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, 2010, and the accompanying consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q. Unless otherwise indicated, the terms "we," "us," "our" or "our company" in this report refer to Stifel Financial Corp. and its wholly-owned subsidiaries.

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, 2010, 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.

Executive Summary

Stifel Financial Corp. (the "Parent"), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Stifel Bank & Trust ("Stifel Bank"), Stifel Nicolaus Limited ("SN Ltd"), Century Securities Associates, Inc. ("CSA"), Stifel Nicolaus Canada, Inc. ("SN Canada"), Thomas Weisel Partners LLC ("TWP"), and Thomas Weisel Partners International Limited ("TWPIL"), is principally engaged in retail brokerage; securities trading; investment banking; investment advisory; retail, consumer, and commercial banking; and related financial services. Although we have offices throughout the United States, two Canadian cities, and three European cities, our major geographic area of concentration is in the Midwest and Mid-Atlantic regions, with a growing presence in the Northeast, Southeast and Western United States. Our principal customers are individual investors, corporations, municipalities, and institutions.

On July 1, 2010, we acquired Thomas Weisel Partners Group, Inc. ("TWPG"), an investment bank focused principally on the growth sectors of the economy, which generates revenues from three principal sources: investment banking, brokerage and asset management. The investment banking group is comprised of two primary categories of services: corporate finance and strategic advisory. The brokