock option exercises		—			2,278
Repurchase of common stock		(180,434	)		(62,514	)
Cash dividends on preferred stock		(12,476	)		(7,031	)
Cash dividends paid to common stock and equity-award holders		(31,697	)		(26,023	)
Other		(2,379	)		—
Net cash (used in)/provided by financing activities		(1,332,429	)		1,229,986
Effect of exchange rate changes on cash		(5,198	)		(3,429	)
Decrease in cash, cash equivalents, and cash segregated for regulatory purposes		(1,137,854	)		(71,198	)
Cash, cash equivalents, and cash segregated for regulatory purposes at beginning of period		2,069,374			787,085
Cash, cash equivalents, and cash segregated for regulatory purposes at end of period	$	931,520		$	715,887
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds	$	110,907		$	27,280
Cash paid for interest		149,984			111,832
Noncash financing activities:
Unit grants, net of forfeitures		128,539			119,051
Issuance of common stock for acquisitions		—			110,671

The following presents cash, cash equivalents, and cash restricted for regulatory purposes for the periods presented ($ in thousands):
	September 30, 2019		December 31, 2018
Cash and cash equivalents	$	868,866	$	1,936,560
Cash segregated for regulatory purposes		62,654		132,814
Total cash, cash equivalents, and cash segregated for regulatory purposes	$	931,520	$	2,069,374

See accompanying Notes to Consolidated Financial Statements.

STIFEL FINANCIAL CORP.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – Nature of Operations, Basis of Presentation, and Summary of Significant Accounting Policies

Nature of Operations

Stifel Financial Corp. (the “Company”), through its wholly owned subsidiaries, is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. We have offices throughout the United States and Europe. Our major geographic area of concentration is throughout the United States, with a growing presence in the United Kingdom and Europe. Our company’s principal customers are individual investors, corporations, municipalities, and institutions.

On January 2, 2019, the Company completed the acquisition of First Empire Holding Corp. (“First Empire”) and its subsidiaries, including First Empire Securities, Inc., an institutional broker-dealer specializing in the fixed income markets.

On July 1, 2019, the Company completed the acquisition of Mooreland Partners (“Mooreland”), an independent M&A and private capital advisory firm serving the global technology industry.

On September 3, 2019, the Company completed the acquisition of B&F Capital Markets, Inc. (“B&F”), a privately held firm focused on providing regional and community banks throughout the United States with interest rate derivative programs through a combination of experienced professionals and proprietary software.

On September 27, 2019, the Company completed the acquisition of certain assets of George K. Baum & Company (“GKB”), a privately held investment-banking firm focused on public finance and taxable fixed income sales and trading.

See Note 8 in the notes to consolidated financial statements for more details on our acquisitions.

Pro forma information is not presented, because these acquisition are not considered to be material, as defined by the SEC. The results of operations of First Empire, Mooreland, B&F, and GKB have been included in our results prospectively from the respective dates of acquisition.

Basis of Presentation

The consolidated financial statements include Stifel Financial Corp. and its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated (“Stifel”), Keefe, Bruyette & Woods, Inc., and Stifel Bancorp, Inc. (“Stifel Bancorp”). Unless otherwise indicated, the terms “we,” “us,” “our,” or “our company” in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

We have prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles. In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise noted) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2018 on file with the SEC.

Certain amounts from prior periods have been reclassified to conform to the current period’s presentation. The effect of these reclassifications on our company’s previously reported consolidated financial statements was not material.

Consolidation Policies

The consolidated financial statements include the accounts of Stifel Financial Corp. and its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. For consolidated subsidiaries that are less than wholly owned, the third-party holdings of equity interests are referred to as non-controlling interests. The portion of shareholders’ equity that is attributable to non-controlling interests for such subsidiaries is presented as non-controlling interests, a component of total equity, in the consolidated statements of financial condition.

Our non-controlling interest represents a 27.5% third-party ownership of North Shore Aviation Holdings LLC (“North Shore”), a consolidated subsidiary of the Company that, through its subsidiary, owns airplane engines.

We have investments or interests in other entities for which we must evaluate whether to consolidate by determining whether we have a controlling financial interest or are considered to be the primary beneficiary. Under our current consolidation policy, which complies with the provisions of ASC 810 as amended by ASU 2015-02, we consolidate those entities where we have the power to direct the

activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the rights to receive benefits from the entity that could potentially be significant to the entity.

We determine whether we are the primary beneficiary of a variable interest entity (“VIE”) by performing an analysis of the VIE’s control structure, expected benefits and losses, and expected residual returns. This analysis includes a review of, among other factors, the VIE’s capital structure, contractual terms, which interests create or absorb benefits or losses, variability, related party relationships, and the design of the VIE. We reassess our evaluation of whether an entity is a VIE when certain reconsideration events occur. We reassess our determination of whether we are the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances. See Note 25 for additional information on VIEs.

Summary of Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, see Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018.

During the nine months ended September 30, 2019, other than the following, there were no significant changes made to the Company’s significant accounting policies. The accounting policy changes are attributable to the adoption of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (the “new lease standard” or “ASU 2016-02”) on January 1, 2019. These lease policy updates are applied prospectively in our consolidated financial statements from January 1, 2019. Reported financial information for the historical comparable period was not revised and continues to be reported under the accounting standards in effect during the historical periods.

Operating Leases

Our company enters into operating leases for real estate, office equipment and other assets, substantially all of which are used in connection with its operations. We adopted ASU 2016-02 on January 1, 2019, which required our company to recognize, for leases longer than one year, a right-of-use asset representing the right to use the underlying asset for the lease term, and a lease liability representing the liability to make payments. The lease term is generally determined based on the contractual maturity of the lease. For leases where our company has the option to terminate or extend the lease, an assessment of the likelihood of exercising the option is incorporated into the determination of the lease term. Such assessment is initially performed at the inception of the lease and is updated if events occur that impact the original assessment.

An operating lease right-of-use asset is initially determined based on the operating lease liability, adjusted for initial direct costs, lease incentives and amounts paid at or prior to lease commencement. This amount is then amortized over the lease term. See Note 17 for information about operating leases.

For leases where our company ceased using the space and management has concluded that it will not derive any future economic benefits, we record an impairment of right-of-use assets.

NOTE 2 – New Accounting Pronouncements

Recently Adopted Accounting Guidance

Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The objective of this guidance is to improve the effectiveness of disclosure requirements on fair value measurement by eliminating certain disclosure requirements for fair value measurements for all entities, requiring public entities to disclose certain new information and modifying some disclosure requirements. The accounting update is effective for the fiscal year beginning after December 15, 2019 (January 1, 2020 for our company) and early adoption is permitted. We early adopted the guidance in the update on January 1, 2019. The adoption of the accounting update did not have a material impact on our consolidated financial statements. See Note 4 for further information.

Derivatives and Hedging

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), which amends the hedge accounting recognition and presentation requirements. The accounting update improves the transparency and understandability of information conveyed to financial statement users by better aligning companies’ hedging relationship to their existing risk management strategies, simplifies the application of hedge accounting and increases transparency regarding the scope and results of hedging program. The accounting update is effective for the fiscal year beginning after December 15, 2018 (January 1, 2019 for our company). The adoption of the accounting update did not have a material impact on our consolidated financial statements. See Note 12 for further information.

In April 2019, the FASB issued ASU No. 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments" which clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, recognition and measurement.

The accounting update clarifies that the reclassification of a debt security from held-to-maturity to available-for-sale under the transition guidance in ASU 2017-12 would not (1) call into question the classification of other held-to-maturity securities, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. The accounting update is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for our company) and early adoption is permitted. We early adopted the provisions of the accounting update related to Topic 815 on August 1, 2019. As a result of the adoption of the accounting update, we made a one-time decision to transfer a portion of our held-to-maturity securities to available-for-sale. The adoption of the accounting guidance had no other impact on our consolidated financial statements. See Note 6 for further information.

Callable Debt Securities

In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” which shortens the amortization period for the premium on certain callable debt securities to the earliest call date. The amendments are applicable to any purchased individual debt security with an explicit and non-contingent call feature that is callable at a fixed price on a preset date. The accounting update is effective for fiscal years beginning after December 15, 2018 (January 1, 2019 for our company) under a modified retrospective approach. The change was applied prospectively from January 1, 2019 and there is no impact to our previously presented results. The adoption of the accounting update resulted in a reduction of beginning retained earnings of $4.4 million after-tax as a cumulative effect of adoption of an accounting change.

Leases

In February 2016, the FASB issued ASU 2016-02 that requires for leases longer than one year, a lessee recognize in the statements of financial condition a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the liability to make lease payments. The accounting update also requires that for finance leases, a lessee recognize interest expense on the lease liability, separately from the amortization of the right-of-use asset in the statements of earnings, while for operating leases, such amounts should be recognized as a combined expense. In addition, this accounting update requires expanded disclosures about the nature and terms of lease agreements.

This change was applied prospectively from January 1, 2019 and there is no impact on our previously presented results. Upon adoption, in accordance with the new lease standard, we elected to not reassess the lease classification or initial direct costs of existing leases, and to not reassess whether existing contracts contain a lease. In addition, we have elected to account for each contract’s lease and non-lease components as a single lease component. The adoption of the new lease standard resulted in a reduction of beginning retained earnings of $6.8 million after-tax as a cumulative effect of adoption of an accounting change. Upon adoption, the company recorded a gross up of approximately $670 million on its consolidated statements of financial condition to recognize the right-of-use assets, included in fixed assets, net and lease liabilities, included in accounts payable and accrued expenses.

Recently Issued Accounting Guidance

Goodwill Impairment Testing

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under the accounting update, the annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The accounting update is effective for annual or any interim impairment tests in fiscal years beginning after December 15, 2019 (January 1, 2020 for our company) and early adoption is permitted. We are currently evaluating the impact of the accounting update, but the adoption is not expected to have a material impact on our consolidated financial statements.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments − Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This accounting update impacts the impairment model for certain financial assets measured at amortized cost by requiring a current expected credit loss (“CECL”) methodology to estimate expected credit losses over the entire life of the financial asset, recorded at inception or purchase. CECL will replace the loss model currently applicable to bank loans, held-to-maturity securities, and other receivables carried at amortized cost.

The accounting update also eliminates the concept of other-than-temporary impairment for available-for-sale securities. Impairments on available-for-sale securities will be required to be recognized in earnings through an allowance, when the fair value is less than amortized cost and a credit loss exists or the securities are expected to be sold before recovery of amortized cost. Under the accounting

update, there may be an ability to determine there are no expected credit losses in certain circumstances, e.g., based on collateral arrangements for lending and financing transactions or based on the credit quality of the borrower or issuer. Expected credit losses, including losses on off-balance-sheet exposures, such as lending commitments, will be measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount. Overall, the amendments in this accounting update are expected to accelerate the recognition of credit losses for portfolios where CECL models will be applied.

The accounting update is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for our company) under a modified retrospective approach with early adoption permitted.

We have substantially completed development of credit loss models for significant loan portfolios and are in the process of testing these models and validating data inputs, while continuing to develop the policies, systems and controls that will be required to implement CECL. The adoption of the accounting update is not expected to have a material impact on our consolidated financial statements. Ultimately, the extent of the impact of adoption of this accounting update on our company’s consolidated financial statements may vary and will depend on, among other things, the economic environment, the completion of our company’s models, policies and other management judgments, and the size and type of loan portfolios held by our company on the date of adoption.

The accounting update provides guidance on how companies will estimate expected credit losses by incorporating (1) expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) clarifying that contractual extensions or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The accounting update is effective for fiscal years beginning after December 15, 2019 (January 1, 2020 for our company) and early adoption is permitted. The adoption of the accounting update is not expected to have a material impact on our consolidated financial statements.

In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief,” which allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019 (January 1, 2020 for our company). The adoption of the accounting update is not expected to have a material impact on our consolidated financial statements.

NOTE 3 – Receivables From and Payables to Brokers, Dealers, and Clearing Organizations

Amounts receivable from brokers, dealers, and clearing organizations at September 30, 2019 and December 31, 2018, included (in thousands):

	September 30, 2019		December 31, 2018
Receivables from clearing organizations	$	350,730	$	320,277
Deposits paid for securities borrowed		214,100		109,795
Securities failed to deliver		107,727		85,502
	$	672,557	$	515,574

Amounts payable to brokers, dealers, and clearing organizations at September 30, 2019 and December 31, 2018, included (in thousands):

	September 30, 2019		December 31, 2018
Deposits received from securities loaned	$	516,941	$	392,163
Securities failed to receive		76,774		27,975
Payable to clearing organizations		20,073		12,161
	$	613,788	$	432,299

Deposits paid for securities borrowed approximate the market value of the securities. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received on settlement date.

NOTE 4 – Fair Value Measurements

We measure certain financial assets and liabilities at fair value on a recurring basis, including financial instruments owned, available-for-sale securities, investments, financial instruments sold, but not yet purchased, and derivatives.

We generally utilize third-party pricing services to value Level 1 and Level 2 available-for-sale investment securities, as well as certain derivatives designated as cash flow hedges. We review the methodologies and assumptions used by the third-party pricing services and evaluate the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data. We may occasionally adjust certain values provided by the third-party pricing service when we believe, as the result of our review, that the adjusted price most appropriately reflects the fair value of the particular security.

Following are descriptions of the valuation methodologies and key inputs used to measure financial assets and liabilities recorded at fair value. The descriptions include an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.

Financial Instruments Owned and Available-For-Sale Securities

When available, the fair value of financial instruments is based on quoted prices in active markets and reported in Level 1. Level 1 financial instruments include highly liquid instruments with quoted prices, such as equity securities listed in active markets, corporate fixed income securities, U.S. government securities, and U.S. government agency securities.

If quoted prices are not available for identical instruments, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs, such as the present value of estimated cash flows, and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 2 financial instruments include U.S. government agency securities, mortgage-backed securities, corporate fixed income and equity securities infrequently traded, state and municipal securities, sovereign debt, and asset-backed securities, which primarily include collateralized loan obligations.

We have identified Level 3 financial instruments to include certain asset-backed securities and loans with unobservable pricing inputs. Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Investments

Investments carried at fair value primarily include corporate equity securities, auction-rate securities (“ARS”), and private company investments.

Corporate equity securities are primarily valued based on quoted prices in active markets and reported in Level 1.

ARS are primarily valued based upon our expectations of issuer redemptions and using internal discounted cash flow models that utilize unobservable inputs. ARS are primarily reported as Level 3 assets.

Direct investments in private companies may be valued using the market approach and were valued based on an assessment of each underlying investment, incorporating evaluation of additional significant third-party financing, changes in valuations of comparable peer companies, the business environment of the companies, market indices, assumptions relating to appropriate risk adjustments for nonperformance, and legal restrictions on disposition, among other factors. The fair value derived from the methods used are evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples. For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation could result in a significantly higher (lower) fair value measurement.

Investments in Funds That Are Measured at Net Asset Value Per Share

The Company’s investments in funds measured at NAV include partnership interests, mutual funds, private equity funds, and money market funds. Private equity funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed investments. The private equity funds are primarily closed-end

funds in which the Company’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed.

The general and limited partnership interests in investment partnerships were primarily valued based upon NAVs received from third-party fund managers. The various partnerships are investment companies, which record their underlying investments at fair value based on fair value policies established by management of the underlying fund. Fair value policies at the underlying fund generally require the funds to utilize pricing/valuation information, including independent appraisals, from third-party sources. However, in some instances, current valuation information for illiquid securities or securities in markets that are not active may not be available from any third-party source or fund management may conclude that the valuations that are available from third-party sources are not reliable. In these instances, fund management may perform model-based analytical valuations that may be used as an input to value these investments.

The tables below present the fair value of our investments in, and unfunded commitments to, funds that are measured at NAV (in thousands):

	September 30, 2019
	Fair value of investments		Unfunded commitments
Money market funds	$	28,047	$	—
Mutual funds		7,315		—
Private equity funds		2,508		1,477
Partnership interests		3,458		952
Total	$	41,328	$	2,429

	December 31, 2018
	Fair value of investments		Unfunded commitments
Money market funds	$	19,719	$	—
Mutual funds		9,122		—
Private equity funds		3,461		1,480
Partnership interests		3,976		1,024
Total	$	36,278	$	2,504

Financial Instruments Sold, But Not Yet Purchased

Financial instruments sold, but not purchased, recorded at fair value based on quoted prices in active markets and other observable market data include highly liquid instruments with quoted prices, such as U.S. government securities, equity and fixed income securities listed in active markets, which are reported as Level 1.

If quoted prices are not available, fair values are obtained from pricing services, broker quotes, or other model-based valuation techniques with observable inputs, such as the present value of estimated cash flows, and reported as Level 2. The nature of these financial instruments include instruments for which quoted prices are available but traded less frequently, instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 2 financial instruments include U.S. government agency securities, agency mortgage-backed securities not actively traded, corporate fixed income, and sovereign debt securities.

Derivatives

Derivatives are valued using quoted market prices for identical instruments when available or pricing models based on the net present value of estimated future cash flows. The valuation models used require market observable inputs, including contractual terms, market prices, yield curves, credit curves, and measures of volatility. We manage credit risk for our derivative positions on a counterparty-by-counterparty basis and calculate credit valuation adjustments, included in the fair value of these instruments, on the basis of our relationships at the counterparty portfolio/master netting agreement level. These credit valuation adjustments are determined by applying a credit spread for the counterparty to the total expected exposure of the derivative after considering collateral and other master netting arrangements. We have classified our interest rate swaps as Level 2.

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2019, are presented below (in thousands):

	September 30, 2019
	Total		Level 1		Level 2		Level 3
Financial instruments owned:
U.S. government securities	$	24,034	$	24,034	$	—	$	—
U.S. government agency securities		112,481		—		112,481		—
Mortgage-backed securities:
Agency		457,110		—		457,110		—
Non-agency		10,205		—		10,205		—
Asset-backed securities		36,157		—		35,982		175
Corporate securities:
Fixed income securities		333,808		4,364		329,444		—
Equity securities		77,649		77,186		463		—
Sovereign debt		1,977		—		1,977		—
State and municipal securities		118,671		—		118,671		—
Loans		17,800		—		—		17,800
Total financial instruments owned		1,189,892		105,584		1,066,333		17,975
Available-for-sale securities:
U.S. government agency securities		4,610		100		4,510		—
State and municipal securities		31,510		—		31,510		—
Mortgage-backed securities:
Agency		887,760		—		887,760		—
Commercial		114,498		—		114,498		—
Non-agency		10,511		—		10,511		—
Corporate fixed income securities		674,878		—		674,878		—
Asset-backed securities		1,725,034		—		1,725,034		—
Total available-for-sale securities		3,448,801		100		3,448,701		—
Investments:
Corporate equity securities		36,603		35,543		—		1,060
Auction rate securities:
Equity securities		13,664		—		—		13,664
Municipal securities		654		—		470		184
Other		9,965		8,847		265		853
Investments in funds and partnerships measured at NAV		13,281
Total investments		74,167		44,390		735		15,761
Cash equivalents measured at NAV		28,047
Derivative contracts ⁽¹⁾		1,416		—		1,416		—
	$	4,742,323	$	150,074	$	4,517,185	$	33,736

⁽¹⁾	Included in other assets in the consolidated statements of financial condition.

	September 30, 2019
	Total		Level 1		Level 2		Level 3
Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	421,418	$	421,418	$	—	$	—
Agency mortgage-backed securities		157,903		—		157,903		—
Corporate securities:
Fixed income securities		238,245		119		238,126		—
Equity securities		78,764		78,764		—		—
Sovereign debt		9,467		—		9,467		—
Total financial instruments sold, but not yet purchased	$	905,797	$	500,301	$	405,496	$	—

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2018, are presented below (in thousands):

	December 31, 2018
	Total		Level 1		Level 2		Level 3
Financial instruments owned:
U.S. government securities	$	42,121	$	42,121	$	—	$	—
U.S. government agency securities		72,532		—		72,532		—
Mortgage-backed securities:
Agency		564,111		—		564,111		—
Non-agency		25,727		—		25,726		1
Asset-backed securities		25,905		—		25,730		175
Corporate securities:
Fixed income securities		310,457		1,100		309,357		—
Equity securities		57,911		57,125		786		—
Sovereign debt		14,063		—		14,063		—
State and municipal securities		154,622		—		154,622		—
Total financial instruments owned		1,267,449		100,346		1,166,927		176
Available-for-sale securities:
U.S. government agency securities		5,215		417		4,798		—
State and municipal securities		68,226		—		68,226		—
Mortgage-backed securities:
Agency		230,408		—		230,408		—
Commercial		69,715		—		69,715		—
Non-agency		1,219		—		1,219		—
Corporate fixed income securities		931,604		—		931,604		—
Asset-backed securities		1,764,060		—		1,764,060		—
Total available-for-sale securities		3,070,447		417		3,070,030		—
Investments:
Corporate equity securities		33,046		31,670		1,376		—
Auction rate securities:
Equity securities		16,632		—		—		16,632
Municipal securities		704		—		—		704
Other		1,041		—		184		857
Investments in funds and partnerships measured at NAV		16,559
Total investments		67,982		31,670		1,560		18,193
Cash equivalents measured at NAV		19,719
Derivative contracts ⁽¹⁾		7,683		—		7,683		—
	$	4,433,280	$	132,433	$	4,246,200	$	18,369

⁽¹⁾	Included in other assets in the consolidated statements of financial condition.

	December 31, 2018
	Total		Level 1		Level 2		Level 3
Liabilities:
Financial instruments sold, but not yet purchased:
U.S. government securities	$	534,817	$	534,817	$	—	$	—
U.S. government agency securities		32,755		—		32,755		—
Agency mortgage-backed securities		123,456		—		123,456		—
Corporate securities:
Fixed income securities		208,725		1,289		207,436		—
Equity securities		36,117		35,398		719		—
Sovereign debt		11,429		—		11,429		—
State and municipal securities		7		—		7		—
Total financial instruments sold, but not yet purchased	$	947,306	$	571,504	$	375,802	$	—

The following table summarizes the changes in fair value associated with Level 3 financial instruments during the three months ended September 30, 2019 (in thousands):

	Three Months Ended September 30, 2019
	Financial instruments owned				Investments
	Asset-Backed Securities		Loans		Corporate Equity Securities		Auction Rate Securities – Equity			Auction Rate Securities – Municipal		Other
Balance at June 30, 2019	$	175	$	—	$	—	$	16,732		$	184	$	853
Unrealized gains/(losses):
Included in changes in net assets ⁽¹⁾		—		—		—		(418	)		—		—
Realized gains/(losses) ⁽¹⁾		—		—		—		—			—		—
Purchases		—		17,335		—		—			—		—
Sales		—		—		—		—			—		—
Redemptions		—		—		—		(2,650	)		—		—
Transfers:
Into Level 3		—		465		1,060		—			—		—
Out of Level 3		—		—		—		—			—		—
Net change		—		17,800		1,060		(3,068	)		—		—
Balance at September 30, 2019	$	175	$	17,800	$	1,060	$	13,664		$	184	$	853

⁽¹⁾	Realized and unrealized gains/(losses) related to financial instruments owned and investments are reported in other income in the consolidated statements of operations.

The following table summarizes the change in fair value associated with Level 3 financial instruments during the nine months ended September 30, 2019 (in thousands):

	Nine Months Ended September 30, 2019
	Financial instruments owned										Investments
	Mortgage- Backed Securities – Non-Agency			Asset-Backed Securities			Loans		Corporate Equity Securities		Auction Rate Securities – Equity			Auction Rate Securities – Municipal			Other
Balance at December 31, 2018	$	1		$	175		$	—	$	—	$	16,632		$	704		$	857
Unrealized gains/(losses):
Included in changes in net assets ⁽¹⁾		—			2			—		—		(318	)		—			—
Realized gains/(losses) ⁽¹⁾		(1	)		—			—		—		—			—			—
Purchases		—			—			17,335		—		—			—			—
Sales		—			—			—		—		—			—			—
Redemptions		—			(2	)		—		—		(2,650	)		(50	)		(4	)
Transfers:
Into Level 3		—			—			465		1,060		—			—			—
Out of Level 3		—			—			—		—		—			(470	)		—
Net change		(1	)		—			17,800		1,060		(2,968	)		(520	)		(4	)
Balance at September 30, 2019	$	—		$	175		$	17,800	$	1,060	$	13,664		$	184		$	853

⁽¹⁾	Realized and unrealized gains/(losses) related to financial instruments owned and investments are reported in other income in the consolidated statements of operations.

The results included in the tables above are only a component of the overall investment strategies of our company. The tables above do not present Level 1 or Level 2 valued assets or liabilities. The changes in unrealized gains/(losses) recorded in earnings for the three and nine months ended September 30, 2019, relating to Level 3 assets still held at September 30, 2019, were immaterial.

The fair value of certain Level 3 assets was determined using various methodologies, as appropriate, including third-party pricing vendors and broker quotes. These inputs are evaluated for reasonableness through various procedures, including due diligence reviews of third-party pricing vendors, variance analyses, consideration of current market environment, and other analytical procedures.

The fair value for our auction rate securities was determined using an income approach based on an internally developed discounted cash flow model. The discounted cash flow model utilizes two significant unobservable inputs: discount rate and workout period. Significant increases in any of these inputs in isolation would result in a significantly lower fair value. On an ongoing basis, management verifies the fair value by reviewing the appropriateness of the discounted cash flow model and its significant inputs.

Fair Value of Financial Instruments

The following reflects the fair value of financial instruments as of September 30, 2019 and December 31, 2018, whether or not recognized in the consolidated statements of financial condition at fair value (in thousands).

	September 30, 2019				December 31, 2018
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	868,866	$	868,866	$	1,936,560	$	1,936,560
Cash segregated for regulatory purposes		62,654		62,654		132,814		132,814
Securities purchased under agreements to resell		624,049		624,049		699,900		699,900
Financial instruments owned		1,189,892		1,189,892		1,267,449		1,267,449
Available-for-sale securities		3,448,801		3,448,801		3,070,447		3,070,447
Held-to-maturity securities		2,881,484		2,855,791		4,218,854		4,122,907
Bank loans		9,101,903		9,223,031		8,517,615		8,565,347
Loans held for sale		265,330		265,330		205,557		205,557
Investments		74,167		74,167		67,982		67,982
Derivative contracts ⁽¹⁾		1,416		1,416		7,683		7,683
Financial liabilities:
Securities sold under agreements to repurchase	$	564,892	$	564,892	$	535,394	$	535,394
Bank deposits		14,836,646		13,849,447		15,863,613		14,661,996
Financial instruments sold, but not yet purchased		905,797		905,797		947,306		947,306
Federal Home Loan Bank advances		250,000		250,000		540,000		540,000
Borrowings		150		150		180,655		180,655
Senior notes		1,016,751		1,068,923		1,015,973		989,790
Debentures to Stifel Financial Capital Trusts		60,000		43,570		60,000		49,747

⁽¹⁾	Included in other assets in the consolidated statements of financial condition.

The following tables present the estimated fair values of financial instruments not measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	840,819	$	840,819	$	—	$	—
Cash segregated for regulatory purposes		62,654		62,654		—		—
Securities purchased under agreements to resell		624,049		541,495		82,554		—
Held-to-maturity securities		2,855,791		—		2,690,211		165,580
Bank loans		9,223,031		—		9,223,031		—
Loans held for sale		265,330		—		265,330		—
Financial liabilities:
Securities sold under agreements to repurchase	$	564,892	$	19,175	$	545,717	$	—
Bank deposits		13,849,447		—		13,849,447		—
Federal Home Loan Bank advances		250,000		250,000		—		—
Borrowings		150		150		—		—
Senior notes		1,068,923		1,068,923		—		—
Debentures to Stifel Financial Capital Trusts		43,570		—		—		43,570

	December 31, 2018
	Total		Level 1		Level 2		Level 3
Financial assets:
Cash	$	1,916,841	$	1,916,841	$	—	$	—
Cash segregated for regulatory purposes		132,814		132,814		—		—
Securities purchased under agreements to resell		699,900		645,632		54,268		—
Held-to-maturity securities		4,122,907		—		3,960,099		162,808
Bank loans		8,565,347		—		8,565,347		—
Loans held for sale		205,557		—		205,557		—
Financial liabilities:
Securities sold under agreements to repurchase	$	535,394	$	87,273	$	448,121	$	—
Bank deposits		14,661,996		—		14,661,996		—
Federal Home Loan Bank advances		540,000		540,000		—		—
Borrowings		180,655		180,655		—		—
Senior notes		989,790		989,790		—		—
Debentures to Stifel Financial Capital Trusts		49,747		—		—		49,747

The following, as supplemented by the discussion above, describes the valuation techniques used in estimating the fair value of our financial instruments as of September 30, 2019 and December 31, 2018.

Financial Assets

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2019 and December 31, 2018 approximate fair value due to their short-term nature.

Held-to-Maturity Securities

Securities held to maturity are recorded at amortized cost based on our company’s positive intent and ability to hold these securities to maturity. Securities held to maturity include agency mortgage-backed securities, asset-backed securities, consisting of collateralized loan obligation securities and corporate fixed income securities. The estimated fair value, included in the above table, is determined using several factors; however, primary weight is given to discounted cash flow modeling techniques that incorporated an estimated discount rate based upon recent observable debt security issuances with similar characteristics.

Loans Held for Sale

Loans held for sale consist of fixed-rate and adjustable-rate residential real estate mortgage loans intended for sale. Loans held for sale are stated at lower of cost or market value. Market value is determined based on prevailing market prices for loans with similar characteristics or on sale contract prices.

Bank Loans

The fair values of mortgage loans and commercial loans were estimated using a discounted cash flow method, a form of the income approach. Discount rates were determined considering rates at which similar portfolios of loans, with similar remaining maturities, would be made and considering liquidity spreads applicable to each loan portfolio based on the secondary market.

Financial Liabilities

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase are collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The carrying values at September 30, 2019 and December 31, 2018 approximate fair value due to the short-term nature.

Bank Deposits

The fair value of interest-bearing deposits, including certificates of deposits, demand deposits, savings, and checking accounts, was calculated by discounting the future cash flows using discount rates based on the replacement cost of funding of similar structures and terms.

Borrowings

The carrying amount of borrowings approximates fair value due to the relative short-term nature of such borrowings. In addition, Stifel Bancorp’s FHLB advances reflect terms that approximate current market rates for similar borrowings.

Senior Notes

The fair value of our senior notes is estimated based upon quoted market prices.

Debentures to Stifel Financial Capital Trusts

The fair value of our trust preferred securities is based on the discounted value of contractual cash flows. We have assumed a discount rate based on similar type debt instruments.

These fair value disclosures represent our best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.

NOTE 5 – Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased

The components of financial instruments owned and financial instruments sold, but not yet purchased, at September 30, 2019 and December 31, 2018 are as follows (in thousands):

	September 30, 2019		December 31, 2018
Financial instruments owned:
U.S. government securities	$	24,034	$	42,121
U.S. government agency securities		112,481		72,532
Mortgage-backed securities:
Agency		457,110		564,111
Non-agency		10,205		25,727
Asset-backed securities		36,157		25,905
Corporate securities:
Fixed income securities		333,808		310,457
Equity securities		77,649		57,911
Sovereign debt		1,977		14,063
State and municipal securities		118,671		154,622
Loans		17,800		—
	$	1,189,892	$	1,267,449
Financial instruments sold, but not yet purchased:
U.S. government securities	$	421,418	$	534,817
U.S. government agency securities		—		32,755
Agency mortgage-backed securities		157,903		123,456
Corporate securities:
Fixed income securities		238,245		208,725
Equity securities		78,764		36,117
Sovereign debt		9,467		11,429
State and municipal securities		—		7
	$	905,797	$	947,306

At September 30, 2019 and December 31, 2018, financial instruments owned in the amount of $586.9 million and $669.0 million, respectively, were pledged as collateral for our repurchase agreements and short-term borrowings. Our financial instruments owned are presented on a trade-date basis in the consolidated statements of financial condition.

Financial instruments sold, but not yet purchased, represent obligations of our company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices in future periods. We are obligated to acquire the securities sold short at prevailing market prices in future periods, which may exceed the amount reflected in the consolidated statements of financial condition.

NOTE 6 – Available-for-Sale and Held-to-Maturity Securities

The following tables provide a summary of the amortized cost and fair values of the available-for-sale securities and held-to-maturity securities at September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	4,565	$	48	$	(3	)	$	4,610
State and municipal securities		31,366		144		—			31,510
Mortgage-backed securities:
Agency		892,207		2,604		(7,051	)		887,760
Commercial		114,052		627		(181	)		114,498
Non-agency		10,468		70		(27	)		10,511
Corporate fixed income securities		664,800		10,183		(105	)		674,878
Asset-backed securities		1,733,203		601		(8,770	)		1,725,034
	$	3,450,661	$	14,277	$	(16,137	)	$	3,448,801
Held-to-maturity securities ⁽²⁾
Asset-backed securities	$	2,881,484	$	7,385	$	(33,078	)	$	2,855,791

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Estimated Fair Value
Available-for-sale securities
U.S. government agency securities	$	5,237	$	13	$	(35	)	$	5,215
State and municipal securities		72,487		—		(4,261	)		68,226
Mortgage-backed securities:
Agency		234,292		88		(3,972	)		230,408
Commercial		74,411		4		(4,700	)		69,715
Non-agency		1,245		—		(26	)		1,219
Corporate fixed income securities		958,406		—		(26,802	)		931,604
Asset-backed securities		1,779,496		672		(16,108	)		1,764,060
	$	3,125,574	$	777	$	(55,904	)	$	3,070,447
Held-to-maturity securities ⁽²⁾
Mortgage-backed securities:
Agency	$	1,198,442	$	1,307	$	(31,689	)	$	1,168,060
Commercial		51,524		185		—			51,709
Asset-backed securities		2,968,888		4,585		(70,335	)		2,903,138
	$	4,218,854	$	6,077	$	(102,024	)	$	4,122,907

⁽¹⁾	Unrealized gains/(losses) related to available-for-sale securities are reported in accumulated other comprehensive loss.

⁽²⁾	Held-to-maturity securities are carried in the consolidated statements of financial condition at amortized cost, and the changes in the value of these securities, other than impairment charges, are not reported on the consolidated financial statements.

For the three and nine months ended September 30, 2019, we received proceeds of $486.5 million and $641.8 million, respectively, from the sale of available-for-sale securities, which resulted in an immaterial realized gain for the third quarter of 2019 and a realized loss of $0.3 million for the nine months ended September 30, 2019. For the three and nine months ended September 30, 2018, we received proceeds of $55.4 million from the sale of available-for-sale securities, which resulted in a realized loss of $0.4 million.

During the third quarter of 2019, the Company transferred certain mortgage-backed securities from the held-to-maturity category to available-for sale. As of August 1, 2019, the securities reclassified had a fair value of $1.1 billion and resulted in a net of tax increase to other comprehensive income of $17.9 million for the three and nine months ended September 30, 2019.

During the three months ended September 30, 2019 and September 30, 2018, unrealized losses, net of deferred taxes, of $1.6 million and $3.1 million were recorded in accumulated other comprehensive loss in the consolidated statements of financial condition. During the nine months ended September 30, 2019 and September 30, 2018, unrealized gains, net of deferred taxes, of $40.5 million and unrealized losses, net of deferred taxes, of $28.1 million were recorded in accumulated other comprehensive loss in the consolidated statements of financial condition.

The table below summarizes the amortized cost and fair values of our securities by contractual maturity at September 30, 2019 and December 31, 2018. Expected maturities may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2019				December 31, 2018
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Available-for-sale securities
Within one year	$	1,899	$	1,897	$	5,872	$	5,855
After one year through three years		226,534		226,822		234,101		227,951
After three years through five years		413,589		419,809		407,507		397,372
After five years through ten years		412,619		415,878		469,566		458,442
After ten years		2,396,020		2,384,395		2,008,528		1,980,827
	$	3,450,661	$	3,448,801	$	3,125,574	$	3,070,447
Held-to-maturity securities
Within one year	$	—	$	—	$	—	$	—
After one year through three years		—		—		51,524		51,709
After three years through five years		—		—		—		—
After five years through ten years		495,850		494,530		536,717		530,616
After ten years		2,385,634		2,361,261		3,630,613		3,540,582
	$	2,881,484	$	2,855,791	$	4,218,854	$	4,122,907

The maturities of our available-for-sale (fair value) and held-to-maturity (amortized cost) securities at September 30, 2019, are as follows (in thousands):

	Within 1 Year		1-5 Years		5-10 Years		After 10 Years		Total
Available-for-sale securities ⁽¹⁾
U.S. government agency securities	$	1,597	$	3,013	$	—	$	—	$	4,610
State and municipal securities		—		—		5,854		25,656		31,510
Mortgage-backed securities:
Agency		—		950		26,463		860,347		887,760
Commercial		—		36,091		—		78,407		114,498
Non-agency		—		9,483		—		1,028		10,511
Corporate fixed income securities		300		597,094		77,484		—		674,878
Asset-backed securities		—		—		306,077		1,418,957		1,725,034
	$	1,897	$	646,631	$	415,878	$	2,384,395	$	3,448,801
Held-to-maturity securities
Asset-backed securities	$	—	$	—	$	495,850	$	2,385,634	$	2,881,484

⁽¹⁾	Due to the immaterial amount of income recognized on tax-exempt securities, yields were not calculated on a tax-equivalent basis.

At September 30, 2019 and December 31, 2018, securities of $675.5 million and $1.9 billion, respectively, were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. At September 30, 2019 and December 31, 2018, securities of $946.4 million and $1.6 billion, respectively, were pledged with the Federal Reserve discount window.

The following table shows the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses, aggregated by investment category and length of time the individual investment securities have been in continuous unrealized loss positions, at September 30, 2019 (in thousands):

	Less than 12 months					12 months or more					Total
	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities
U.S. government securities	$	—		$	—	$	(3	)	$	1,746	$	(3	)	$	1,746
Mortgage-backed securities:
Agency		(4,945	)		485,290	$	(2,106	)	$	182,398		(7,051	)		667,688
Commercial		(162	)		36,263		(19	)		2,216		(181	)		38,479
Non-agency		—			—		(27	)		1,027		(27	)		1,027
Corporate fixed income securities		(19	)		44,242		(86	)		57,443		(105	)		101,685
Asset-backed securities		(5,241	)		702,155		(3,529	)		239,386		(8,770	)		941,541
	$	(10,367	)	$	1,267,950	$	(5,770	)	$	484,216	$	(16,137	)	$	1,752,166
Held-to-maturity securities
Asset-backed securities	$	(3,899	)	$	572,590	$	(29,179	)	$	1,515,354	$	(33,078	)	$	2,087,944

At September 30, 2019, the amortized cost of 137 securities classified as available for sale exceeded their fair value by $16.1 million, of which $5.8 million related to investment securities that had been in a loss position for 12 months or longer. The total fair value of these investments at September 30, 2019, was $1.8 billion, which was 50.8% of our available-for-sale portfolio.

At September 30, 2019, the carrying value of 108 securities held to maturity exceeded their fair value by $33.1 million, of which $29.2 million related to securities held to maturity that have been in a loss position for 12 months or longer. As discussed in more detail below, we conduct periodic reviews of all securities with unrealized losses to assess whether the impairment is other-than-temporary.

Other-Than-Temporary Impairment

We evaluate all securities in an unrealized loss position quarterly to assess whether the impairment is other-than-temporary. Our other-than-temporary impairment (“OTTI”) assessment is a subjective process requiring the use of judgments and assumptions. There was no credit-related OTTI recognized during the three and nine months ended September 30, 2019 and 2018.

We believe the gross unrealized losses of $49.2 million related to our investment portfolio, as of September 30, 2019, are attributable to issuer-specific credit spreads and changes in market interest rates and asset spreads. We, therefore, do not expect to incur any credit losses related to these securities. In addition, we have no intent to sell these securities with unrealized losses, and it is not more likely than not that we will be required to sell these securities prior to recovery of the amortized cost. Accordingly, we have concluded that the impairment on these securities is not other-than-temporary.

NOTE 7 – Bank Loans

Our loan portfolio consists primarily of the following segments:

Commercial and industrial (C&I). C&I loans primarily include commercial and industrial lending used for general corporate purposes, working capital and liquidity, and “event-driven." “Event-driven” loans support client merger, acquisition or recapitalization activities. C&I lending is structured as revolving lines of credit, letter of credit facilities, term loans and bridge loans. Risk factors considered in determining the allowance for corporate loans include the borrower’s financial strength, seniority of the loan, collateral type, leverage, volatility of collateral value, debt cushion, and covenants.

Real Estate. Real estate loans include residential real estate non-conforming loans, residential real estate conforming loans, commercial real estate, and home equity lines of credit. The allowance methodology related to real estate loans considers several factors, including, but not limited to, loan-to-value ratio, FICO score, home price index, delinquency status, credit limits, and utilization rates.

Securities-based loans. Securities-based loans allow clients to borrow money against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities or refinancing margin debt. The majority of consumer loans are structured as revolving lines of credit and letter of credit facilities and are primarily offered through Stifel’s Pledged Asset ("SPA") program. The allowance methodology for securities-based lending considers the collateral type underlying the loan, including the liquidity and trading volume of the collateral, position concentration and other borrower specific factors such as personal guarantees.

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

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

The following table presents the balance and associated percentage of each major loan category in our bank loan portfolio at September 30, 2019 and December 31, 2018 (in thousands, except percentages):

	September 30, 2019						December 31, 2018
	Balance			Percent			Balance			Percent
Commercial and industrial	$	3,315,706			36.0	%	$	3,304,234			38.5	%
Residential real estate		3,043,271			33.1			2,875,014			33.5
Securities-based loans		1,986,339			21.6			1,786,966			20.8
Commercial real estate		387,868			4.2			318,961			3.7
Construction and land		293,116			3.2			138,245			1.6
Home equity lines of credit		50,518			0.5			38,098			0.4
Other		120,814			1.4			120,129			1.5
Gross bank loans		9,197,632			100.0	%		8,581,647			100.0	%
Unamortized loan discount, net		(8,418	)					(12,155	)
Loans in process		2,450						27,984
Unamortized loan fees, net		1,599						5,972
Allowance for loan losses		(91,360	)					(85,833	)
Bank loans, net	$	9,101,903					$	8,517,615

At September 30, 2019 and December 31, 2018, Stifel Bancorp had loans outstanding to its executive officers and directors and executive officers and directors of certain affiliated entities in the amount of $26.3 million and $28.8 million, respectively.

At September 30, 2019 and December 31, 2018, we had loans held for sale of $265.3 million and $205.6 million, respectively. For the three months ended September 30, 2019 and 2018, we recognized gains of $4.5 million and $2.6 million, respectively, from the sale of originated loans, net of fees and costs. For the nine months ended September 30, 2019 and 2018, we recognized gains of $7.7 million and $7.8 million, respectively, from the sale of originated loans, net of fees and costs.

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

	Three Months Ended September 30, 2019
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	69,263	$	(1,070	)	$	(21	)	$	—	$	68,172
Residential real estate		12,042		519			—			1		12,562
Securities-based loans		2,311		(130	)		—			—		2,181
Commercial real estate		2,478		425			—			—		2,903
Construction and land		2,402		865			—			—		3,267
Home equity lines of credit		421		13			—			1		435
Other		179		38			(35	)		13		195
Qualitative		1,376		269			—			—		1,645
	$	90,472	$	929		$	(56	)	$	15	$	91,360

	Nine Months Ended September 30, 2019
	Beginning Balance		Provision			Charge-offs			Recoveries		Ending Balance
Commercial and industrial	$	68,367	$	(116	)	$	(79	)	$	—	$	68,172
Residential real estate		11,228		1,246			—			88		12,562
Securities-based loans		1,978		203			—			—		2,181
Commercial real estate		1,778		1,125			—			—		2,903
Construction and land		1,241		2,026			—			—		3,267
Home equity lines of credit		310		123			—			2		435
Other		88		156			(87	)		38		195
Qualitative		843		802			—			—		1,645
	$	85,833	$	5,565		$	(166	)	$	128	$	91,360

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at September 30, 2019 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and industrial	$	8,158	$	60,014	$	68,172	$	14,169	$	3,301,537	$	3,315,706
Residential real estate		24		12,538		12,562		1,697		3,041,574		3,043,271
Securities-based loans		—		2,181		2,181		—		1,986,339		1,986,339
Commercial real estate		—		2,903		2,903		—		387,868		387,868
Construction and land		—		3,267		3,267		—		293,116		293,116
Home equity lines of credit		—		435		435		184		50,334		50,518
Other		18		177		195		153		120,661		120,814
Qualitative		—		1,645		1,645		—		—		—
	$	8,200	$	83,160	$	91,360	$	16,203	$	9,181,429	$	9,197,632

The following tables detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2018 (in thousands).

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

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

The following table presents the recorded balances of loans and amount of allowance allocated based upon impairment method by portfolio segment at December 31, 2018 (in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial and industrial	$	8,678	$	59,689	$	68,367	$	23,677	$	3,280,557	$	3,304,234
Residential real estate		24		11,204		11,228		519		2,874,495		2,875,014
Securities-based loans		—		1,978		1,978		—		1,786,966		1,786,966
Commercial real estate		—		1,778		1,778		—		318,961		318,961
Construction and land		—		1,241		1,241		—		138,245		138,245
Home equity lines of credit		—		310		310		184		37,914		38,098
Other		1		87		88		21		120,108		120,129
Qualitative		—		843		843		—		—		—
	$	8,703	$	77,130	$	85,833	$	24,401	$	8,557,246	$	8,581,647

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

There are two components of the allowance for loan losses: the inherent allowance component and the specific allowance component.

The inherent allowance component of the allowance for loan losses is used to estimate the probable losses inherent in the loan portfolio and includes non-homogeneous loans that have not been identified as impaired and portfolios of smaller balance homogeneous loans. The Company maintains methodologies by loan product for calculating an allowance for loan losses that estimates the inherent losses in the loan portfolio. Qualitative and environmental factors such as economic and business conditions,

nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered in the calculations. The allowance for loan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probable losses inherent in the portfolio.

The specific allowance component of the allowance for loan losses is used to estimate probable losses for non-homogeneous exposures, including loans modified in a troubled debt restructuring, which have been specifically identified for impairment analysis by the Company and determined to be impaired. At September 30, 2019, we had $16.2 million of impaired loans, net of discounts, which included $0.2 million in troubled debt restructurings. The specific allowance on impaired loans at September 30, 2019 was $8.2 million. At December 31, 2018, we had $24.4 million of impaired loans, net of discounts, which included $9.1 million in troubled debt restructurings. The specific allowance on impaired loans at December 31, 2018 was $8.7 million. The gross interest income related to impaired loans, which would have been recorded, had these loans been current in accordance with their original terms, and the interest income recognized on these loans during the three and nine months ended September 30, 2019 and 2018, were insignificant to the consolidated financial statements.

The tables below present loans that were individually evaluated for impairment by portfolio segment at September 30, 2019 and December 31, 2018, including the average recorded investment balance for the year to date period presented (in thousands):

	September 30, 2019
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	14,169	$	104	$	14,065	$	14,169	$	8,158	$	22,102
Residential real estate		1,767		1,532		165		1,697		24		1,536
Home equity lines of credit		184		184		—		184		—		184
Other		303		—		153		153		18		185
Total	$	16,423	$	1,820	$	14,383	$	16,203	$	8,200	$	24,007

	December 31, 2018
	Unpaid Contractual Principal Balance		Recorded Investment with No Allowance		Recorded Investment with Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial and industrial	$	23,677	$	242	$	23,435	$	23,677	$	8,678	$	23,807
Residential real estate		544		352		167		519		24		275
Home equity lines of credit		184		184		—		184		—		184
Other		694		11		10		21		1		70
Total	$	25,099	$	789	$	23,612	$	24,401	$	8,703	$	24,336

The following tables present the aging of the recorded investment in past due loans at September 30, 2019 and December 31, 2018 by portfolio segment (in thousands):

	As of September 30, 2019
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	14,116	$	14,116	$	3,301,590	$	3,315,706
Residential real estate		3,018		1,248		4,266		3,039,005		3,043,271
Securities-based loans		—		—		—		1,986,339		1,986,339
Commercial real estate		—		—		—		387,868		387,868
Construction and land		—		—		—		293,116		293,116
Home equity lines of credit		216		—		216		50,302		50,518
Other		175		147		322		120,492		120,814
Total	$	3,409	$	15,511	$	18,920	$	9,178,712	$	9,197,632

	As of September 30, 2019*
	Non-Accrual		Restructured		Total
Commercial and industrial	$	14,116	$	—	$	14,116
Residential real estate		1,532		165		1,697
Home equity lines of credit		184		—		184
Other		153		—		153
Total	$	15,985	$	165	$	16,150

*	There were no loans past due 90 days and still accruing interest at September 30, 2019.

	As of December 31, 2018
	30 – 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current Balance		Total
Commercial and industrial	$	—	$	14,656	$	14,656	$	3,289,578	$	3,304,234
Residential real estate		6,970		377		7,347		2,867,667		2,875,014
Securities-based loans		—		—		—		1,786,966		1,786,966
Commercial real estate		—		—		—		318,961		318,961
Construction and land		—		—		—		138,245		138,245
Home equity lines of credit		33		—		33		38,065		38,098
Other		—		134		134		119,995		120,129
Total	$	7,003	$	15,167	$	22,170	$	8,559,477	$	8,581,647

	As of December 31, 2018*
	Non-Accrual		Restructured		Total
Commercial and industrial	$	14,741	$	8,936	$	23,677
Residential real estate		352		167		519
Home equity lines of credit		184		—		184
Other		21		—		21
Total	$	15,298	$	9,103	$	24,401

*	There were no loans past due 90 days and still accruing interest at December 31, 2018.

Credit quality indicators

Loans meet the definition of Pass when they are performing and do not demonstrate adverse characteristics that are likely to result in a credit loss. A loan is determined to be impaired when principal or interest becomes 90 days past due or when collection becomes uncertain. At the time a loan is determined to be impaired, the accrual of interest and amortization of deferred loan origination fees is discontinued (“non-accrual status”), and any accrued and unpaid interest income is reversed.

We closely monitor economic conditions and loan performance trends to manage and evaluate our exposure to credit risk. Trends in delinquency ratios are an indicator, among other considerations, of credit risk within our loan portfolio. The level of nonperforming assets represents another indicator of the potential for future credit losses. Accordingly, key metrics we track and use in evaluating the credit quality of our loan portfolio include delinquency and nonperforming asset rates, as well as charge-off rates and our internal risk ratings of the loan portfolio. In general, we are a secured lender. At September 30, 2019 and December 31, 2018, 98.3% and 98.4% of our loan portfolio was collateralized, respectively. Collateral is required in accordance with the normal credit evaluation process based upon the creditworthiness of the customer and the credit risk associated with the particular transaction. The Company uses the following definitions for risk ratings:

Pass. A credit exposure rated pass has a continued expectation of timely repayment, all obligations of the borrower are current, and the obligor complies with material terms and conditions of the lending agreement.

Special Mention. Extensions of credit that have potential weakness that deserve management’s close attention, and if left uncorrected may, at some future date, result in the deterioration of the repayment prospects or collateral position.

Substandard. Obligor has a well-defined weakness that jeopardizes the repayment of the debt and has a high probability of payment default with the distinct possibility that the Company will sustain some loss if noted deficiencies are not corrected.

Doubtful. Inherent weakness in the exposure makes the collection or repayment in full, based on existing facts, conditions and circumstances, highly improbable, and the amount of loss is uncertain.

Substandard loans are regularly reviewed for impairment. Doubtful loans are considered impaired. When a loan is impaired the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent.

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

	As of September 30, 2019
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	3,275,266	$	26,271	$	14,169	$	—	$	3,315,706
Residential real estate		3,041,574		—		1,697		—		3,043,271
Securities-based loans		1,986,339		—		—		—		1,986,339
Commercial real estate		387,868		—		—		—		387,868
Construction and land		293,116		—		—		—		293,116
Home equity lines of credit		50,334		—		184		—		50,518
Other		120,661		—		—		153		120,814
Total	$	9,155,158	$	26,271	$	16,050	$	153	$	9,197,632

	As of December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	3,254,698	$	34,795	$	14,741	$	—	$	3,304,234
Residential real estate		2,874,495		—		519		—		2,875,014
Securities-based loans		1,786,966		—		—		—		1,786,966
Commercial real estate		318,961		—		—		—		318,961
Construction and land		138,245		—		—		—		138,245
Home equity lines of credit		37,914		—		184		—		38,098
Other		119,912		196		—		21		120,129
Total	$	8,531,191	$	34,991	$	15,444	$	21	$	8,581,647

NOTE 8 – Goodwill and Intangible Assets

The carrying amount of goodwill and intangible assets attributable to each of our reporting segments is presented in the following table (in thousands):

	December 31, 2018		Adjustments		Write-off		September 30, 2019
Goodwill
Global Wealth Management	$	340,395	$	6,336	$	—	$	346,731
Institutional Group		694,284		117,108		—		811,392
	$	1,034,679	$	123,444	$	—	$	1,158,123

	December 31, 2018		Net Additions		Amortization			September 30, 2019
Intangible assets
Global Wealth Management	$	60,532	$	—	$	(5,527	)	$	55,005
Institutional Group		59,123		7,743		(5,433	)		61,433
	$	119,655	$	7,743	$	(10,960	)	$	116,438

The adjustments to goodwill included in our Institutional Group segment during the nine months ended September 30, 2019 are primarily attributable to the following:

On January 2, 2019, the Company completed the acquisition of First Empire. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $22.7 million of goodwill and intangible assets in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment.

On July 1, 2019, the Company completed the acquisition of Mooreland. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $37.4 million of goodwill and intangible assets in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment.

On September 3, 2019, the Company completed the acquisition of B&F. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $19.6 million of goodwill and intangible assets in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment.

On September 27, 2019, the Company completed the acquisition of certain assets of GKB. The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. We recorded $45.2 million of goodwill and intangible assets in the consolidated statement of financial condition, which has been allocated to our company’s Institutional Group segment.

The allocation of the purchase price of these acquisitions are preliminary and will be finalized upon completion of the analysis of the fair values of the net assets as of the respective acquisition dates and the identified intangible assets. The final goodwill recorded on the consolidated statement of financial condition may differ from that reflected herein as a result of future measurement period adjustments and the recording of identified intangible assets. See Note 1 in the notes to our consolidated financial statements for additional information regarding our acquisitions.

The goodwill represents the value expected from the synergies created through the operational enhancement benefits that will result from the integration of each respective business, its employees and customer base. Goodwill is expected to be deductible for federal income tax purposes.

The adjustments to goodwill included in our Global Wealth Management segment during the nine months ended September 30, 2019 are primarily attributable to the Business Bank acquisition, which closed on August 31, 2018.

Amortizable intangible assets consist of acquired customer relationships, trade name, investment banking backlog, and non-compete agreements that are amortized over their contractual or determined useful lives. Intangible assets subject to amortization as of September 30, 2019 and December 31, 2018 were as follows (in thousands):

	September 30, 2019				December 31, 2018
	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Customer relationships	$	168,110	$	72,794	$	160,745	$	65,254
Trade name		27,131		13,200		26,831		11,755
Core deposits		8,615		2,474		8,615		816
Non-compete agreements		2,714		1,794		2,603		1,452
Investment banking backlog		1,445		1,315		1,431		1,293
	$	208,015	$	91,577	$	200,225	$	80,570

Amortization expense related to intangible assets was $3.8 million and $3.0 million for the three months ended September 30, 2019 and 2018, respectively. Amortization expense related to intangible assets was $11.0 million and $8.7 million for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense is included in other operating expenses in the consolidated statements of operations.

The weighted-average remaining lives of the following intangible assets at September 30, 2019, are: customer relationships, 9.7 years; trade name, 9.0 years; core deposits, 4.4 years; and non-compete agreements, 9.3 years. We have an intangible asset that is not subject to amortization and is, therefore, not included in the table below. As of September 30, 2019, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal year
Remainder of 2019	$	3,493
2020		13,573
2021		12,718
2022		11,903
2023		11,234
Thereafter		61,399
	$	114,320

NOTE 9 – Borrowings and Federal Home Loan Bank Advances

Our short-term financing is generally obtained through short-term bank line financing on an uncommitted, secured basis, securities lending arrangements, advances from the Federal 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.

Our uncommitted secured lines of credit at September 30, 2019, totaled $935.0 million with five 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 $276.0 million during the nine months ended September 30, 2019. 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. At September 30, 2019, we had no outstanding balances on our uncommitted secured lines of credit.

The Federal Home Loan advances of $250.0 million as of September 30, 2019 are floating-rate advances. The weighted average interest rates on these advances during the three and nine months ended September 30, 2019 was 1.70% and 1.79%, respectively. The advances are secured by Stifel 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.

Our committed bank line financing at September 30, 2019, consisted of a $200.0 million revolving credit facility. The credit facility expires in March 2024. The applicable interest rate under the revolving credit facility is calculated as a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 1.75%, as defined in the revolving credit facility. At September 30, 2019, we had no advances on our revolving credit facility and were in compliance with all covenants.

Stifel, our broker-dealer subsidiary, has a 364-day Credit Agreement (“Stifel Credit Facility”) with a maturity date of June 2020 in which the lenders are a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to $250.0 million at variable rates of interest. At September 30, 2019, we had no advances on the Stifel Credit Facility and were in compliance with all covenants.

NOTE 10 – Senior Notes

The following table summarizes our senior notes as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019			December 31, 2018
4.250% senior notes, due 2024 ⁽¹⁾	$	500,000		$	500,000
3.50% senior notes, due 2020 ⁽²⁾		300,000			300,000
5.20% senior notes, due 2047 ⁽³⁾		225,000			225,000
		1,025,000			1,025,000
Debt issuance costs, net		(8,249	)		(9,027	)
Senior notes, net	$	1,016,751		$	1,015,973

⁽¹⁾

In July 2014, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 4.250% senior notes due July 2024. Interest on these senior notes is payable semi-annually in arrears. We may redeem the 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. In July 2016, we issued an additional $200.0 million in aggregate principal amount of 4.25% senior notes due 2024.

⁽²⁾

In December 2015, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 3.50% senior notes due December 2020. Interest on these senior notes is payable semi-annually in arrears. We may redeem the 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.

⁽³⁾

In October 2017, we completed the pricing of a registered underwritten public offering of $200.0 million in aggregate principal amount of 5.20% senior notes due October 2047. Interest on the senior notes is payable quarterly in arrears on January 15, April 15, July 15, and October 15. On or after October 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. On October 27, 2017, we completed the sale of an additional $25.0 million aggregate principal amount of Notes pursuant to the over-allotment option.

Our senior notes mature as follows, based upon contractual terms (in thousands):

2019	$	—
2020		300,000
2021		—
2022		—
2023		—
Thereafter		725,000
	$	1,025,000

NOTE 11 – Bank Deposits

Deposits consist of money market and savings accounts, certificates of deposit, and demand deposits. Deposits at September 30, 2019 and December 31, 2018 were as follows (in thousands):

	September 30, 2019		December 31, 2018
Money market and savings accounts	$	13,573,614	$	13,609,612
Certificates of deposit		792,515		1,763,336
Demand deposits (interest-bearing)		359,529		392,765
Demand deposits (non-interest-bearing)		110,988		97,900
	$	14,836,646	$	15,863,613

The weighted-average interest rate on deposits was 0.73% and 0.60% at September 30, 2019 and December 31, 2018, respectively.

Scheduled maturities of certificates of deposit at September 30, 2019 and December 31, 2018 were as follows (in thousands):

	September 30, 2019		December 31, 2018
Certificates of deposit, less than $100,000:
Within one year	$	5,317	$	4,858
One to three years		437		623
Three to five years		113		140
	$	5,867	$	5,621
Certificates of deposit, $100,000 and greater:
Within one year	$	706,225	$	1,535,784
One to three years		70,398		195,159
Three to five years		10,025		26,772
		786,648		1,757,715
	$	792,515	$	1,763,336

At September 30, 2019 and December 31, 2018, the amount of deposits includes related party deposits, primarily interest-bearing and time deposits of executive officers, directors, and their affiliates of $8.9 million and $6.5 million, respectively. Brokerage customers’ deposits were $13.7 billion and $15.2 billion, respectively.

NOTE 12 – Derivative Instruments and Hedging Activities

We use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps generally involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our company making fixed payments. Our policy is not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under master netting arrangements.

The following table provides the notional values and fair values of our derivative instruments designated as hedging instruments as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019
	Notional Value		Balance Sheet Location	Fair Value
Derivative Assets
Cash flow interest rate contracts	$	250,000	Other assets	$	1,416

	December 31, 2018
	Notional Value		Balance Sheet Location	Fair Value
Derivative Assets
Cash flow interest rate contracts	$	540,000	Other assets	$	7,683

Cash Flow Hedges

We have entered into interest rate swap agreements that effectively modify our exposure to interest rate risk by converting floating rate debt to a fixed rate debt. The swaps have an average remaining life of 1.3 years.

Any unrealized gains or losses related to cash flow hedging instruments are reclassified from accumulated other comprehensive loss into earnings in the same period the hedged forecasted transaction affects earnings and are recorded in interest expense on the accompanying consolidated statements of operations. The ineffective portion of the cash flow hedging instruments is recorded in other income or other operating expense.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate deposits. During the next twelve months, we estimate that $1.0 million will be reclassified as interest income.

The following table shows the effect of our company’s derivative instruments in the consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Gain/(Loss) Recognized in OCI					Gain Reclassified From OCI Into Income
	Three Months Ended September 30,					Three Months Ended September 30,
	2019		2018			2019		2018
Cash flow interest rate contracts	$	40	$	(603	)	$	604	$	1,504

	Gain/(Loss) Recognized in OCI					Gain Reclassified From OCI Into Income
	Nine Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Cash flow interest rate contracts	$	2,846	$	(5,823	)	$	2,910	$	3,262

We maintain a risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our goal is to manage sensitivity to changes in rates by hedging the maturity characteristics of variable rate affiliated deposits, thereby limiting the impact on earnings. By using derivative instruments, we are exposed to credit and market risk on those derivative positions. We manage the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Credit risk is equal to the extent of the fair value gain in a derivative if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no repayment risk. See Note 4 in the notes to our consolidated financial statements for further discussion on how we determine the fair value of our financial instruments. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Credit Risk-Related Contingency Features

We have agreements with our derivative counterparties containing provisions where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.

We have agreements with certain of our derivative counterparties that contain provisions where if our shareholders’ equity declines below a specified threshold or if we fail to maintain a specified minimum shareholders’ equity, then we could be declared in default on our derivative obligations.

Certain of our agreements with our derivative counterparties contain provisions where if a specified event or condition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

Regulatory Capital-Related Contingency Features

Certain of our derivative instruments contain provisions that require us to maintain our capital adequacy requirements. If we were to lose our status as “adequately capitalized,” we would be in violation of those provisions, and the counterparties of the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions.

Counterparty Risk

In the event of counterparty default, our economic loss may be higher than the uncollateralized exposure of our derivatives if we were not able to replace the defaulted derivatives in a timely fashion. We monitor the risk that our uncollateralized exposure to each of our counterparties for interest rate swaps will increase under certain adverse market conditions by performing periodic market stress tests. These tests evaluate the potential additional uncollateralized exposure we would have to each of these derivative counterparties assuming changes in the level of market rates over a brief time period.

NOTE 13 – Disclosures About Offsetting Assets and Liabilities

The following table provides information about financial assets and derivative assets that are subject to offset as of September 30, 2019 and December 31, 2018 (in thousands):

							Gross amounts not offset in the Statement of Financial Condition
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts Presented in the Statement of Financial Condition		Amounts available for offset			Available collateral			Net Amount
As of September 30, 2019:
Securities borrowing ⁽¹⁾	$	214,100	$	—	$	214,100	$	(139,759	)	$	(55,766	)	$	18,575
Reverse repurchase agreements ⁽²⁾		624,049		—		624,049		(27,766	)		(595,165	)		1,118
Cash flow interest rate contracts		1,416		—		1,416		—			—			1,416
	$	839,565	$	—	$	839,565	$	(167,525	)	$	(650,931	)	$	21,109
As of December 31, 2018:
Securities borrowing ⁽¹⁾	$	109,795	$	—	$	109,795	$	(57,328	)	$	(45,005	)	$	7,462
Reverse repurchase agreements ⁽²⁾		699,900		—		699,900		(365,822	)		(329,740	)		4,338
Cash flow interest rate contracts		7,683		—		7,683		—			—			7,683
	$	817,378	$	—	$	817,378	$	(423,150	)	$	(374,745	)	$	19,483

⁽¹⁾

Securities borrowing transactions are included in receivables from brokers, dealers, and clearing organizations on the consolidated statements of financial condition. See Note 3 in the notes to consolidated financial statements for additional information on receivables from brokers, dealers, and clearing organizations.

⁽²⁾

Collateral received includes securities received by our company from the counterparty. These securities are not included on the consolidated statements of financial condition unless there is an event of default. The fair value of securities pledged as collateral was $623.2 million and $695.6 million at September 30, 2019 and December 31, 2018, respectively.

The following table provides information about financial liabilities and derivative liabilities that are subject to offset as of September 30, 2019 and December 31, 2018 (in thousands):

									Gross amounts not offset in the Statement of Financial Condition
	Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Statement of Financial Condition		Net Amounts Presented in the Statement of Financial Condition			Amounts available for offset		Collateral Pledged		Net Amount
As of September 30, 2019:
Securities lending ⁽³⁾	$	(516,941	)	$	—	$	(516,941	)	$	139,759	$	377,182	$	—
Repurchase agreements ⁽⁴⁾		(564,892	)		—		(564,892	)		27,766		537,126		—
	$	(1,081,833	)	$	—	$	(1,081,833	)	$	167,525	$	914,308	$	—
As of December 31, 2018:
Securities lending ⁽³⁾	$	(392,163	)	$	—	$	(392,163	)	$	57,328	$	325,110	$	(9,725	)
Repurchase agreements ⁽⁴⁾		(535,394	)		—		(535,394	)		365,822		169,572		—
	$	(927,557	)	$	—	$	(927,557	)	$	423,150	$	494,682	$	(9,725	)

⁽³⁾

Securities lending transactions are included in payables to brokers, dealers, and clearing organizations on the consolidated statements of financial condition. See Note 3 in the notes to consolidated financial statements for additional information on payables to brokers, dealers, and clearing organizations.

⁽⁴⁾

Collateral pledged includes the fair value of securities pledged by our company to the counterparty. These securities are included in the consolidated statements of financial condition unless we default. Collateral pledged by our company to the counterparty includes U.S. government agency securities, U.S. government securities, and corporate fixed income securities with market values of $586.9 million and $558.6 million at September 30, 2019 and December 31, 2018, respectively.

NOTE 14 – Commitments, Guarantees, and Contingencies

Broker-Dealer Commitments and Guarantees

In the normal course of business, we enter into underwriting commitments. Settlement of transactions relating to such underwriting commitments, which were open at September 30, 2019, had no material effect on the consolidated financial statements.

As a part of our fixed income public finance operations, we enter into forward commitments to purchase agency mortgage-backed securities. In order to hedge the market interest rate risk to which we would otherwise be exposed between the date of the commitment and date of sale of the mortgage-backed securities, we enter into to be announced (“TBA”) security contracts with investors for generic mortgage-backed security at specific rates and prices to be delivered on settlement dates in the future. We may be subject to loss if the timing of, or the actual amount of, the mortgage-backed security differs significantly from the term and notional amount of the TBA security contract to which we entered. These TBA securities and related purchase commitment are accounted for at fair value. As of September 30, 2019, the fair value of the TBA securities and the estimated fair value of the purchase commitments were insignificant.

We also provide guarantees to securities clearinghouses and exchanges under their standard membership agreement, which requires members to guarantee the performance of other members. Under the agreement, if another member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. Our liability under these agreements is not quantifiable and may exceed the cash and securities we have posted as collateral. However, the potential requirement for us to make payments under these arrangements is considered remote. Accordingly, no liability has been recognized for these arrangements.

Other Commitments

In the ordinary course of business, Stifel Bancorp has commitments to extend credit in the form of commitments to originate loans, standby letters of credit, and lines of credit. See Note 21 in the notes to consolidated financial statements for further details.

Concentration of Credit Risk

We provide investment, capital-raising, and related services to a diverse group of domestic customers, including governments, corporations, and institutional and individual investors. Our exposure to credit risk associated with the non-performance of customers in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile securities markets, credit markets, and regulatory changes. This exposure is measured on an individual customer basis and on a group basis for customers that share similar attributes. To reduce the potential for risk concentrations, counterparty credit limits have been implemented for certain products and are continually monitored in light of changing customer and market conditions. As of September 30, 2019, we did not have significant concentrations of credit risk with any one customer or counterparty, or any group of customers or counterparties.

NOTE 15 – Legal Proceedings

Our company and its subsidiaries are named in and subject to various proceedings and claims arising primarily from our securities business activities, including lawsuits, arbitration claims, class actions, and regulatory matters. Some of these claims seek substantial compensatory, punitive, or indeterminate damages. Our company and its subsidiaries are also involved in other reviews, investigations, and proceedings by governmental and self-regulatory organizations regarding our business, which may result in adverse judgments, settlements, fines, penalties, injunctions, and other relief. We are contesting allegations in these claims, and we believe that there are meritorious defenses in each of these lawsuits, arbitrations, and regulatory investigations. In view of the number and diversity of claims against our company, the number of jurisdictions in which litigation is pending, and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be.

We have established reserves for potential losses that are probable and reasonably estimable that may result from pending and potential legal actions, investigations, and regulatory proceedings. In many cases, however, it is inherently difficult to determine whether any loss is probable or reasonably possible or to estimate the amount or range of any potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated.

In our opinion, based on currently available information, review with outside legal counsel, and consideration of amounts provided for in our consolidated financial statements with respect to these matters, the ultimate resolution of these matters will not have a material adverse impact on our financial position and results of operations. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and depending upon the level of income for such period. For matters where a reserve has not been established and for which we believe a loss is reasonably possible, as well as for matters where a reserve has been recorded but for which an exposure to loss in excess of the amount accrued is reasonably possible, based on currently available information, we believe that such losses will not have a material effect on our consolidated financial statements.

NOTE 16 – Regulatory Capital Requirements

We operate in a highly regulated environment and are subject to capital requirements, which may limit distributions to our company from its subsidiaries. Distributions from our broker-dealer subsidiaries are subject to net capital rules. A broker-dealer that fails to comply with the SEC’s Uniform Net Capital Rule (Rule 15c3-1) may be subject to disciplinary actions by the SEC and self-regulatory organizations, such as FINRA, including censures, fines, suspension, or expulsion. Stifel has chosen to calculate its net capital under the alternative method, which prescribes that their net capital shall not be less than the greater of $1.0 million or two percent of aggregate debit balances (primarily receivables from customers) computed in accordance with the SEC’s Customer Protection Rule (Rule 15c3-3). Our other broker-dealer subsidiaries calculate their net capital under the aggregate indebtedness method, whereby their aggregate indebtedness may not be greater than fifteen times their net capital (as defined).

Our international subsidiary is subject to the regulatory supervision and requirements of the Financial Conduct Authority (“FCA”) in the United Kingdom. At September 30, 2019, our international subsidiary’s capital and reserves were in excess of the financial resources requirement under the rules of the FCA.

Our company, as a bank holding company, Stifel Bank & Trust, Stifel Bank, Stifel Trust Company, N.A., and Stifel Trust Company, Delaware, N.A. (collectively, “bank subsidiaries”) are subject to various regulatory capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our company’s and its bank subsidiaries’ financial results. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, our company and its bank subsidiaries must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our company’s and its bank subsidiaries’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Under the Basel III rules, the quantity and quality of regulatory capital increased, a capital conservation buffer was established, selected changes were made to the calculation of risk-weighted assets, and a new ratio, common equity Tier 1 was introduced, all of which are applicable to both our company and its bank subsidiaries.

Our company and its bank subsidiaries are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined in Basel III, Common equity Tier 1 capital to risk-weighted assets. Our company and its bank subsidiaries each calculate these ratios in order to assess compliance with both regulatory requirements and their internal capital policies. At current capital levels, our company and its bank subsidiaries are each categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” our company and its bank subsidiaries must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios.

The amounts and ratios for Stifel Financial Corp., Stifel Bank & Trust, and Stifel Bank as of September 30, 2019 are represented in the tables below (in thousands, except ratios).

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
Stifel Financial Corp.	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital	$	1,952,043		15.6	%	$	563,006		4.5	%	$	813,231		6.5	%
Tier 1 capital		2,266,356		18.1	%		750,675		6.0	%		1,000,900		8.0	%
Total capital		2,416,874		19.3	%		1,000,900		8.0	%		1,251,125		10.0	%
Tier 1 leverage		2,266,356		10.0	%		907,623		4.0	%		1,134,529		5.0	%

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
Stifel Bank & Trust	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital	$	1,032,752		13.1	%	$	355,002		4.5	%	$	512,781		6.5	%
Tier 1 capital		1,037,065		13.1	%		473,336		6.0	%		631,115		8.0	%
Total capital		1,127,126		14.3	%		631,115		8.0	%		788,894		10.0	%
Tier 1 leverage		1,037,065		7.3	%		568,473		4.0	%		710,592		5.0	%

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
Stifel Bank	Amount		Ratio			Amount		Ratio			Amount		Ratio
Common equity tier 1 capital	$	148,620		17.9	%	$	37,443		4.5	%	$	54,084		6.5	%
Tier 1 capital		148,620		17.9	%		49,924		6.0	%		66,565		8.0	%
Total capital		158,649		19.1	%		66,565		8.0	%		83,206		10.0	%
Tier 1 leverage		148,620		7.0	%		84,407		4.0	%		105,508		5.0	%

NOTE 17 – Operating Leases

The table below presents information about operating lease liabilities as of September 30, 2019, (in thousands, except percentages).

Remainder of 2019	$	22,331
2020		86,712
2021		81,631
2022		80,779
2023		79,830
Thereafter		537,119
Total undiscounted lease payments		888,402
Imputed interest		(215,274	)
Total operating lease liabilities	$	673,128
Weighted average remaining lease term	11.4 years
Weighted average discount rate		4.60	%

In the table above, the weighted average discount rate represents our company’s incremental borrowing rate as of January 2019 for leases existing on the date of adoption of the new lease standard and at the lease inception date for leases entered into subsequent to the adoption of ASU 2016-02.

Operating lease costs, included in occupancy and equipment rental in the consolidated statements of operations, were $22.1 million and $21.5 million for the three months ended September 30, 2019 and 2018, respectively. Operating lease costs were $65.6 million and $65.6 million for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, the Company had a total lease portfolio of 13 aircraft engines with a net book value of $179.1 million, which is included in fixed assets, net in the consolidated statements of financial condition.

As of September 30, 2019, minimum future payments under non-cancelable leases were (in thousands):

Remainder of 2019	$	6,531
2020		24,598
2021		20,162
2022		11,980
2023		6,865
Thereafter		11,737
	$	81,873

Lease income, included in other income in the consolidated statements of operations, was $5.2 million and $18.5 million for the three and nine months ended September 30, 2019, respectively.

NOTE 18 – Revenues from Contracts with Customers

The following table presents the Company’s total revenues broken out by revenues from contracts with customers and other sources of revenues for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30,
	2019		2018
Revenues from contracts with customers:
Commissions	$	163,920	$	158,016
Investment banking		198,790		169,012
Asset management and service fees		217,628		200,743
Other		5,249		4,394
Total revenue from contracts with customers		585,587		532,165
Other sources of revenue:
Interest		178,784		169,760
Principal transactions		97,847		83,152
Other		3,498		1,733
Total revenues	$	865,716	$	786,810

	Nine Months Ended September 30,
	2019		2018
Revenues from contracts with customers:
Commissions	$	484,350	$	490,693
Investment banking		540,247		506,437
Asset management and service fees		624,066		596,112
Other		12,779		11,908
Total revenue from contracts with customers		1,661,442		1,605,150
Other sources of revenue:
Interest		557,795		461,915
Principal transactions		298,343		269,918
Other		21,682		6,649
Total revenues	$	2,539,262	$	2,343,632

Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised services to the customers. A service is transferred to a customer when, or as, the customer obtains control of that service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation in a manner that depicts the transfer of the services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the customer obtains control over the promised service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties.

The following provides detailed information on the recognition of our revenues from contracts with customers:

Commissions. We earn commission revenue by executing, settling, and clearing transactions for clients primarily in OTC and listed equity securities, insurance products, and options. Trade execution and clearing and custody services, when provided together, represent a single performance obligation as the services are not separately identifiable in the context of the contract. Commission revenues associated with combined trade execution and clearing and custody services, as well as trade execution services on a standalone basis, are recognized at a point in time on trade-date. Commission revenues are generally paid on settlement date and we record a receivable between trade-date and payment on settlement date.

Investment Banking. We provide our clients with a full range of capital markets and financial advisory services. Capital markets services include underwriting and placement agent services in both the equity and debt capital markets, including private equity placements, initial public offerings, follow-on offerings, underwriting and distributing public and private debt.

Capital raising revenues are recognized at a point in time on trade-date, as the client obtains the control and benefit of the capital markets offering at that point. Costs associated with capital raising transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded, and are recorded on a gross basis within other operating expenses in the consolidated statements of operations as we are acting as a principal in the arrangement. Any expenses reimbursed by our clients are recognized as investment banking revenues.

Revenues from financial advisory services primarily consist of fees generated in connection with merger, acquisition and restructuring transactions. Advisory fees from mergers and acquisitions engagements are recognized at a point in time when the related transaction is completed, as the performance obligation is to successfully broker a specific transaction. Fees received prior to the completion of the transaction are deferred within accounts payable and accrued expenses on the consolidated statements of financial condition. Advisory fees from restructuring engagements are recognized over time using a time elapsed measure of progress as our clients simultaneously receive and consume the benefits of those services as they are provided. A significant portion of the fees we receive for our advisory services are considered variable as they are contingent upon a future event (e.g., completion of a transaction or third party emergence from bankruptcy) and are excluded from the transaction price until the uncertainty associated with the variable consideration is subsequently resolved, which is expected to occur upon achievement of the specified milestone. Payment for advisory services are generally due promptly upon completion of a specified milestone or, for retainer fees, periodically over the course of the engagement. We recognize a receivable between the date of completion of the milestone and payment by the customer. Expenses associated with investment banking advisory engagements are deferred only to the extent they are explicitly reimbursable by the client and the related revenue is recognized at the same time as the associated expense. All other investment banking advisory related expenses, including expenses incurred related to restructuring assignments, are expensed as incurred. All investment banking advisory expenses are recognized within other operating expenses on the consolidated statements of operations and any expenses reimbursed by our clients are recognized as investment banking revenues.

Asset Management Fees. We earn management and performance fees in connection with investment advisory services provided to institutional and individual clients. Investment advisory fees are charged based on the value of assets in fee-based accounts and are affected by changes in the balances of client assets due to market fluctuations and levels of net new client assets. Fees are charged either in advance based on fixed rates applied to the value of the customers’ account at the beginning of the period or periodically based on contracted rates and account performance. Contracts can be terminated at any time with no incremental payments due to our company upon termination. If the contract is terminated by the customer fees are prorated for the period and fees charged for the post termination period are refundable to the customer.

Disaggregation of Revenue

The following tables present the Company’s revenues from contracts with customers by reportable segment disaggregated by major business activity and primary geographic regions for the three and nine months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30, 2019⁽¹⁾
	Global Wealth Management		Institutional Group		Other		Total
Major business activity:
Commissions	$	118,061	$	45,859	$	—	$	163,920
Capital raising ⁽¹⁾		9,855		84,088		—		93,943
Advisory fees ⁽¹⁾		—		104,847		—		104,847
Investment banking		9,855		188,935		—		198,790
Asset management		217,616		12		—		217,628
Other		4,615		—		634		5,249
Total		350,147		234,806		634		585,587
Primary Geographic Region:
United States		350,147		195,220		634		546,001
United Kingdom		—		38,249		—		38,249
Other		—		1,337		—		1,337
	$	350,147	$	234,806	$	634	$	585,587

	Three Months Ended September 30, 2018⁽¹⁾
	Global Wealth Management		Institutional Group		Other		Total
Major business activity:
Commissions	$	117,795	$	40,220	$	—	$	158,015
Capital raising ⁽¹⁾		7,722		85,553		—		93,275
Advisory fees ⁽¹⁾		—		75,717		—		75,717
Investment banking		7,722		161,270		—		168,992
Asset management		200,735		8		—		200,743
Other		3,376		—		1,018		4,394
Total		329,628		201,498		1,018		532,144
Primary Geographic Region:
United States		329,628		172,382		1,018		503,028
United Kingdom		—		28,197		—		28,197
Other		—		919		—		919
	$	329,628	$	201,498	$	1,018	$	532,144

⁽¹⁾ Excludes revenues not derived from contracts with customers included in the Other segment.

	Nine Months Ended September 30, 2019⁽¹⁾
	Global Wealth Management		Institutional Group		Other		Total
Major business activity:
Commissions	$	348,272	$	136,078	$	—	$	484,350
Capital raising ⁽¹⁾		28,637		218,962		—		247,599
Advisory fees ⁽¹⁾		—		292,648		—		292,648
Investment banking		28,637		511,610		—		540,247
Asset management		624,025		41		—		624,066
Other		10,619		—		2,160		12,779
Total		1,011,553		647,729		2,160		1,661,442
Primary Geographic Region:
United States		1,011,553		544,918		2,160		1,558,631
United Kingdom		—		99,020		—		99,020
Other		—		3,791		—		3,791
	$	1,011,553	$	647,729	$	2,160	$	1,661,442

	Nine Months Ended September 30, 2018⁽¹⁾
	Global Wealth Management		Institutional Group		Other		Total
Major business activity:
Commissions	$	355,129	$	135,563	$	—	$	490,692
Capital raising ⁽¹⁾		23,378		222,666		—		246,044
Advisory fees ⁽¹⁾		81		260,312		—		260,393
Investment banking		23,459		482,978		—		506,437
Asset management		596,081		31		—		596,112
Other		8,969		—		2,939		11,908
Total		983,638		618,572		2,939		1,605,149
Primary Geographic Region:
United States		983,638		522,147		2,939		1,508,724
United Kingdom		—		92,029		—		92,029
Other		—		4,396		—		4,396
	$	983,638	$	618,572	$	2,939	$	1,605,149

⁽¹⁾Excludes revenues not derived from contracts with customers included in the Other segment.

See Note 22 for further break-out of revenues by geography.

Information on Remaining Performance Obligations and Revenue Recognized from Past Performance

We do not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at September 30, 2019. Investment banking advisory fees that are contingent upon completion of a specific milestone and fees associated with certain distribution services are also excluded as the fees are considered variable and not included in the transaction price at September 30, 2019.

Contract Balances

The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied.

We had receivables related to revenues from contracts with customers of $147.6 million and $116.7 million at September 30, 2019 and December 31, 2018, respectively. We had no significant impairments related to these receivables during the nine months ended September 30, 2019.

Our deferred revenue primarily relates to retainer fees received in investment banking advisory engagements and investment advisory fees where the performance obligation has not yet been satisfied. Deferred revenue at September 30, 2019 and December 31, 2018 was $14.4 million and $11.1 million, respectively.

NOTE 19 – Interest Income and Interest Expense

The components of interest income and interest expense are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Interest income:
Bank loans, net	$	95,436	$	78,766	$	284,541	$	210,790
Investment securities		54,945		66,825		182,127		185,263
Margin balances		13,334		13,066		40,437		36,322
Financial instruments owned		5,668		5,733		18,395		15,645
Other		9,401		5,370		32,295		13,895
	$	178,784	$	169,760	$	557,795	$	461,915
Interest expense:
Bank deposits	$	24,815	$	25,856	$	82,228	$	49,329
Senior notes		11,121		11,248		33,365		33,488
Federal Home Loan Bank advances		1,146		4,232		5,735		10,579
Other		7,062		7,132		25,155		18,804
	$	44,144	$	48,468	$	146,483	$	112,200

NOTE 20 – Employee Incentive, Deferred Compensation, and Retirement Plans

We maintain an incentive stock plan and a wealth accumulation plan (“the 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 employees. We are permitted to issue new shares under all stock award plans approved by shareholders or to reissue our treasury shares. Stock awards issued under our company’s incentive stock plan are granted at market value at the date of grant. Our deferred awards generally vest ratably over a one- to ten-year vesting period.

Our stock-based compensation plans are administered by the Compensation Committee of the Board of Directors (“Compensation Committee”), which has the authority to interpret the plans, determine to whom awards may be granted under the plans, and determine the terms of each award. According to the incentive stock plan, we are authorized to grant an additional 3.3 million shares at September 30, 2019.

Stock-based compensation expense included in compensation and benefits expense in the consolidated statements of operations for our company’s incentive stock award plan was $33.6 million and $31.7 million for the three months ended September 30, 2019 and 2018, respectively, and $97.4 million and $82.5 million for the nine months ended September 30, 2019 and 2018, respectively.

Restricted Stock Units and Restricted Stock Awards

A restricted stock unit represents the right to receive a share of the Company’s common stock 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 vest on an annual basis over the next one to ten years and are distributable, if vested, at future specified dates. Our Company grants Performance-based Restricted Stock Units (“PRSUs”) to certain of its executive officers. Under the terms of the grants, the number of PRSUs that will vest and convert to shares will be based on the Company's achievement of the pre-determined performance objectives during the performance period. Any resulting delivery of shares for PRSUs granted as part of compensation will occur after four years for 80% of the earned award, and in the fifth year for the remaining 20% of the earned award. The number of shares converted has the potential to range from 0% to 200% based on how the Company performs during the performance period. Restricted stock awards are restricted as to sale or disposition. These restrictions lapse over the next one to five years. Compensation expense is amortized over the service period based on the fair value of the deferred award on the grant date. The Company’s pre-determined performance objectives must be met for the deferred awards to vest. Employees forfeit unvested deferred awards upon termination of employment with a corresponding reversal of compensation expense. Certain deferred awards may continue to vest under certain circumstances as described in the Plan. At September 30, 2019, the total number of restricted stock units, PRSUs, and restricted stock awards outstanding was 15.9 million, of which 13.8 million were unvested.

At September 30, 2019, there was unrecognized compensation cost for deferred awards of approximately $456.7 million, which is expected to be recognized over a weighted-average period of 2.8 years.

Deferred Compensation Plans

The Plan is provided to certain revenue producers, officers, and key administrative employees, whereby a certain percentage of their incentive compensation is deferred as defined by the Plan into company stock units, restricted stock, and debentures. Participants may elect to defer a portion of their incentive compensation. Deferred awards generally vest over a one- to ten-year period and are distributable upon vesting or at future specified dates. Deferred compensation costs are amortized on a straight-line basis over the vesting period. Elective deferrals are 100% vested.

Additionally, the Plan allows Stifel’s financial advisors who achieve certain levels of production the option to defer a certain percentage of their gross commissions. As stipulated by the Plan, the financial advisors will defer 5% of their gross commissions. The mandatory deferral is split between company restricted stock units and debentures. They have the option to defer an additional 1% of gross commissions into company stock units with a 25% matching contribution.

In addition, certain financial advisors, upon joining our company, may receive company stock units in lieu of transition cash payments. Deferred compensation related to these awards generally vests over a one- to eight-year period. Deferred compensation costs are amortized on a straight-line basis over the deferral period.

Profit Sharing Plan

Eligible employees of our company who have met certain service requirements may participate in the Stifel Financial Corp. Profit Sharing 401(k) Plan (the “401(k) Plan”). Employees are permitted within limitations imposed by tax law to make pre-tax contributions to the 401(k) Plan. We may match certain employee contributions or make additional contributions to the 401(k) Plan at our discretion. Our contributions to the 401(k) Plan were $3.2 million and $3.4 million for the three months ended September 30, 2019 and 2018, respectively and $9.6 million and $10.1 million for the nine months ended September 30, 2019 and 2018, respectively.

NOTE 21 – Off-Balance Sheet Credit Risk

In the normal course of business, we execute, settle, and finance customer and proprietary securities transactions. These activities expose our company to off-balance sheet risk in the event that customers or other parties fail to satisfy their obligations.

In accordance with industry practice, securities transactions generally settle within two business days after trade date. Should a customer or broker fail to deliver cash or securities as agreed, we may be required to purchase or sell securities at unfavorable market prices.

We borrow and lend securities to facilitate the settlement process and finance transactions, utilizing customer margin securities held as collateral. We monitor the adequacy of collateral levels on a daily basis. We periodically borrow from banks on a collateralized basis, utilizing firm and customer margin securities in compliance with SEC rules. Should the counterparty fail to return customer securities pledged, we are subject to the risk of acquiring the securities at prevailing market prices in order to satisfy our customer obligations. We control our exposure to credit risk by continually monitoring our counterparties’ positions, and where deemed necessary, we may require a deposit of additional collateral and/or a reduction or diversification of positions. Our company sells securities it does not currently own (short sales) and is obligated to subsequently purchase such securities at prevailing market prices. We are exposed to

risk of loss if securities prices increase prior to closing the transactions. We control our exposure to price risk from short sales through daily review and setting position and trading limits.

We manage our risks associated with the aforementioned transactions through position and credit limits and the continuous monitoring of collateral. Additional collateral is required from customers and other counterparties when appropriate.

We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At September 30, 2019 and December 31, 2018, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $2.7 billion and $2.4 billion, respectively, and the fair value of the collateral that had been sold or repledged was $564.9 million and $535.4 million, respectively.

We enter into interest rate derivative contracts to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are principally used to manage differences in the amount, timing, and duration of our known or expected cash payments related to certain variable-rate affiliated deposits. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments. Our interest rate hedging strategies may not work in all market environments and, as a result, may not be effective in mitigating interest rate risk.

Derivatives’ notional contract amounts are not reflected as assets or liabilities in the consolidated statements of financial condition. Rather, the market or fair value of the derivative transactions are reported in the consolidated statements of financial condition as other assets or accounts payable and accrued expenses, as applicable.

For a complete discussion of our activities related to derivative instruments, see Note 12 in the notes to consolidated financial statements.

In the ordinary course of business, Stifel Bancorp has commitments to originate loans, standby letters of credit, and lines of credit. Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established by the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash commitments. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if necessary, is based on the credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate.

At September 30, 2019 and December 31, 2018, Stifel Bancorp had outstanding commitments to originate loans aggregating $616.1 million and $146.7 million, respectively. The commitments extended over varying periods of time, with all commitments at September 30, 2019, scheduled to be disbursed in the following three months.

Through Stifel Bancorp, in the normal course of business, we originate residential mortgage loans and sell them to investors. We may be required to repurchase mortgage loans that have been sold to investors in the event there are breaches of certain representations and warranties contained within the sales agreements. We may be required to repurchase mortgage loans that were sold to investors in the event that there was inadequate underwriting or fraud, or in the event that the loans become delinquent shortly after they are originated. We also may be required to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and in various other circumstances, and the amount of such losses could exceed the repurchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold loans.

Standby letters of credit are irrevocable conditional commitments issued by Stifel Bancorp to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should Stifel Bancorp be obligated to perform under the standby letters of credit, it may seek recourse from the customer for reimbursement of amounts paid. At September 30, 2019 and December 31, 2018, Stifel Bancorp had outstanding letters of credit totaling $16.1 million and $26.3 million, respectively. A majority of the standby letters of credit commitments at September 30, 2019, have expiration terms that are less than one year.

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Stifel Bancorp uses the same credit policies in granting lines of credit as it does for on-balance sheet instruments. At September 30, 2019 and December 31, 2018, Stifel Bancorp had granted unused lines of credit to commercial and consumer borrowers aggregating $1.4 billion and $919.5 million, respectively.

NOTE 22 – Segment Reporting

We currently operate through the following three business segments: Global Wealth Management, Institutional Group, and various corporate activities combined in the Other segment.

Our Global Wealth Management segment consists of two businesses, the Private Client Group and Stifel Bancorp. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the 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 clients through our bank subsidiaries, which provide residential, consumer, and commercial lending, as well as 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.

Information concerning operations in these segments of business for the three and nine months ended September 30, 2019 and 2018 is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net revenues: ⁽¹⁾
Global Wealth Management	$	534,571		$	498,161		$	1,577,614		$	1,481,063
Institutional Group		290,222			245,952			822,110			768,855
Other		(3,221	)		(5,771	)		(6,945	)		(18,486	)
	$	821,572		$	738,342		$	2,392,779		$	2,231,432
Income/(loss) before income taxes:
Global Wealth Management	$	202,823		$	183,377		$	589,665		$	548,043
Institutional Group		48,623			34,305			120,129			114,899
Other		(100,692	)		(77,152	)		(273,249	)		(284,511	)
	$	150,754		$	140,530		$	436,545		$	378,431

⁽¹⁾	No individual client accounted for more than 10 percent of total net revenues for the three and nine months ended September 30, 2019 or 2018.

The following table presents our company’s total assets on a segment basis at September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019		December 31, 2018
Global Wealth Management	$	20,153,135	$	21,040,224
Institutional Group		3,730,332		3,238,617
Other		277,310		240,757
	$	24,160,777	$	24,519,598

We have operations in the United States, United Kingdom, and Europe. The Company’s foreign operations are conducted through its wholly owned subsidiary, SNEL. Substantially all long-lived assets are located in the United States.

Revenues, classified by the major geographic areas in which they are earned for the three and nine months ended September 30, 2019 and 2018, were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	775,356	$	703,746	$	2,271,056	$	2,113,039
United Kingdom		43,632		32,623		113,783		109,482
Other		2,584		1,973		7,940		8,911
	$	821,572	$	738,342	$	2,392,779	$	2,231,432

NOTE 23 – Earnings Per Share (“EPS”)

Basic EPS is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted earnings per share include dilutive stock options and stock units under the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income applicable to Stifel Financial Corp.	$	109,414	$	103,858	$	317,706	$	279,906
Preferred dividends		4,844		2,343		12,476		7,031
Net income available to common shareholders	$	104,570	$	101,515	$	305,230	$	272,875
Shares for basic and diluted calculation:
Average shares used in basic computation		71,197		71,919		72,512		71,824
Dilutive effect of stock options and units ⁽¹⁾		6,947		9,565		6,314		9,601
Average shares used in diluted computation		78,144		81,484		78,826		81,425
Earnings per common share:
Basic	$	1.47	$	1.41	$	4.21	$	3.80
Diluted	$	1.34	$	1.25	$	3.87	$	3.35

⁽¹⁾	Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.

For the three and nine months ended September 30, 2019 and 2018, the anti-dilutive effect from restricted stock units was immaterial.

Cash Dividends

During the three and nine months ended September 30, 2019, we declared and paid cash dividends of $0.15 and $0.45 per common share. During the three and nine months ended September 30, 2018, we declared and paid cash dividends of $0.12 and $0.36 per common share.

NOTE 24 – Shareholders’ Equity

Share Repurchase Program

We have an ongoing authorization from the Board of Directors to repurchase our common stock in the open market or in negotiated transactions. At September 30, 2019, the maximum number of shares that may yet be purchased under this plan was 5.8 million. The repurchase program has no expiration date. These purchases may be made on the open market or in privately negotiated transactions, depending upon market conditions and other factors. Repurchased shares may be used to meet obligations under our employee benefit plans and for general corporate purposes. During the three months ended September 30, 2019, we repurchased $55.5 million, or 1.0 million shares using existing Board authorizations at an average price of $55.43 per share to meet obligations under our company’s employee benefit plans and for general corporate purposes. During the nine months ended September 30, 2019, we repurchased $180.4 million, or 3.3 million shares using existing Board authorizations at an average price of $55.10 per share to meet obligations under our company’s employee benefit plans and for general corporate purposes. During the three months ended September 30, 2018, we repurchased $16.6 million, or 0.3 million shares using existing Board authorizations at an average price of $53.93 per share to

meet obligations under our company’s employee benefit plans and for general corporate purposes. During the nine months ended September 30, 2018, we repurchased $62.5 million, or 1.1 million shares using existing Board authorizations at an average price of $55.66 per share to meet obligations under our company’s employee benefit plans and for general corporate purposes.

Issuance of Common Stock

During the nine months ended September 30, 2019, we issued 1.4 million shares, which were primarily reissued from treasury. Share issuances were primarily a result of the vesting and conversion transactions under our incentive stock award plans.

Issuance of Preferred Stock

On February 21, 2019, the Company issued $150.0 million of 6.25% Non-Cumulative Perpetual Preferred Stock, Series B, $1.00 par value, with a liquidation preference of $25,000 per share (equivalent to $25 liquidation preference per depositary share). In March 2019, we completed a public offering of an additional $10.0 million of Series B Preferred, pursuant to the over-allotment option.

When, as, and if declared by the board of directors of the Company, dividends will be payable at an annual rate of 6.25%, payable quarterly, in arrears. The Company may redeem the Series B preferred stock at its option, subject to regulatory approval, on or after March 15, 2024 or following a regulatory capital treatment event, as defined.

NOTE 25 – Variable Interest Entities

Our company’s involvement with VIEs is limited to entities used as investment vehicles and private equity funds, the establishment of Stifel Financial Capital Trusts, and our issuance of a convertible promissory note.

We have formed several non-consolidated investment funds with third-party investors that are typically organized as limited liability companies (“LLCs”) or limited partnerships. These partnerships and LLCs have assets of $245.2 million at September 30, 2019. For those funds where we act as the general partner, our company’s economic interest is generally limited to management fee arrangements as stipulated by the fund operating agreements. We have generally provided the third-party investors with rights to terminate the funds or to remove us as the general partner. Management fee revenue earned by our company was insignificant during the three and nine months ended September 30, 2019 and 2018. In addition, our direct investment interest in these entities is insignificant at September 30, 2019.

Thomas Weisel Capital Management LLC, a subsidiary of our company, acts as the general partner of a series of investment funds in venture capital and fund of funds and manages investment funds that are active buyers of secondary interests in private equity funds, as well as portfolios of direct interests in venture-backed companies. These partnerships have combined assets of $223.4 million at September 30, 2019. We hold variable interests in these funds as a result of our company’s rights to receive management fees. Our company’s investment in and additional capital commitments to the private equity funds are also considered variable interests. The additional capital commitments are subject to call at a later date and are limited in amount. Our exposure to loss is limited to our investments in, advances and commitments to, and receivables due from these funds, and that exposure is insignificant at September 30, 2019. Management fee revenue earned by our company was insignificant during the three and nine months ended September 30, 2019 and 2018.

For the entities noted above that were determined to be VIEs, we have concluded that we are not the primary beneficiary, and therefore, we are not required to consolidate these entities.

Debenture to Stifel Financial Capital Trusts

We have completed private placements of cumulative trust preferred securities through Stifel Financial Capital Trust II, Stifel Financial Capital Trust III, and Stifel Financial Capital Trust IV (collectively, the “Trusts”). The Trusts are non-consolidated wholly owned business trust subsidiaries of our company and were established for the limited purpose of issuing trust securities to third parties and lending the proceeds to our company.

The trust preferred securities represent an indirect interest in junior subordinated debentures purchased from our company by the Trusts, and we effectively provide for the full and unconditional guarantee of the securities issued by the Trusts. We make timely payments of interest to the Trusts as required by contractual obligations, which are sufficient to cover payments due on the securities issued by the Trusts, and believe that it is unlikely that any circumstances would occur that would make it necessary for our company to make payments related to these Trusts other than those required under the terms of the debenture agreements and the trust preferred securities agreements. The Trusts were determined to be VIEs because the holders of the equity investment at risk do not have adequate decision-making ability over the Trust’s activities. Our investment in the Trusts is not a variable interest, because equity interests are variable interests only to the extent that the investment is considered to be at risk. Because our investment was funded by the Trusts, it is not considered to be at risk.

Securitization Interests

On July 31, 2018, the Company purchased 100% of the share capital of Jet Holding S.a.r.l. (“Jet Holdings”), which is the owner of 100% of the outstanding E-Certificates in FAN Engine Securitization Ltd. (“FAN”). FAN is a securitization which purchases, leases, and disposes of commercial aircraft engines. As of the acquisition date, FAN owned 24 leased aircraft engines through common law trusts and FAN Leasing Dublin Limited, all of which are wholly owned subsidiaries of FAN.

As the holder of the E-Certificate, our obligation to absorb losses is limited to the equity at risk (in this instance the consideration paid to acquire the E-Certificate). The residual returns that could be potentially generated by the activities of FAN are not pro rata with our ownership interests in the securitization. As Jet Holdings maintained significant power and benefits of FAN through the E-Certificate and other contractual rights, on the acquisition date, our company was considered the primary beneficiary, and Jet Holdings and FAN were consolidated.

On May 1, 2019, the holders of the Series A Notes issued a Written Direction to Give Default Notice to Deutsche Bank Trust. The Event of Default Notice, which accelerated the amortization on the repayment of the debt, materially altered the cash flows and benefits available to our company as the holder of the E-Certificate. Based on the structural changes of the securitization interests, the Company concluded that it was no longer the primary beneficiary of the variable interest; therefore, Jet Holdings and FAN were deconsolidated on July 1, 2019. The impact of the deconsolidation was immaterial to the consolidated financial statements.

NOTE 26 – Subsequent Events

We evaluate subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Based on the evaluation, we did not identify any recognized subsequent events that would have required adjustment to the consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of our company should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, 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, the investment banking industry, our 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. 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 below under “External Factors Impacting Our Business” as well as the factors identified under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as updated in our subsequent reports filed with the SEC. These reports are available at our web site at www.stifel.com and at the SEC web site at www.sec.gov.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, unless we are obligated to do so under federal securities laws.

Unless otherwise indicated, the terms “we,” “us,” “our” or “our company” in this report refer to Stifel Financial Corp. and its wholly owned subsidiaries.

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 across the United States and in Europe. 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 throughout the United States, with a growing presence in the United Kingdom and Europe. 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 off Wall 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 our Global Wealth Management and Institutional Group businesses.

Our ability to attract and retain highly skilled and productive employees 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 attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.

On January 2, 2019, the Company completed the acquisition of First Empire Holding Corp. and its subsidiaries (“First Empire”), including First Empire Securities, Inc., an institutional broker-dealer specializing in the fixed income markets.

On February 28, 2019, the Company completed an underwritten registered public offering of $150 million 6.25% Non-Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred”). In March 2019, we completed a public offering of an additional $10.0 million of Series B Preferred, pursuant to the over-allotment option.

On July 1, 2019, the Company completed the acquisition of Mooreland Partners, an independent M&A and private capital advisory firm serving the global technology industry. The acquisition was funded with cash from operations.

On November 1, 2019, the Company completed the acquisition of MainFirst, an independent European capital markets firm, specializing in equity brokerage and research, equity capital markets, and asset management.

Results for the three and nine months ended September 30, 2019

For the three months ended September 30, 2019, net revenues increased 11.3% to a record $821.6 million from $738.3 million during the comparable period in 2018. Net income available to common shareholders increased 3.0% to $104.6 million, or $1.34 per diluted common share for the three months ended September 30, 2019, compared to $101.5 million, or $1.25 per diluted common share during the comparable period in 2018.

For the nine months ended September 30, 2019, net revenues increased 7.2% to a record $2.4 billion compared to $2.2 billion during the comparable period in 2018. Net income available to common shareholders increased 11.9% to $305.2 million, or $3.87 per diluted common share for the nine months ended September 30, 2019, compared to $272.9 million, or $3.35 per diluted common share during the comparable period in 2018.

Our revenue growth for the three months ended September 30, 2019 was primarily attributable to an increase in advisory fees; an increase in brokerage revenues; the growth in asset management and service fees as a result of increased assets under management; and higher net interest income as a result of an increase in interest-earning assets at Stifel Bancorp.

Our revenue growth for the nine months ended September 30, 2019 was primarily attributable to higher net interest income as a result of an increase in interest-earning assets at Stifel Bancorp; an increase in brokerage revenues; increased advisory fee revenues; and the growth in asset management and service fees as a result of increased assets under management; partially offset by a decrease in commissions 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 municipal underwriting market is challenging as state and local governments reduce their debt levels. Investors are showing a lack of demand for longer-dated municipals and are reluctant to take on credit or liquidity risks.

Our overall financial results continue to be highly and directly correlated to the direction and activity levels of the United States equity and fixed income markets. At September 30, 2019, the NASDAQ, S&P 500, and Dow Jones Industrial Average closed 20.6%, 18.7%, and 15.4% higher than their December 31, 2018 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.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018

The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):

	Three Months Ended September 30,							As a Percentage of Net Revenues For the Three Months Ended September 30,
	2019		2018		% Change			2019			2018
Revenues:
Commissions	$	163,920	$	158,016		3.7			20.0	%		21.4	%
Principal transactions		97,847		83,152		17.7			11.9			11.3
Brokerage revenues		261,767		241,168		8.5			31.9			32.7
Investment banking		198,790		169,012		17.6			24.2			22.9
Asset management and service fees		217,628		200,743		8.4			26.5			27.2
Interest		178,784		169,760		5.3			21.8			23.0
Other income		8,747		6,127		42.8			1.0			0.8
Total revenues		865,716		786,810		10.0			105.4			106.6
Interest expense		44,144		48,468		(8.9	)		5.4			6.6
Net revenues		821,572		738,342		11.3			100.0			100.0
Non-interest expenses:
Compensation and benefits		486,160		422,324		15.1			59.2			57.2
Occupancy and equipment rental		58,649		54,035		8.5			7.1			7.3
Communication and office supplies		36,817		33,330		10.5			4.5			4.5
Commissions and floor brokerage		10,542		11,338		(7.0	)		1.3			1.5
Other operating expenses		78,650		76,785		2.4			9.6			10.5
Total non-interest expenses		670,818		597,812		12.2			81.7			81.0
Income before income taxes		150,754		140,530		7.3			18.3			19.0
Provision for income taxes		40,632		36,672		10.8			4.9			5.0
Net Income		110,122		103,858		6.0			13.4			14.0
Net income applicable to non-controlling interests		708		—	n/m				0.1			—
Net income applicable to Stifel Financial Corp.		109,414		103,858		5.3			13.3			14.0
Preferred dividends		4,844		2,343		106.7			0.6			0.3
Net income available to common shareholders	$	104,570	$	101,515		3.0			12.7	%		13.7	%

Nine months Ended September 30, 2019 Compared with Nine months Ended September 30, 2018

The following table presents consolidated financial information for the periods indicated (in thousands, except percentages):

	Nine Months Ended September 30,							As a Percentage of Net Revenues For the Nine Months Ended September 30,
	2019		2018		% Change			2019			2018
Revenues:
Commissions	$	484,350	$	490,693		(1.3	)		20.2	%		22.0	%
Principal transactions		298,343		269,918		10.5			12.5			12.1
Brokerage revenues		782,693		760,611		2.9			32.7			34.1
Investment banking		540,247		506,437		6.7			22.6			22.7
Asset management and service fees		624,066		596,112		4.7			26.1			26.7
Interest		557,795		461,915		20.8			23.3			20.7
Other income		34,461		18,557		85.7			1.4			0.8
Total revenues		2,539,262		2,343,632		8.3			106.1			105.0
Interest expense		146,483		112,200		30.6			6.1			5.0
Net revenues		2,392,779		2,231,432		7.2			100.0			100.0
Non-interest expenses:
Compensation and benefits		1,411,135		1,322,387		6.7			59.0			59.3
Occupancy and equipment rental		178,566		165,226		8.1			7.5			7.4
Communication and office supplies		107,583		103,468		4.0			4.5			4.6
Commissions and floor brokerage		32,506		30,798		5.5			1.4			1.4
Other operating expenses		226,444		231,122		(2.0	)		9.4			10.4
Total non-interest expenses		1,956,234		1,853,001		5.6			81.8			83.1
Income before income taxes		436,545		378,431		15.4			18.2			16.9
Provision for income taxes		117,227		98,525		19.0			4.9			4.4
Net Income		319,318		279,906		14.1			13.3			12.5
Net income applicable to non-controlling interests		1,612		—	n/m				0.1			—
Net income applicable to Stifel Financial Corp.		317,706		279,906		13.5			13.2			12.5
Preferred dividends		12,476		7,031		77.4			0.5			0.3
Net income available to common shareholders	$	305,230	$	272,875		11.9			12.7	%		12.2	%

NET REVENUES

The following table presents consolidated net revenues for the periods indicated (in thousands, except percentages):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		% Change		2019		2018		% Change
Net revenues:
Commissions	$	163,920	$	158,016		3.7	$	484,350	$	490,693		(1.3	)
Principal transactions		97,847		83,152		17.7		298,343		269,918		10.5
Brokerage revenues		261,767		241,168		8.5		782,693		760,611		2.9
Advisory fees		104,847		75,717		38.5		292,648		260,393		12.4
Capital raising		93,943		93,295		0.7		247,599		246,044		0.6
Investment banking		198,790		169,012		17.6		540,247		506,437		6.7
Asset management and service fees		217,628		200,743		8.4		624,066		596,112		4.7
Net interest		134,640		121,292		11.0		411,312		349,715		17.6
Other income		8,747		6,127		42.8		34,461		18,557		85.7
Total net revenues	$	821,572	$	738,342		11.3	$	2,392,779	$	2,231,432		7.2

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 ended September 30, 2019, commission revenues increased 3.7% to $163.9 million from $158.0 million in the comparable period in 2018. The increase is primarily attributable to transactions associated with our new litigation finance product. For the nine months ended September 30, 2019, commission revenues decreased 1.3% to $484.4 million from $490.7 million in the

comparable period in 2018. The decrease is primarily attributable to lower OTC transactions from the comparable period in 2018, partially offset by an increase in revenues associated with our litigation finance product.

Principal transactions – Principal transaction revenues are gains and losses on secondary trading, principally fixed income brokerage revenues.

For the three months ended September 30, 2019, principal transactions revenues increased 17.7% to $97.8 million from $83.2 million in the comparable period in 2018. For the nine months ended September 30, 2019, principal transactions revenues increased 10.5% to $298.3 million from $269.9 million in the comparable period in 2018. The increase is primarily attributable to higher institutional fixed income brokerage revenues, as a result of increased trading levels.

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 September 30, 2019, investment banking revenues increased 17.6% to $198.8 million from $169.0 million in the comparable period in 2018.

Advisory fee revenues increased 38.5% to $104.8 million for the three months ended September 30, 2019 from $75.7 million in the comparable period in 2018. The increase is primarily attributable to an increase in the number of advisory transactions over the comparable period in 2018.

Capital raising revenues increased 0.7% to $93.9 million for the three months ended September 30, 2019 from $93.3 million in the comparable period in 2018. For the three months ended September 30, 2019, equity capital raising revenues decreased 11.2% to $59.0 million from $66.5 million in the comparable period in 2018. For the three months ended September 30, 2019, fixed income capital raising revenues increased 30.3% to $34.9 million from $26.8 million in the comparable period in 2018.

For the nine months ended September 30, 2019, investment banking revenues increased 6.7% to $540.2 million from $506.4 million in the comparable period in 2018.

Advisory fee revenues increased 12.4% to $292.6 million for the nine months ended September 30, 2019 from $260.4 million in the comparable period in 2018. The increase is primarily attributable to an increase in the number of advisory transactions over the comparable period in 2018.

Capital raising revenues increased 0.6% to $247.6 million for the nine months ended September 30, 2019 from $246.0 million in the comparable period in 2018. For the nine months ended September 30, 2019, equity capital raising revenues decreased 9.7% to $156.0 million from $172.8 million in the comparable period in 2018. For the nine months ended September 30, 2019, fixed income capital raising revenues increased 25.1% to $91.6 million from $73.2 million in the comparable period in 2018.

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 ended September 30, 2019, asset management and service fee revenues increased 8.4% to $217.6 million from $200.7 million in the comparable period in 2018. For the nine months ended September 30, 2019, asset management and service fee revenues increased 4.7% to $624.1 million from $596.1 million in the comparable period in 2018. 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 ended September 30, 2019, other income increased 42.8% to $8.7 million from $6.1 million during the comparable period in 2018. For the nine months ended September 30, 2019, other income increased 85.7% to $34.5 million from $18.6 million during the comparable period in 2018. The increase is primarily attributable to rental income generated from our aircraft engine leasing business. Other income primarily includes investment gains and losses, rental income, and loan originations fees.

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
	September 30, 2019							September 30, 2018
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Interest-earning assets:
Interest-bearing cash and federal funds sold	$	1,056,265	$	5,682		2.15	%	$	387,771	$	2,275		2.35	%
Financial instruments owned		1,157,797		5,668		1.96	%		1,171,440		5,733		1.96	%
Margin balances		1,308,259		13,334		4.08	%		1,323,964		13,066		3.95	%
Investment portfolio		6,403,691		54,945		3.43	%		8,004,215		66,825		3.34	%
Loans		9,325,120		95,436		4.09	%		8,111,469		78,766		3.88	%
Other interest-bearing assets		678,717		3,719		2.19	%		747,427		3,095		1.66	%
Total interest-earning assets/interest income	$	19,929,849	$	178,784		3.59	%	$	19,746,286	$	169,760		3.44	%
Interest-bearing liabilities:
Short-term borrowings	$	20,991	$	138		2.63	%	$	35,251	$	255		2.89	%
Stock loan		494,699		1,175		0.95	%		497,081		2,022		1.63	%
Senior notes (Stifel Financial)		1,016,580		11,121		4.38	%		1,015,714		11,248		4.43	%
Stifel Capital Trusts		60,000		645		4.30	%		67,500		715		4.24	%
Deposits		14,926,177		24,815		0.67	%		14,003,177		25,856		0.74	%
FHLB		270,092		1,146		1.70	%		1,028,789		4,232		1.65	%
Other interest-bearing liabilities		1,118,287		5,104		1.83	%		1,027,141		4,140		1.61	%
Total interest-bearing liabilities/interest expense	$	17,906,826		44,144		0.99	%	$	17,674,653		48,468		1.10	%
Net interest income/margin			$	134,640		2.70	%			$	121,292		2.46	%

	Nine Months Ended
	September 30, 2019							September 30, 2018
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Interest-earning assets:
Interest-bearing cash and federal funds sold	$	986,935	$	17,837		2.41	%	$	391,421	$	5,807		1.98	%
Financial instruments owned		1,251,880		18,395		1.96	%		1,181,295		15,645		1.77	%
Margin balances		1,286,090		40,437		4.19	%		1,303,902		36,322		3.71	%
Investment portfolio		6,857,310		182,127		3.54	%		7,751,000		185,263		3.19	%
Loans		9,142,924		284,541		4.15	%		7,622,413		210,790		3.69	%
Other interest-bearing assets		748,868		14,458		2.57	%		775,449		8,088		1.39	%
Total interest-earning assets/interest income	$	20,274,007	$	557,795		3.67	%	$	19,025,480	$	461,915		3.24	%
Interest-bearing liabilities:
Short-term borrowings	$	39,667	$	902		3.03	%	$	99,037	$	1,868		2.51	%
Stock loan		505,932		6,612		1.74	%		434,538		5,771		1.77	%
Senior notes (Stifel Financial)		1,016,309		33,365		4.38	%		1,015,714		33,488		4.40	%
Stifel Capital Trusts		60,000		1,985		4.41	%		67,500		2,014		3.98	%
Deposits		14,978,783		82,228		0.73	%		13,529,200		49,329		0.49	%
FHLB		426,535		5,735		1.79	%		925,075		10,579		1.52	%
Other interest-bearing liabilities		1,109,281		15,656		1.88	%		1,010,782		9,151		1.21	%
Total interest-bearing liabilities/interest expense	$	18,136,507		146,483		1.08	%	$	17,081,846		112,200		0.88	%
Net interest income/margin			$	411,312		2.71	%			$	349,715		2.45	%

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 ended September 30, 2019, net interest income increased to $134.6 million from $121.3 million during the comparable period in 2018. For the nine months ended September 30, 2019, net interest income increased to $411.3 million from $349.7 million during the comparable period in 2018.

For the three months ended September 30, 2019, interest revenue increased 5.3% to $178.8 million from $169.8 million in the comparable period in 2018, principally as a result of an increase in interest revenue generated from interest-earning assets of Stifel Bancorp and an increase in interest-earning cash balances. The average interest-earning assets of Stifel Bancorp increased to $16.3 billion during the three months ended September 30, 2019 compared to $16.2 billion during the comparable period in 2018 at average interest rates of 3.77% and 3.61%, respectively.

For the nine months ended September 30, 2019, interest revenue increased 20.8% to $557.8 million from $461.9 million in the comparable period in 2018, principally as a result of an increase in interest revenue generated from the interest-earning assets of Stifel Bancorp, an increase in interest-earning cash balances, and higher margin interest income. The average interest-earning assets of Stifel Bancorp increased to $16.6 billion during the nine months ended September 30, 2019 compared to $15.5 billion during the comparable period in 2018 at average interest rates of 3.85% and 3.43%, respectively.

For the three months ended September 30, 2019, interest expense decreased 8.9% to $44.1 million from $48.5 million during the comparable period in 2018. The decrease is primarily attributable to a decrease in interest-bearing liabilities (FHLB advances and deposits) at Stifel Bancorp. For the nine months ended September 30, 2019, interest expense increased 30.6% to $146.5 million from $112.2 million in the comparable period in 2018. The increase is primarily attributable to an increase in interest-bearing liabilities (deposits) at Stifel Bancorp, partially offset by a decrease in FHLB advances.

NON-INTEREST EXPENSES

The following table presents consolidated non-interest expenses for the periods indicated (in thousands, except percentages):

	Three Months Ended September 30,							Nine Months Ended September 30,
	2019		2018		% Change			2019		2018		% Change
Non-interest expenses:
Compensation and benefits	$	486,160	$	422,324		15.1		$	1,411,135	$	1,322,387		6.7
Occupancy and equipment rental		58,649		54,035		8.5			178,566		165,226		8.1
Communications and office supplies		36,817		33,330		10.5			107,583		103,468		4.0
Commissions and floor brokerage		10,542		11,338		(7.0	)		32,506		30,798		5.5
Other operating expenses		78,650		76,785		2.4			226,444		231,122		(2.0	)
Total non-interest expenses	$	670,818	$	597,812		12.2		$	1,956,234	$	1,853,001		5.6

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 September 30, 2019, compensation and benefits expense increased 15.1% to $486.2 million from $422.3 million during the comparable period in 2018. For the nine months ended September 30, 2019, compensation and benefits expense increased 6.7% to $1.4 billion from $1.3 billion during the comparable period in 2018.

Compensation and benefits expense as a percentage of net revenues was 59.2% and 59.0% for the three and nine months ended September 30, 2019, respectively, compared to 57.2% and 59.3% for the three and nine months ended September 30, 2018, respectively. The decrease in the compensation ratio is primarily attributable to growth of higher margin business.

Occupancy and equipment rental – For the three months ended September 30, 2019, occupancy and equipment rental expense increased 8.5% to $58.6 million from $54.0 million during the comparable period in 2018. For the nine months ended September 30, 2019, occupancy and equipment rental expense increased 8.1% to $178.6 million from $165.2 million during the comparable period in 2018. The increase is primarily attributable to an increase in depreciation expense as a result of the expansion of our aircraft engine leasing business, an increase in data processing costs associated with the growth of our business, and higher rent expense as a result of an increase in locations.

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 September 30, 2019, communications and office supplies expense increased 10.5% to $36.8 million from $33.3 million during the comparable period in 2018. For the nine months ended September 30, 2019, communications and office supplies expense increased 4.0% to $107.6 million from $103.5 million during the comparable period in 2018. The increase is primarily attributable to higher communication and quote equipment expenses associated with the continued growth of our business.

Commissions and floor brokerage – For the three months ended September 30, 2019, commissions and floor brokerage expense decreased 7.0% to $10.5 million from $11.3 million during the comparable period in 2018. The decrease is primarily attributable to lower volumes from the comparable period in 2018. For the nine months ended September 30, 2019, commissions and floor brokerage expense increased 5.5% to $32.5 million from $30.8 million during the comparable period in 2018. The increase is primarily attributable to an increase in institutional fixed income brokerage trading volumes.

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 September 30, 2019, other operating expenses increased 2.4% to $78.7 million from $76.8 million during the comparable period in 2018. The increase is primarily attributable to increases in settlement expenses, subscriptions, and conference expenses, partially offset by decreases in the provision for loan losses, travel costs, and insurance expense.

For the nine months ended September 30, 2019, other operating expenses decreased 2.0% to $226.4 million from $231.1 million during the comparable period in 2018. The decrease is primarily attributable to a decrease in the provision for loan losses, lower insurance and settlement expenses, partially offset by an increase in legal costs, subscriptions, travel costs, dues and assessments expenses.

Provision for income taxes – For the three and nine months ended September 30, 2019, our provision for income taxes was $40.6 million and $117.2 million, representing an effective tax rate of 27.1% and 27.0%, respectively, compared to $36.7 million and $98.5 million for the comparable periods in 2018, representing an effective tax rate of 26.1% and 26.0%, respectively.

SEGMENT ANALYSIS

Our reportable segments include Global Wealth Management, Institutional Group, and Other.

Our Global Wealth Management segment consists of two businesses, the Private Client Group and Stifel Bancorp, Inc. The Private Client Group includes branch offices and independent contractor offices of our broker-dealer subsidiaries located throughout the 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 as Federal 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.

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.

Results of Operations – Global Wealth Management

Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018

The following table presents consolidated financial information for the Global Wealth Management segment for the periods indicated (in thousands, except percentages):

	Three Months Ended September 30,							As a Percentage of Net Revenues For the Three Months Ended September 30,
	2019		2018		% Change			2019			2018
Revenues:
Commissions	$	118,061	$	117,795		0.2			22.1	%		23.6	%
Principal transactions		42,056		41,023		2.5			7.9			8.3
Brokerage revenues		160,117		158,818		0.8			30.0			31.9
Asset management and service fees		217,616		200,735		8.4			40.7			40.3
Investment banking		9,855		7,722		27.6			1.8			1.6
Interest		168,902		161,133		4.8			31.6			32.3
Other income		9,046		3,545		155.2			1.7			0.7
Total revenues		565,536		531,953		6.3			105.8			106.8
Interest expense		30,965		33,792		(8.4	)		5.8			6.8
Net revenues		534,571		498,161		7.3			100.0			100.0
Non-interest expenses:
Compensation and benefits		261,681		241,713		8.3			49.0			48.5
Occupancy and equipment rental		29,382		26,428		11.2			5.5			5.3
Communication and office supplies		14,084		14,593		(3.5	)		2.6			2.9
Commissions and floor brokerage		5,049		4,884		3.4			0.9			1.0
Other operating expenses		21,552		27,166		(20.7	)		4.1			5.5
Total non-interest expenses		331,748		314,784		5.4			62.1			63.2
Income before income taxes	$	202,823	$	183,377		10.6			37.9	%		36.8	%

	September 30,
	2019		2018
Branch offices		381		368
Financial advisors ⁽¹⁾		2,097		2,045
Independent contractors		96		104
Total financial advisors		2,193		2,149

⁽¹⁾	Reflects change in the definition of producing brokers as of January 1, 2019. Prior period amounts have been restated to conform with the current period presentation.

Nine months Ended September 30, 2019 Compared with Nine months Ended September 30, 2018

The following table presents consolidated financial information for the Global Wealth Management segment for the periods indicated (in thousands, except percentages):

	Nine Months Ended September 30,							As a Percentage of Net Revenues For the Nine Months Ended September 30,
	2019		2018		% Change			2019			2018
Revenues:
Commissions	$	348,272	$	355,129		(1.9	)		22.1	%		24.0	%
Principal transactions		127,427		125,713		1.4			8.1			8.5
Brokerage revenues		475,699		480,842		(1.1	)		30.2			32.5
Asset management and service fees		624,025		596,081		4.7			39.6			40.2
Investment banking		28,637		23,459		22.1			1.8			1.6
Interest		523,686		440,252		19.0			33.2			29.7
Other income		28,422		9,898		187.1			1.7			0.7
Total revenues		1,680,469		1,550,532		8.4			106.5			104.7
Interest expense		102,855		69,469		48.1			6.5			4.7
Net revenues		1,577,614		1,481,063		6.5			100.0			100.0
Non-interest expenses:
Compensation and benefits		771,475		721,352		6.9			48.9			48.7
Occupancy and equipment rental		89,620		78,082		14.8			5.7			5.3
Communication and office supplies		42,824		46,315		(7.5	)		2.7			3.1
Commissions and floor brokerage		15,095		13,797		9.4			1.0			0.9
Other operating expenses		68,935		73,474		(6.2	)		4.3			5.0
Total non-interest expenses		987,949		933,020		5.9			62.6			63.0
Income before income taxes	$	589,665	$	548,043		7.6			37.4	%		37.0	%

NET REVENUES

For the three months ended September 30, 2019, Global Wealth Management net revenues increased 7.3% to a record $534.6 million from $498.2 million for the comparable period in 2018. The increase in net revenues over the comparable period in 2018 is primarily attributable to the growth in asset management and service fee revenues, an increase in net interest income, and an increase in other income.

For the nine months ended September 30, 2019, Global Wealth Management net revenues increased 6.5% to $1.6 billion from $1.5 billion for the comparable period in 2018. The increase in net revenues over the comparable period in 2018 is primarily attributable to an increase in net interest income, the growth in asset management and service fee revenues, an increase in other income and investment banking revenues. Net revenues for the nine months ended September 30, 2019 have been negatively impacted by a decrease in commission revenues from the comparable period in 2018.

Commissions – For the three months ended September 30, 2019, commission revenues increased 0.2% to $118.1 million from $117.8 million in the comparable period in 2018. For the nine months ended September 30, 2019, commission revenues decreased 1.9% to $348.3 million from $355.1 million in the comparable period in 2018.

Principal transactions – For the three months ended September 30, 2019, principal transactions revenues increased 2.5% to $42.1 million from $41.0 million in the comparable period in 2018. For the nine months ended September 30, 2019, principal transactions revenues increased 1.4% to $127.4 million from $125.7 million in the comparable period in 2018.

Brokerage revenues - For the three months ended September 30, 2019, brokerage revenues increased 0.8% to $160.1 million from $158.8 million in the comparable period in 2018. For the nine months ended September 30, 2019, brokerage revenues decreased 1.1% to $475.7 million from $480.8 million in the comparable period in 2018. Brokerage revenues were impacted by continued migration of client activity from brokerage to asset management activities.

Asset management and service fees – For the three months ended September 30, 2019, asset management and service fees increased 8.4% to $217.6 million from $200.7 million in the comparable period in 2018. For the nine months ended September 30, 2019, asset management and service fees increased 4.7% to $624.0 million from $596.1 million in the comparable period in 2018. The increase is primarily a result of continued migration to fee-based accounts and our continued expansion in the asset management business.

Client asset metrics as of the periods indicated (in thousands, except number of accounts and percentages):

	9/30/19		9/30/18		% Change		6/30/19		% Change
Client assets	$	311,819,000	$	289,136,000		7.8	$	305,233,000		2.2
Fee-based client assets	$	108,138,000	$	96,008,000		12.6	$	103,824,000		4.2
Number of client accounts		1,009,000		968,000		4.2		998,000		1.1
Number of fee-based client accounts		223,000		201,000		10.9		216,000		3.2

The increase in the value of our client assets and fee-based assets over the comparable period in 2018 was primarily attributable to the rise in the markets, as well as asset growth resulting from strong recruiting efforts. The growth of our client assets was impacted by an increase in cash outflows due to tax season.

Investment banking – Investment banking, which represents sales credits for investment banking underwritings, increased 27.6% to $9.9 million for the three months ended September 30, 2019 from $7.7 million during the comparable period in 2018. For the nine months ended September 30, 2019, investment banking revenues increased 22.1% to $28.6 million from $23.5 million during the comparable period in 2018. See “Investment banking” in the Institutional Group segment discussion for information on the changes in net revenues.

Interest revenue – For the three months ended September 30, 2019, interest revenue increased 4.8% to $168.9 million from $161.1 million in the comparable period in 2018. For the nine months ended September 30, 2019, interest revenue increased 19.0% to $523.7 million from $440.3 million during the comparable period in 2018. The increase is primarily due to a growth of interest-earning assets at Stifel Bancorp, and an increase in the weighted-average yield. 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 September 30, 2019, other income increased 155.2% to $9.0 million from $3.5 million in the comparable period in 2018. For the nine months ended September 30, 2019, other income increased 187.1% to $28.4 million from $9.9 million during the comparable period in 2018. The increase is primarily attributable to rental income generated from our aircraft engine leasing business.

Interest expense – For the three months ended September 30, 2019, interest expense decreased 8.4% to $31.0 million from $33.8 million during the comparable period in 2018. For the nine months ended September 30, 2019, interest expense increased 48.1% to $102.9 million from $69.5 million during the comparable period in 2018. The increase in interest expense is primarily attributable to an increase in interest-earning liabilities at Stifel Bancorp from the comparable period in 2018.

NET INTEREST INCOME – STIFEL BANCORP

The following tables present average balance data and operating interest revenue and expense data for Stifel Bancorp, as well as related interest yields for the periods indicated (in thousands, except rates):

	Three Months Ended September 30, 2019							Three Months Ended September 30, 2018
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Assets:
Interest-bearing cash and federal funds sold	$	540,767	$	3,194		2.36	%	$	29,383	$	151		2.06	%
U.S. government agencies		4,546		68		5.98			6,733		25		1.49
U.S. Treasuries		—		—		—			1,900		7		1.47
State and municipal securities (tax-exempt) ⁽¹⁾		34,306		195		2.27			73,226		364		1.99
Mortgage-backed securities		1,253,362		6,584		2.10			1,668,433		9,098		2.18
Corporate fixed income securities		743,704		5,696		3.06			1,286,710		9,173		2.85
Asset-backed securities		4,367,773		42,402		3.88			4,967,213		48,158		3.88
Federal Home Loan Bank ("FHLB") and other capital stock		46,706		355		3.04			73,863		773		4.19
Loans ⁽²⁾
Securities-based loans		1,959,281		19,870		4.06			1,848,213		18,202		3.94
Commercial and industrial		3,330,231		39,700		4.77			2,950,203		34,071		4.62
Residential real estate		3,003,776		23,163		3.08			2,753,661		19,812		2.88
Commercial real estate		377,157		5,206		5.52			192,355		2,395		4.98
Home equity lines of credit		51,330		614		4.78			24,118		290		4.81
Construction and land		258,307		3,446		5.34			64,200		857		5.34
Other		135,301		1,756		5.19			54,200		679		5.01
Loans held for sale		209,737		1,681		3.21			224,519		2,460		4.38
Total interest-earning assets ⁽³⁾	$	16,316,284	$	153,930		3.77	%	$	16,218,930	$	146,515		3.61	%
Cash and due from banks		49,493							14,944
Other non interest-earning assets		366,596							144,687
Total assets	$	16,732,373						$	16,378,561
Liabilities and stockholder's equity:
Deposits:
Money market	$	12,773,765	$	12,713		0.40	%	$	11,980,962	$	15,877		0.53	%
Time deposits		1,074,433		6,792		2.53			1,535,836		8,221		2.14
Demand deposits		578,067		2,212		1.53			478,486		1,722		1.44
Savings		499,912		3,098		2.48			7,893		36		1.82
FHLB advances		270,092		1,146		1.70			1,028,789		4,232		1.65
Other borrowings		1,663		27		6.49			28,129		223		3.17
Total interest-bearing liabilities ⁽³⁾		15,197,932		25,988		0.68	%		15,060,095		30,311		0.81	%
Non-interest-bearing liabilities		123,924							79,424
Other non-interest bearing liabilities		83,133							99,557
Total liabilities		15,404,989							15,239,076
Stockholder's equity		1,327,384							1,139,485
Total liabilities and stockholder's equity	$	16,732,373						$	16,378,561
Net interest income/spread			$	127,942		3.09	%			$	116,204		2.80	%
Net interest margin						3.14	%						2.87	%

⁽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.

	Nine Months Ended September 30, 2019							Nine Months Ended September 30, 2018
	Average Balance		Interest Income/ Expense		Average Interest Rate			Average Balance		Interest Income/ Expense		Average Interest Rate
Assets:
Interest-bearing cash and federal funds sold	$	532,074	$	9,525		2.39	%	$	29,383	$	420		1.91	%
U.S. government agencies		3,161		68		2.87			2,269		25		1.47
U.S. Treasuries		—		—		—			640		7		1.46
State and municipal securities (tax-exempt) ⁽¹⁾		44,104		716		2.16			73,635		981		1.78
Mortgage-backed securities		1,416,057		24,170		2.28			1,699,462		27,741		2.18
Corporate fixed income securities		870,183		19,771		3.03			1,275,929		26,004		2.72
Asset-backed securities		4,523,805		137,402		4.05			4,699,065		130,505		3.70
Federal Home Loan Bank ("FHLB") and other capital stock		52,328		2,085		5.31			68,783		2,042		3.96
Loans ⁽²⁾
Securities-based loans		1,892,268		59,154		4.17			1,826,920		50,694		3.70
Commercial and industrial		3,361,206		121,833		4.83			2,673,867		89,563		4.47
Residential real estate		2,959,501		68,176		3.07			2,688,638		56,869		2.82
Commercial real estate		356,161		14,900		5.58			133,874		4,507		4.49
Home equity lines of credit		46,732		1,725		4.92			18,537		643		4.62
Construction and land		203,386		8,329		5.46			31,064		1,181		5.07
Other		130,939		5,121		5.21			34,487		1,178		4.55
Loans held for sale		192,731		5,303		3.67			215,026		6,155		3.82
Total interest-earning assets ⁽³⁾	$	16,584,636	$	478,278		3.85	%	$	15,471,579	$	398,515		3.43	%
Cash and due from banks		46,521							15,544
Other non interest-earning assets		395,158							217,332
Total assets	$	17,026,315						$	15,704,455
Liabilities and stockholder's equity:
Deposits:
Money market	$	12,722,788	$	44,627		0.47	%	$	12,452,063	$	35,096		0.38	%
Time deposits		1,336,471		24,174		2.41			699,603		11,060		2.11
Demand deposits		636,131		8,120		1.70			360,358		2,917		1.08
Savings		283,393		5,307		2.50			17,176		256		1.99
FHLB advances		426,535		5,735		1.79			925,075		10,579		1.52
Other borrowings		1,691		95		7.49			20,166		576		3.81
Total interest-bearing liabilities ⁽³⁾		15,407,009		88,058		0.76	%		14,474,441		60,484		0.56	%
Non-interest-bearing liabilities		135,336							49,502
Other non-interest bearing liabilities		167,746							69,135
Total liabilities		15,710,091							14,593,078
Stockholder's equity		1,316,224							1,111,377
Total liabilities and stockholder's equity	$	17,026,315						$	15,704,455
Net interest income/spread			$	390,220		3.09	%			$	338,031		2.87	%
Net interest margin						3.14	%						2.91	%

⁽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.

The following table sets forth an analysis of the effect on net interest income of volume and rate changes for the three and nine month periods ended September 30, 2019 compared to the three and nine month periods ended September 30, 2018 (in thousands):

	Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018									Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
	Increase/(decrease) due to:									Increase/(decrease) due to:
	Volume			Rate			Total			Volume			Rate			Total
Interest income:
Interest-bearing cash and federal funds sold	$	2,894		$	149		$	3,043		$	8,955		$	150		$	9,105
U.S. government agencies		(55	)		98			43			15			28			43
U.S. Treasuries		(4	)		(3	)		(7	)		(4	)		(3	)		(7	)
State and municipal securities (tax-exempt) ⁽¹⁾		(461	)		292			(169	)		(542	)		277			(265	)
Mortgage-backed securities		(2,191	)		(323	)		(2,514	)		(4,916	)		1,345			(3,571	)
Corporate fixed income securities		(4,221	)		744			(3,477	)		(9,755	)		3,522			(6,233	)
Asset-backed securities		(5,819	)		63			(5,756	)		(4,566	)		11,463			6,897
FHLB and other capital stock		(241	)		(177	)		(418	)		(101	)		144			43
Loans
Securities-based loans		1,117			551			1,668			1,864			6,596			8,460
Commercial and industrial		4,502			1,127			5,629			24,456			7,814			32,270
Residential real estate		1,872			1,479			3,351			6,000			5,307			11,307
Commercial real estate		2,524			287			2,811			9,067			1,326			10,393
Home equity lines of credit		325			(1	)		324			1,038			44			1,082
Construction and land		2,589			—			2,589			7,049			99			7,148
Other		1,052			25			1,077			3,749			194			3,943
Loans held for sale		(153	)		(626	)		(779	)		(345	)		(507	)		(852	)
	$	3,730		$	3,685		$	7,415		$	41,964		$	37,799		$	79,763
Interest expense:
Deposits:
Money market	$	5,646		$	(8,810	)	$	(3,164	)	$	779		$	8,752		$	9,531
Time deposits		(3,598	)		2,169			(1,429	)		11,321			1,793			13,114
Demand deposits		377			113			490			2,968			2,235			5,203
Savings		3,044			18			3,062			4,969			82			5,051
FHLB advances		(3,985	)		899			(3,086	)		(7,190	)		2,346			(4,844	)
Other borrowings		(977	)		781			(196	)		(954	)		473			(481	)
	$	507		$	(4,830	)	$	(4,323	)	$	11,893		$	15,681		$	27,574

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.

For the three months ended September 30, 2019, interest revenue of $153.9 million was generated from average interest-earning assets of $16.3 billion at an average interest rate of 3.77%. Interest revenue of $146.5 million for the comparable period in 2018 was generated from average interest-earning assets of $16.2 billion at an average interest rate of 3.61%.

For the nine months ended September 30, 2019, interest revenue of $478.3 million was generated from average interest-earning assets of $16.6 billion at an average interest rate of 3.85%. Interest revenue of $398.5 million for the comparable period in 2018 was generated from average interest-earning assets of $15.5 billion at an average interest rate of 3.43%.

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 ended September 30,

2019 was $15.2 billion at an average interest rate of 0.68%. The average balance of interest-bearing liabilities for the comparable period in 2018 was $15.1 billion at an average interest rate of 0.81%. The average balance of interest-bearing liabilities during the nine months ended September 30, 2019 was $15.4 billion at an average interest rate of 0.76%. The average balance of interest-bearing liabilities for the comparable period in 2018 was $14.5 billion at an average interest rate of 0.56%.

See “Net Interest Income – Stifel Bancorp” above for more information regarding average balances, interest income and expense, and average interest rate yields.

NON-INTEREST EXPENSES

For the three months ended September 30, 2019, Global Wealth Management non-interest expenses increased 5.4% to $331.7 million from $314.8 million for the comparable period in 2018. For the nine months ended September 30, 2019, Global Wealth Management non-interest expenses increased 5.9% to $987.9 million from $933.0 million for the comparable period in 2018.

Compensation and benefits – For the three months ended September 30, 2019, compensation and benefits expense increased 8.3% to $261.7 million from $241.7 million during the comparable period in 2018. For the nine months ended September 30, 2019, compensation and benefits expense increased 6.9% to $771.5 million from $721.4 million during the comparable period in 2018. The increase is principally due to increased variable compensation. Compensation and benefits expense as a percentage of net revenues was 49.0% and 48.9% for the three and nine months ended September 30, 2019, respectively, compared to 48.5% and 48.7% for the comparable periods in 2018, respectively.

Occupancy and equipment rental – For the three months ended September 30, 2019, occupancy and equipment rental expense increased 11.2% to $29.4 million from $26.4 million during the comparable period in 2018. For the nine months ended September 30, 2019, occupancy and equipment rental expense increased 14.8% to $89.6 million from $78.1 million during the comparable period in 2018. The increase is primarily attributable an increase in locations over the comparable period in 2018.

Communications and office supplies – For the three months ended September 30, 2019, communications and office supplies expense decreased 3.5% to $14.1 million from $14.6 million during the comparable period in 2018. For the nine months ended September 30, 2019, communications and office supplies expense decreased 7.5% to $42.8 million from $46.3 million during the comparable period in 2018.

Commissions and floor brokerage – For the three months ended September 30, 2019, commissions and floor brokerage expense increased 3.4% to $5.0 million from $4.9 million during the comparable period in 2018. For the nine months ended September 30, 2019, commissions and floor brokerage expense increased 9.4% to $15.1 million from $13.8 million during the comparable period in 2018. The increase is primarily attributable to higher trading and clearing expenses.

Other operating expenses – For the three months ended September 30, 2019, other operating expenses decreased 20.7% to $21.6 million from $27.2 million during the comparable period in 2018. For the nine months ended September 30, 2019, other operating expenses decreased 6.2% to $68.9 million from $73.5 million during the comparable period in 2018. The decrease in other operating expenses from the comparable periods in 2018 is primarily attributable to decreases in provision for loan losses, travel expense, and insurance expense, partially offset by increases in settlement costs, professional fees, conference, and subscription expenses.

INCOME BEFORE INCOME TAXES

For the three months ended September 30, 2019, income before income taxes increased 10.6% to $202.8 million from $183.4 million during the comparable period in 2018. For the nine months ended September 30, 2019, income before income taxes increased 7.6% to $589.7 million from $548.0 million during the comparable period in 2018.

For the three months ended September 30, 2019, profit margins (income before income taxes as a percent of net revenues) have increased to 37.9% from 36.8% during the comparable period in 2018. For the nine months ended September 30, 2019, profit margins increased to 37.4% from 37.0% during the comparable period in 2018.

Results of Operations – Institutional Group

Three Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018

The following table presents consolidated financial information for the Institutional Group segment for the periods indicated (in thousands, except percentages):

	Three Months Ended September 30,								As a Percentage of Net Revenues For the Three Months Ended September 30,
	2019			2018		% Change			2019			2018
Revenues:
Commissions	$	45,859		$	40,220		14.0			15.8	%		16.4	%
Principal transactions		55,791			42,130		32.4			19.2			17.1
Brokerage revenues		101,650			82,350		23.4			35.0			33.5
Advisory fees		104,847			75,717		38.5			36.1			30.8
Capital raising		84,088			85,553		(1.7	)		29.0			34.8
Investment banking		188,935			161,270		17.2			65.1			65.6
Interest		5,938			5,183		14.6			2.0			2.1
Other income		(407	)		2,477		(116.4	)		(0.1	)		1.0
Total revenues		296,116			251,280		17.8			102.0			102.2
Interest expense		5,894			5,328		10.6			2.0			2.2
Net revenues		290,222			245,952		18.0			100.0			100.0
Non-interest expenses:
Compensation and benefits		171,534			146,187		17.3			59.1			59.4
Occupancy and equipment rental		12,427			11,763		5.6			4.3			4.8
Communication and office supplies		19,053			15,789		20.7			6.6			6.4
Commissions and floor brokerage		5,503			6,453		(14.7	)		1.9			2.6
Other operating expenses		33,082			31,455		5.2			11.3			12.9
Total non-interest expenses		241,599			211,647		14.2			83.2			86.1
Income before income taxes	$	48,623		$	34,305		41.7			16.8	%		13.9	%

Nine months Ended September 30, 2019 Compared with Nine months Ended September 30, 2018

The following table presents consolidated financial information for the Institutional Group segment for the periods indicated (in thousands, except percentages):

	Nine Months Ended September 30,							As a Percentage of Net Revenues For the Nine Months Ended September 30,
	2019		2018		% Change			2019			2018
Revenues:
Commissions	$	136,078	$	135,563		0.4			16.6	%		17.6	%
Principal transactions		170,916		144,206		18.5			20.8			18.8
Brokerage revenues		306,994		279,769		9.7			37.4			36.4
Advisory fees		292,647		260,312		12.4			35.6			33.8
Capital raising		218,963		222,666		(1.7	)		26.6			29.0
Investment banking		511,610		482,978		5.9			62.2			62.8
Interest		18,171		13,880		30.9			2.2			1.8
Other income		3,888		6,583		(40.9	)		0.5			0.9
Total revenues		840,663		783,210		7.3			102.3			101.9
Interest expense		18,553		14,355		29.2			2.3			1.9
Net revenues		822,110		768,855		6.9			100.0			100.0
Non-interest expenses:
Compensation and benefits		486,724		455,515		6.9			59.2			59.2
Occupancy and equipment rental		38,287		35,269		8.6			4.7			4.6
Communication and office supplies		53,802		51,292		4.9			6.5			6.7
Commissions and floor brokerage		17,420		17,001		2.5			2.1			2.2
Other operating expenses		105,748		94,879		11.5			12.9			12.4
Total non-interest expenses		701,981		653,956		7.3			85.4			85.1
Income before income taxes	$	120,129	$	114,899		4.6			14.6	%		14.9	%

NET REVENUES

For the three months ended September 30, 2019, Institutional Group net revenues increased 18.0% to $290.2 million from $246.0 million for the comparable period in 2018. For the nine months ended September 30, 2019, Institutional Group net revenues increased 6.9% to $822.1 million from $768.9 million during the comparable period in 2018.

The increase in net revenues from the comparable periods in 2018 was primarily attributable to an increase in advisory fees and fixed income institutional brokerage revenues, partially offset by a decrease in equity brokerage revenues and capital raising revenues.

Commissions – For the three months ended September 30, 2019, commission revenues increased 14.0% to $45.9 million from $40.2 million in the comparable period in 2018. For the nine months ended September 30, 2019, commission revenues increased 0.4% to $136.1 million from $135.6 million in the comparable period in 2018.

Principal transactions – For the three months ended September 30, 2019, principal transactions revenues increased 32.4% to $55.8 million from $42.1 million in the comparable period in 2018. For the nine months ended September 30, 2019, principal transaction revenues increased 18.5% to $170.9 million from $144.2 million in the comparable period in 2018.

Brokerage revenues – For the three months ended September 30, 2019, institutional brokerage revenues increased 23.4% to $101.7 million from $82.4 million in the comparable period in 2018. For the nine months ended September 30, 2019, institutional brokerage revenues increased 9.7% to $307.0 million from $279.8 million in the comparable period in 2018. Brokerage revenues were favorably impacted by higher market volatility and trading volumes and negatively impacted by the continued migration from active to passive management strategies.

For the three months ended September 30, 2019, fixed income institutional brokerage revenues increased 57.7% to $60.6 million from $38.4 million in the comparable period in 2018. For the nine months ended September 30, 2019, fixed income brokerage revenues increased 30.8% to $186.4 million from $142.5 million in the comparable period in 2018. The increase is primarily attributable to higher fixed income trading volumes, and to a lesser extent, from the contribution of our acquisition of First Empire, which closed during the first quarter of 2019.

For the three months ended September 30, 2019, equity institutional brokerage revenues decreased 6.5% to $41.0 million from $43.9 million during the comparable period in 2018. For the nine months ended September 30, 2019, equity brokerage revenues decreased 12.1% to $120.6 million from $137.3 million during the comparable period in 2018. The decrease is primarily attributable to continued migration from active to passive management strategies.

Investment banking – For the three months ended September 30, 2019, investment banking revenues increased 17.2% to $188.9 million from $161.3 million during the comparable period in 2018. For the nine months ended September 30, 2019, investment banking revenues increased 5.9% to $511.6 million from $483.0 million during the comparable period in 2018. The increases are primarily attributable to an increase in advisory fees and fixed income capital raising revenues, partially offset by a decrease in equity capital raising revenues. Investment banking revenues benefited from the contribution of our acquisition of Mooreland, which closed in the third quarter of 2019.

For the three months ended September 30, 2019, advisory fee revenues increased 38.5% to $104.8 million from $75.7 million in the comparable period in 2018. For the nine months ended September 30, 2019, advisory fees increased 12.4% to $292.6 million from $260.3 million in the comparable period in 2018. The increase is primarily attributable to an increase in the number of advisory transactions over the comparable periods in 2018, including growth in our fund placement business.

For the three months ended September 30, 2019, capital raising revenues decreased 1.7% to $84.1 million from $85.6 million in the comparable period in 2018. For the nine months ended September 30, 2019, capital raising revenues decreased 1.7% to $219.0 million from $222.7 million in the comparable period in 2018.

For the three months ended September 30, 2019, fixed income capital raising revenues increased 51.2% to $31.1 million from $20.6 million during the comparable period in 2018. For the nine months ended September 30, 2019, fixed income capital raising revenues increased 29.7% to $78.9 million from $60.9 million during the comparable period in 2018. The increase is primarily attributable to an increase in the municipal bond origination business.

For the three months ended September 30, 2019, equity capital raising revenues decreased 18.5% to $53.0 million from $65.0 million during the comparable period in 2018. For the nine months ended September 30, 2019, equity capital raising revenues decreased 13.5% to $140.0 million from $161.8 million during the comparable period in 2018.

Interest – For the three months ended September 30, 2019, interest increased 14.6% to $5.9 million from $5.2 million in the comparable period in 2018. For the nine months ended September 30, 2019, interest increased 30.9% to $18.2 million from $13.9 million during the comparable period in 2018. The increase is primarily attributable to an increase in inventory levels.

Other income – For the three months ended September 30, 2019, other income decreased 116.4% to a loss of $0.4 million from $2.5 million in the comparable period in 2018. For the nine months ended September 30, 2019, other income decreased 40.9% to $3.9 million from $6.6 million during the comparable period in 2018.

Interest expense – For the three months ended September 30, 2019, interest expense increased 10.6% to $5.9 million from $5.3 million in the comparable period in 2018. For the nine months ended September 30, 2019, interest expense increased 29.2% to $18.6 million from $14.4 million in the comparable period in 2018. The increase is primarily attributable to an increase in inventory levels.

NON-INTEREST EXPENSES

For the three months ended September 30, 2019, Institutional Group non-interest expenses increased 14.2% to $241.6 million from $211.6 million for the comparable period in 2018. For the nine months ended September 30, 2019, Institutional Group non-interest expenses increased 7.3% to $702.0 million from $654.0 million during the comparable period in 2018.

Compensation and benefits – For the three months ended September 30, 2019, compensation and benefits expense increased 17.3% to $171.5 million from $146.2 million during the comparable period in 2018. For the nine months ended September 30, 2019, compensation and benefits expense increased 6.9% to $486.7 million from $455.5 million during the comparable period in 2018.

Compensation and benefits expense as a percentage of net revenues was 59.1% and 59.2% for the three and nine months ended September 30, 2019, respectively, compared to 59.4% and 59.2% for comparable periods in 2018, respectively.

Occupancy and equipment rental – For the three months ended September 30, 2019, occupancy and equipment rental expense increased 5.6% to $12.4 million from $11.8 million during the comparable period in 2018. For the nine months ended September 30, 2019, occupancy and equipment rental expense increased 8.6% to $38.3 million from $35.3 million during the comparable period in 2018. The increase is primarily attributable to higher rent expense.

Communications and office supplies – For the three months ended September 30, 2019, communications and office supplies expense increased 20.7% to $19.1 million from $15.8 million during the comparable period in 2018. For the nine months ended September 30, 2019, communications and office supplies expense increased 4.9% to $53.8 million from $51.3 million during the comparable period in 2018. The increase is primarily attributable to higher communication and quote equipment expenses associated with the continued growth of our business.

Commissions and floor brokerage – For the three months ended September 30, 2019, commissions and floor brokerage expense decreased 14.7% to $5.5 million from $6.5 million during the comparable period in 2018. The decrease is primarily attributable to lower volumes from the comparable period in 2018. For the nine months ended September 30, 2019, commissions and floor brokerage expense increased 2.5% to $17.4 million from $17.0 million during the comparable period in 2018.The increase is primarily attributable to increased fixed income brokerage volumes.

Other operating expenses – For the three months ended September 30, 2019, other operating expenses increased 5.2% to $33.1 million from $31.5 million during the comparable period in 2018. The increase is primarily attributable to an increase in dues and assessments, and conference and travel costs. For the nine months ended September 30, 2019, other operating expenses increased 11.5% to $105.7 million from $94.9 million during the comparable period in 2018. Other operating expenses for the nine months ended September 30, 2019 was impacted by an increase in investment banking gross-up costs, which is attributable to an increase in investment banking revenues.

INCOME BEFORE INCOME TAXES

For the three months ended September 30, 2019, income before income taxes for the Institutional Group segment increased 41.7% to $48.6 million from $34.3 million during the comparable period in 2018. For the nine months ended September 30, 2019, income before income taxes for the Institutional Group segment increased 4.6% to $120.1 million from $114.9 million during the comparable period in 2018.

Profit margins (income before income taxes as a percentage of net revenues) have increased to 16.8% for the three months ended September 30, 2019 from 13.9% during the comparable period in 2018 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 decreased to 14.6% for the nine months ended September 30, 2019 from 14.9% during the comparable period in 2018 as a result of an increase in expenses, partially offset by higher revenues.

Results of Operations – Other Segment

Three and Nine months Ended September 30, 2019 Compared with Three and Nine months Ended September 30, 2018

The following table presents consolidated financial information for the Other segment for the periods presented (in thousands, except percentages):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2019			2018			% Change			2019			2018			% Change
Net revenues	$	(3,221	)	$	(5,771	)		44.2		$	(6,945	)	$	(18,486	)		62.4
Non-interest expenses:
Compensation and benefits		52,945			34,425			53.8			152,936			145,521			5.1
Other operating expenses		44,526			36,956			20.5			113,368			120,504			(5.9	)
Total non-interest expenses		97,471			71,381			36.6			266,304			266,025			0.1
Loss before income taxes	$	(100,692	)	$	(77,152	)		30.5	%	$	(273,249	)	$	(284,511	)		(4.0	)%

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 September 30,							Nine Months Ended September 30,
	2019		2018		% Change			2019		2018		% Change
Non-interest expenses:
Compensation and benefits	$	8,827	$	5,475		61.2		$	16,063	$	13,289		20.9
Other operating expenses		6,024		6,051		(0.4	)		17,206		26,966		(36.2	)
Total non-interest expenses	$	14,851	$	11,526		28.8	%	$	33,269	$	40,255		(17.4	)%

The expenses not associated with acquisition-related activities in the other segment are as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2019		2018		% Change			2019		2018		% Change
Non-interest expenses:
Compensation and benefits	$	44,118	$	28,950		52.4		$	136,873	$	132,232		3.5
Other operating expenses		38,502		30,905		24.6			96,162		93,538		2.8
Total non-interest expenses	$	82,620	$	59,855		38.0	%	$	233,035	$	225,770		3.2	%

Non-interest expenses for the three months ended September 30, 2019 increased 38.0% from the comparable period in 2018. The increase consisted of a 52.4% increase in compensation and benefits and a 24.6% increase in other operating expenses. Non-interest expenses for the nine months ended September 30, 2019 increased 3.2% from the comparable period in 2018. The increase consisted of a 3.5% increase in compensation and benefits and a 2.8% 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 of September 30, 2019, our total assets decreased 1.5% to $24.2 billion from $24.5 billion at December 31, 2018. 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 of September 30, 2019, our liabilities were comprised primarily of deposits of $14.8 billion at Stifel Bancorp, senior notes, net of debt issuance costs, of $1.0 billion, Federal Home Loan Bank advances of $250.0 million, payables to customers of $907.1 million at our broker-dealer subsidiaries, accounts payable and accrued expenses of $1.0 billion, accrued employee compensation of $350.8 million, and trust preferred securities of $60.0 million. To meet our obligations to clients and operating needs, we had $868.9 million in cash and cash equivalents at September 30, 2019. We also had highly liquid assets consisting of held-to-maturity securities of $2.9 billion, available-for-sale securities of $3.4 billion, client brokerage receivables of $1.4 billion, and financial instruments of $1.2 billion.

Cash Flow

Cash, cash equivalents, and restricted cash decreased $1.1 billion to $931.5 million at September 30, 2019, from $2.1 billion at December 31, 2018. Operating activities provided cash of $33.3 million. Investing activities provided cash of $166.5 million due to proceeds from the sale and maturity of securities in our investment portfolio and the sale of investments, partially offset by the growth of the loan portfolio, investment portfolio purchases, business acquisitions, and fixed asset purchases. Financing activities used cash of $1.3 billion principally due to a decrease in bank deposits, repayments of FHLB advances, share repurchases, repayments of short-term borrowings, and dividends paid on our common and preferred stock, partially offset by proceeds received from the issuance of preferred stock and an increase in securities loaned.

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 its ability to meet customer deposit withdrawals, maintain reserve requirements, and support asset growth.

As of September 30, 2019, we had $24.2 billion in assets, $9.7 billion of which consisted of cash or assets readily convertible into cash as follows (in thousands, except average days to conversion):

	September 30, 2019		December 31, 2018		Average Conversion
Cash and cash equivalents	$	868,866	$	1,936,560
Receivables from brokers, dealers, and clearing organizations		672,557		515,574	5 days
Securities purchased under agreements to resell		624,049		699,900	1 day
Financial instruments owned at fair value		1,171,917		1,267,273	3 days
Available-for-sale securities at fair value		3,448,801		3,070,447	4 days
Held-to-maturity securities at amortized cost		2,881,484		4,218,854	3 days
Investments		50,921		50,382	10 days
Total cash and assets readily convertible to cash	$	9,718,595	$	11,758,990

As of September 30, 2019 and December 31, 2018, the amount of collateral by asset class is as follows (in thousands):

	September 30, 2019				December 31, 2018
	Contractual		Contingent		Contractual		Contingent
Cash and cash equivalents	$	111,973	$	—	$	71,784	$	—
Financial instruments owned at fair value		564,892		564,892		535,394		600,636
Investment portfolio (AFS & HTM)		—		1,621,881		—		3,536,719
	$	676,865	$	2,186,773	$	607,178	$	4,137,355

Capital Management

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.

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, 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 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 September 30, 2019, the Company maintained sufficient liquidity to meet current and contingent funding obligations as modeled in its liquidity stress test model.

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. At September 30, 2019, available cash and highly liquid investments comprised approximately 16% of Stifel 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 that Stifel 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.

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 $868.9 million of cash and cash equivalents at September 30, 2019, compared to $1.9 billion at December 31, 2018. Cash and cash equivalents provide immediate sources of funds to meet our liquidity needs.

Securities Available-for-Sale – We held $3.4 billion in available-for-sale investment securities at September 30, 2019, compared to $3.1 billion at December 31, 2018. As of September 30, 2019, the weighted-average life of the investment securities portfolio was approximately 1.1 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 of September 30, 2019, we had $14.8 billion in deposits compared to $15.9 billion at December 31, 2018. 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 the Federal 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.

The Federal Home Loan advances of $250.0 million as of September 30, 2019 are floating-rate advances. The weighted average interest rates during the three and nine months ended September 30, 2019 on these advances is 1.70% and 1.79%, respectively. The advances are secured by Stifel 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 short-term borrowings – On March 5, 2019, we amended our existing Credit Agreement, which now expires in March 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. At September 30, 2019, we had no advances on the $200.0 million revolving credit facility and were in compliance with all covenants.

Federal Home Loan Bank Advances and other secured financing – Stifel Bancorp has borrowing capacity with the Federal Home Loan Bank of $2.8 billion at September 30, 2019 and $59.5 million in federal funds agreements, for the purpose of purchasing short-term funds should additional liquidity be needed. At September 30, 2019, outstanding FHLB advances were $250.0 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 $946.4 million with the Fed’s discount window at September 30, 2019. Stifel Bancorp receives overnight funds from excess cash held in Stifel brokerage accounts, which are deposited into a money market account. These balances totaled $13.7 billion at September 30, 2019.

Public Offering of Senior Notes – On July 15, 2014, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 4.250% senior notes due July 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. In July 2014, we received a BBB- rating on the 2014 Notes.

On December 1, 2015, we sold in a registered underwritten public offering, $300.0 million in aggregate principal amount of 3.50% senior notes due December 2020 (the “December 2015 Notes”). Interest on the December 2015 Notes is payable semi-annually in arrears. We may redeem the December 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. In December 2015, we received a BBB- rating on the 2015 Notes.

On July 11, 2016, the Company completed the pricing of an additional $200.0 million in aggregate principal amount of the Company’s 2014 Notes. The 2014 Notes mature in July 2024 and bear interest at 4.250%, payable semi-annually in arrears in January and July.

On October 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 due October 2047. Interest on the senior notes is payable quarterly in arrears on January 15, April 15, July 15, and October 15. On or after October 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. On October 27, 2017, we completed the sale of an additional $25.0 million aggregate principal amount of Notes pursuant to the over-allotment option. In October 2017, we received a BBB- rating on the 2017 Notes.

Preferred Stock Offerings – In July 2016, the Company completed an underwritten registered public offering of $150 million 6.25% Non-Cumulative Perpetual Preferred Stock, Series A.

In February 2019, the Company completed an underwritten registered public offering of $150 million 6.25% Non-Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred”). In March 2019, we completed a public offering of an additional $10.0 million of Series B Preferred, pursuant to the over-allotment option. The net proceeds from the Series B Preferred offering of $155.0 million was used for general corporate purposes.

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 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

On January 2, 2019, the Company completed the acquisition of First Empire, including First Empire Securities, Inc., an institutional broker-dealer specializing in the fixed income markets. The acquisition was funded with cash from operations.

On September 3, 2019, the Company completed the acquisition of B&F, a privately held firm focused on providing regional and community banks throughout the United States with the interest rate derivative programs through a combination of experienced professionals and proprietary software. The acquisition was funded with cash from operations.

On September 27, 2019, the Company completed the acquisition of certain assets of GKB, a private held investment-banking firm focused on public finance and taxable fixed income sales and trading. The acquisition was funded with cash from operations.

We have paid $147.1 million in the form of upfront notes to financial advisors for transition pay during the nine months ended September 30, 2019. 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 three months in 2019, and the years ended December 31, 2020, 2021, 2022, 2023, and thereafter are $42.2 million, $85.5 million, $75.7 million, $66.7 million, $57.9 million, and $160.4 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 employees. Historically, we have granted stock units to our employees 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. At September 30, 2019, the total number of restricted stock units, PRSUs, and restricted stock awards outstanding was 15.9 million, of which 13.8 million were unvested. At September 30, 2019, there was unrecognized compensation cost for deferred awards of approximately $456.7 million, which is expected to be recognized over a weighted-average period of 2.8 years.

The future estimated compensation expense of the deferred awards, assuming current year forfeiture levels and static growth for the remaining three months in 2019, and the years ended December 31, 2020, 2021, 2022, 2023, and thereafter are $32.5 million, $119.3 million, $102.8 million, $89.4 million, $59.4 million, and $53.3 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., and Stifel Trust Company Delaware, N.A. are also subject to various regulatory capital requirements administered by the federal banking agencies. Our broker-dealer subsidiaries and our bank subsidiaries have consistently operated in excess of their capital adequacy requirements.

At September 30, 2019, Stifel had net capital of $326.4 million, which was 18.2% of aggregate debit items and $290.6 million in excess of its minimum required net capital. At September 30, 2019, all of our other broker-dealer subsidiaries’ net capital exceeded the minimum net capital required under the SEC rule. At September 30, 2019, our international subsidiary’s capital and reserves were in excess of the financial resources requirement under the rules of the FCA. At September 30, 2019, our bank subsidiaries were considered well capitalized under the regulatory framework for prompt corrective action. 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 with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the SEC, 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 a full description of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018, as well as Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q.

Valuation of Financial Instruments

We measure certain financial assets and liabilities at fair value on a recurring basis, including trading securities owned, available-for-sale securities, investments, trading securities sold, but not yet purchased, and derivatives.

Trading securities owned and pledged and trading securities sold, but not yet purchased, are carried at fair value on the consolidated statements of financial condition, with unrealized gains and losses reflected on the consolidated statements of operations.

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less pricing observability and are measured at fair value using valuation models that require more judgment. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions generally.

When available, we use observable market prices, observable market parameters, or broker or dealer quotes (bid and ask prices) to derive the fair value of financial instruments. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded.

A substantial percentage of the fair value of our trading securities and other investments owned, trading securities pledged as collateral, and trading securities sold, but not yet purchased, are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to

product. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques involve some degree of judgment.

For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors we consider in determining the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuation in the near term, and the differences could be material.

We have categorized our financial instruments measured at fair value into a three-level classification in accordance with Topic 820, “Fair Value Measurement and Disclosures.” Fair value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1, and fair value measurements of financial instruments that have no direct observable levels are generally categorized as Level 3. All other fair value measurements of financial instruments that do not fall within the Level 1 or Level 3 classification are considered Level 2. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management.

Level 3 financial instruments have little to no pricing observability as of the report date. These financial instruments do not have active two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have identified Level 3 financial instruments to include certain asset-backed securities, consisting of collateral loan obligation securities, that have experienced low volumes of executed transactions, certain corporate bonds and equity securities where there was less frequent or nominal market activity and auction rate securities for which the market has been dislocated and largely ceased to function. Our Level 3 asset-backed securities are valued using cash flow models that utilize unobservable inputs. Level 3 corporate bonds are valued using prices from comparable securities. Equity securities with unobservable inputs are valued using management’s best estimate of fair value, where the inputs require significant management judgment. Auction rate securities are valued based upon our expectations of issuer redemptions and using internal models.

Contingencies

We are involved in various pending and potential legal proceedings related to our business, including litigation, arbitration, and regulatory proceedings. Some of these matters involve claims for substantial amounts, including claims for punitive damages. We have, after consultation with outside legal counsel and consideration of facts currently known by management, recorded estimated losses in accordance with Topic 450 (“Topic 450”), “Contingencies,” to the extent that claims are probable of loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires us to use significant judgment, and our final liabilities may ultimately be materially different. This determination is inherently subjective, as it requires estimates that are subject to potentially significant revision as more information becomes available and due to subsequent events. In making these determinations, we consider many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of a successful defense against the claim, and the potential for, and magnitude of, damages or settlements from such pending and potential litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies. See Item I, “Legal Proceedings,” in Part II of this report for information on our legal, regulatory, and arbitration proceedings.

Allowance for Loan Losses

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. In providing for the allowance for loan losses, we consider historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement, will not be collectible. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration

all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Once a loan is determined to be impaired, when principal or interest becomes 90 days past due or when collection becomes uncertain, the accrual of interest and amortization of deferred loan origination fees is discontinued (“non-accrual status”), and any accrued and unpaid interest income is reversed. Loans placed on non-accrual status are returned to accrual status when all delinquent principal and interest payments are collected and the collectability of future principal and interest payments is reasonably assured. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is certain. Subsequent recoveries, if any, are credited to the allowance for loan loss.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements. Impairment is measured on a loan-by-loan basis for non-homogeneous loans, and a specific allowance is established for individual loans determined to be impaired. Impairment is measured by comparing the carrying value of the impaired loan to the present value of its expected cash flow discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Derivative Instruments and Hedging Activities

Our derivative instruments are carried on the consolidated statement of financial condition at fair value. We utilize these derivative instruments to minimize significant unplanned fluctuations in earnings caused by interest rate volatility. Our company’s goal is to manage sensitivity to changes in rates by offsetting the repricing or maturity characteristics of certain assets and liabilities, thereby limiting the impact on earnings. The use of derivative instruments does expose our company to credit and market risk. We manage credit risk through strict counterparty credit risk limits and/or collateralization agreements. At inception, we determine if a derivative instrument meets the criteria for hedge accounting under Topic 815, “Derivatives and Hedging.” Ongoing effectiveness evaluations are made for instruments that are designated and qualify as hedges. If the derivative does not qualify for hedge accounting, no assessment of effectiveness is needed.

Income Taxes

The provision for income taxes and related tax reserves is based on our consideration of known liabilities and tax contingencies for multiple taxing authorities. Known liabilities are amounts that will appear on current tax returns, amounts that have been agreed to in revenue agent revisions as the result of examinations by the taxing authorities, and amounts that will follow from such examinations but affect years other than those being examined. Tax contingencies are liabilities that might arise from a successful challenge by the taxing authorities taking a contrary position or interpretation regarding the application of tax law to our tax return filings. Factors considered in estimating our liability are results of tax audits, historical experience, and consultation with tax attorneys and other experts.

Topic 740 (“Topic 740”), “Income Taxes,” clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribed recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, Topic 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

Goodwill and Intangible Assets

Under the provisions of Topic 805, “Business Combinations,” we record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities requires certain estimates.

Goodwill for certain acquisitions is deductible for tax purposes. The amortization of goodwill for tax purposes creates a cash tax savings due to a reduction in the current taxes payable. We have recorded cash tax savings for the nine months ending September 30, 2019 of $5.5 million, and anticipate cumulative future cash savings of $76.6 million as of result of the tax amortization of goodwill.

In accordance with Topic 350, “Intangibles – Goodwill and Other,” indefinite-life intangible assets and goodwill are not amortized. Rather, they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate there may be impairment. This test involves assigning tangible assets and liabilities as well as identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying amount. If the fair value is less than the carrying amount, a further test is required to measure the amount of the impairment. We have elected to test for goodwill impairment in the third quarter of each calendar year.

We test goodwill for impairment on an annual basis and on an interim basis when certain events or circumstances exist. We test for impairment at the reporting unit level, which is generally at the level of or one level below our company’s business segments. For both the annual and interim tests, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However, if we conclude otherwise, we are then required to perform the first step of the two-step impairment test. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. If the estimated fair value is below carrying value, however, further analysis is required to determine the amount of the impairment. Additionally, if the carrying value of a reporting unit is zero or a negative value and it is determined that it is more likely than not the goodwill is impaired, further analysis is required. The estimated fair values of the reporting units are derived based on valuation techniques we believe market participants would use for each of the reporting units. Our annual goodwill impairment testing was completed as of October 1, 2018, with no impairment identified.

The goodwill impairment test requires us to make judgments in determining what assumptions to use in the calculation. Assumptions, judgments, and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including, among others, economic trends and market conditions, changes in revenue growth trends or business strategies, unanticipated competition, discount rates, technology, or government regulations. In assessing the fair value of our reporting units, the volatile nature of the securities markets and industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows. In addition to discounted cash flows, we consider other information, such as public market comparables and multiples of recent mergers and acquisitions of similar businesses. Although we believe the assumptions, judgments, and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments, and estimates could materially affect our reported financial results.

Identifiable intangible assets, which are amortized over their estimated useful lives, are tested for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable.

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 December 31, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

Risks are an inherent part of our business and activities. Management of these risks is critical to our soundness and profitability. Risk management at our company is a multi-faceted process that requires communication, judgment, and knowledge of financial products and markets. Our senior management group takes an active role in the risk management process and requires our business units to assist in the identification, assessment, monitoring, and control of various risks. The principal risks involved in our business activities are: market (interest rates and equity prices), credit, operational, and regulatory and legal.

We have adopted policies and procedures concerning Enterprise Risk Management. The Risk Management/Corporate Governance Committee of the Board of Directors, in exercising its oversight of management's activities, conducts periodic reviews and discussions with management regarding the guidelines and policies governing the processes by which risk assessment and risk management are handled.

Market Risk

The potential for changes in the value of financial instruments owned by our company resulting from changes in interest rates and equity prices is referred to as “market risk.” Market risk is inherent to financial instruments, and accordingly, the scope of our market risk management procedures includes all market risk-sensitive financial instruments.

We trade tax-exempt and taxable debt obligations, including U.S. treasury bills, notes, and bonds; U.S. government agency and municipal notes and bonds; bank certificates of deposit; mortgage-backed securities; and corporate obligations. We are also an active market maker in over-the-counter equity securities. In connection with these activities, we may maintain inventories in order to ensure availability and to facilitate customer transactions.

Changes in value of our financial instruments may result from fluctuations in interest rates, credit ratings, equity prices, and the correlation among these factors, along with the level of volatility.

We manage our trading businesses by product and have established trading departments that have responsibility for each product. The trading inventories are managed with a view toward facilitating client transactions, considering the risk and profitability of each inventory position. Position limits in trading inventory accounts are established by our Enterprise Risk Management department and monitored on a daily basis within the business units. We monitor inventory levels and results of the trading departments, as well as inventory aging, pricing, concentration, securities ratings, and risk sensitivities.

We are also exposed to market risk based on our other investing activities. These investments consist of investments in private equity partnerships, start-up companies, venture capital investments, and zero coupon U.S. government securities and are included under the caption “Investments” on the consolidated statements of financial condition.

Interest Rate Risk

We are exposed to interest rate risk as a result of maintaining inventories of interest rate-sensitive financial instruments and from changes in the interest rates on our interest-earning assets (including client loans, stock borrow activities, investments, inventories, and resale agreements) and our funding sources (including client cash balances, FHLB advances, stock lending activities, bank borrowings, and repurchase agreements), which finance these assets. The collateral underlying financial instruments at the broker-dealer is repriced daily, thus requiring collateral to be delivered as necessary. Interest rates on client balances and stock borrow and lending produce a positive spread to our company, with the rates generally fluctuating in parallel.

We manage our inventory exposure to interest rate risk by setting and monitoring limits and, where feasible, hedging with offsetting positions in securities with similar interest rate risk characteristics. While a significant portion of our securities inventories have contractual maturities in excess of five years, these inventories, on average, turn over several times per year.

Additionally, we monitor, on a daily basis, the Value-at-Risk (“VaR”) in our trading portfolios using a ten-day horizon and report VaR at a 99% confidence level. VaR is a statistical technique used to estimate the probability of portfolio losses based on the statistical analysis of historical price trends and volatility. This model assumes that historical changes in market conditions are representative of future changes, and trading losses on any given day could exceed the reported VaR by significant amounts in unusually volatile markets. Further, the model involves a number of assumptions and inputs. While we believe that the assumptions and inputs we use in our risk model are reasonable, different assumptions and inputs could produce materially different VaR estimates.

The following table sets forth the high, low, and daily average VaR for our trading portfolios during the nine months ended September 30, 2019, and the daily VaR at September 30, 2019 and December 31, 2018 (in thousands):

	Nine Months Ended September 30, 2019						VAR Calculation at
	High		Low		Daily Average		September 30, 2019		December 31, 2018
Daily VaR	$	8,765	$	2,309	$	5,358	$	3,767	$	6,473

Stifel Bancorp’s interest rate risk is principally associated with changes in market interest rates related to residential, consumer, and commercial lending activities, as well as FDIC-insured deposit accounts to customers of our broker-dealer subsidiaries and to the general public.

Our primary emphasis in interest rate risk management for Stifel Bancorp is the matching of assets and liabilities of similar cash flow and repricing time frames. This matching of assets and liabilities reduces exposure to interest rate movements and aids in stabilizing positive interest spreads. Stifel Bancorp has established limits for acceptable interest rate risk and acceptable portfolio value risk. To

ensure that Stifel Bancorp is within the limits established for net interest margin, an analysis of net interest margin based on various shifts in interest rates is prepared each quarter and presented to Stifel Bancorp’s Board of Directors. Stifel Bancorp utilizes a third-party model to analyze the available data.

The following table illustrates the estimated change in net interest margin at September 30, 2019, based on shifts in interest rates of up to positive 200 basis points and negative 200 basis points:

Hypothetical change in interest rates	Projected change in net interest margin
+200		11.8	%
+100		5.9
0		—
-100		(15.1	)
-200		(34.5	)

The following GAP Analysis table indicates Stifel Bancorp’s interest rate sensitivity position at September 30, 2019 (in thousands):

	Repricing Opportunities
	0-6 Months			7-12 Months			1-5 Years			5+ Years
Interest-earning assets:
Loans	$	6,317,855		$	324,399		$	1,992,573		$	876,711
Securities		4,676,537			341,285			776,121			581,702
Interest-bearing cash		227,522			—			—			—
	$	11,221,914		$	665,684		$	2,768,694		$	1,458,413
Interest-bearing liabilities:
Transaction accounts and savings	$	13,954,778		$	—		$	—		$	—
Certificates of deposit		607,694			104,586			80,973			—
Borrowings		—			—			250,000			—
	$	14,562,472		$	104,586		$	330,973		$	—
GAP		(3,340,558	)		561,098			2,437,721			1,458,413
Cumulative GAP	$	(3,340,558	)	$	(2,779,460	)	$	(341,739	)	$	1,116,674

Equity Price Risk

We are exposed to equity price risk as a consequence of making markets in equity securities. We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions constantly throughout each day.

Our equity securities inventories are repriced on a regular basis, and there are no unrecorded gains or losses. Our activities as a dealer are client-driven, with the objective of meeting clients’ needs while earning a positive spread.

Credit Risk

We are engaged in various trading and brokerage activities, with the counterparties primarily being broker-dealers. In the event counterparties do not fulfill their obligations, we may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. We manage this risk by imposing and monitoring position limits for each counterparty, monitoring trading counterparties, conducting regular credit reviews of financial counterparties, reviewing security concentrations, holding and marking to market collateral on certain transactions, and conducting business through clearing organizations, which guarantee performance.

Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure associated with our private client business consists primarily of customer margin accounts, which are monitored daily and are collateralized. We monitor exposure to industry sectors and individual

securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

We have accepted collateral in connection with resale agreements, securities borrowed transactions, and customer margin loans. Under many agreements, we are permitted to sell or repledge these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions. At September 30, 2019, the fair value of securities accepted as collateral where we are permitted to sell or repledge the securities was $2.7 billion, and the fair value of the collateral that had been sold or repledged was $564.9 million.

By using derivative instruments, we are exposed to credit and market risk on those derivative positions. Credit risk is equal to the fair value gain in a derivative, if the counterparty fails to perform. When the fair value of a derivative contract is positive, this generally indicates that the counterparty owes our company and, therefore, creates a repayment risk for our company. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by senior management.

Stifel Bancorp extends credit to individual and commercial borrowers through a variety of loan products, including residential and commercial mortgage loans, home equity loans, construction loans, and non-real-estate commercial and consumer loans. Bank loans are generally collateralized by real estate, real property, or other assets of the borrower. Stifel Bancorp’s loan policy includes criteria to adequately underwrite, document, monitor, and manage credit risk. Underwriting requires reviewing and documenting the fundamental characteristics of credit, including character, capacity to service the debt, capital, conditions, and collateral. Benchmark capital and coverage ratios are utilized, which include liquidity, debt service coverage, credit, working capital, and capital to asset ratios. Lending limits are established to include individual, collective, committee, and board authority. Monitoring credit risk is accomplished through defined loan review procedures, including frequency and scope.

We are subject to concentration risk if we hold large positions, extend large loans to, or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (i.e., in the same industry). Securities purchased under agreements to resell consist of securities issued by the U.S. government or its agencies. Receivables from and payables to clients and stock borrow and lending activities, both with a large number of clients and counterparties, and any potential concentration is carefully monitored. Stock borrow and lending activities are executed under master netting agreements, which gives our company right of offset in the event of counterparty default. Inventory and investment positions taken and commitments made, including underwritings, may involve exposure to individual issuers and businesses. We seek to limit this risk through careful review of counterparties and borrowers and the use of limits established by our senior management group, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment, and other positions or commitments outstanding.

Operational Risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems, and inadequacies or breaches in our control processes. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions, and damage to our reputation. In order to mitigate and control operational risk, we have developed policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Accounting, Operations, Information Technology, Legal, Compliance, and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate.

Regulatory and Legal Risk

Legal risk includes the risk of private client group customer claims for sales practice violations. While these claims may not be the result of any wrongdoing, we do, at a minimum, incur costs associated with investigating and defending against such claims. See further discussion on our legal reserves policy under “Critical Accounting Policies and Estimates” in Item 2, Part I and “Legal Proceedings” in Item 1, Part II of this report. In addition, we are subject to potentially sizable adverse legal judgments or arbitration awards, and fines, penalties, and other sanctions for non-compliance with applicable legal and regulatory requirements. We are generally subject to extensive regulation by the SEC, FINRA, and state securities regulators in the different jurisdictions in which we conduct business. As a bank holding company, we are subject to regulation by the Federal Reserve. Our bank subsidiaries are subject to regulation by the FDIC. As a result, we are subject to a risk of loss resulting from failure to comply with banking laws. Our

international subsidiary, SNEL, is subject to the regulatory supervision and requirements of the FCA in the United Kingdom. We have comprehensive procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, the extension of credit, including margin loans, collection activities, money laundering, and record keeping. We act as an underwriter or selling group member in both equity and fixed income product offerings. Particularly when acting as lead or co-lead manager, we have potential legal exposure to claims relating to these securities offerings. To manage this exposure, a committee of senior executives review proposed underwriting commitments to assess the quality of the offering and the adequacy of due diligence investigation.

Our company, as a bank and financial holding company, is subject to regulation, including capital requirements, by the Federal Reserve. Stifel Bancorp is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation ("FDIC") and state banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our company's and Stifel Bancorp's financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to, among other things, provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is accumulated and communicated to senior management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis. Under the direction of the Chief Executive Officer and Chief Financial Officer, management has evaluated our disclosure controls and procedures as of September 30, 2019 and has concluded that the disclosure controls and procedures were adequate and effective as of such date.

Changes in Internal Control over Financial Reporting

We have finalized the integration of the Business Bank of St. Louis, acquired on August 31, 2018, into our system of internal controls over financial reporting. Other than the change noted above, there were no changes in our internal control over financial reporting during the third quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Please see our discussion set forth under Item 3. “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2018 and Item 1. “Financial Statements” in our Form 10-Q for the quarter ended September 30, 2019.

ITEM 1A. RISK FACTORS

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the quarter ended September 30, 2019. The following table sets forth information with respect to purchases made by or on behalf of Stifel Financial Corp. or any “affiliated purchaser” (as defined in Rule 10b-10(a)(3) under the Securities Exchange Act of 1934, as amended), of our common stock during the quarter ended September 30, 2019.

	Total Number of Shares Purchased		Average Price Paid per share		Total Number of Shares Purchased as Part of Publically Announced Plans		Maximum Number of Shares That May Yet be Purchased Under the Plan or Program
July 1 - 31, 2019		305,700	$	58.96		305,700		6,448,471
August 1 - 31, 2019		656,000		53.88		656,000		5,792,471
September 1 - 30, 2019		38,900		53.95		38,900		5,753,571
		1,000,600	$	55.43		1,000,600

ITEM 6. EXHIBITS

Exhibit No.		Description

11.1		Statement Re: Computation of per Share Earnings (The calculation of per share earnings is included in Part I, Item 1 in the Notes to Consolidated Financial Statements (Earnings Per Share) and is omitted here in accordance with Section (b)(11) of Item 601 of Regulation S-K).

31.1		Rule 13a-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a) Certification of Chief Financial Officer.

32.1		Section 1350 Certification of Chief Executive Officer.*

32.2		Section 1350 Certification of Chief Financial Officer.*

101 104		The following financial information, formatted in iXBRL (Inline Extensible Business Report Language), Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Financial Condition as of September 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018; (v) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018; (vi) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018; and (vii) Notes to Consolidated Financial Statements. Cover Page Interactive Data File (embedded within the Inline XBRL document).

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Stifel Financial Corp. under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

STIFEL FINANCIAL CORP.

/s/ Ronald J. Kruszewski

Ronald J. Kruszewski

Chairman of the Board and

Chief Executive Officer

/s/ James M. Marischen

James M. Marischen

Chief Financial Officer

Date: November 6, 2019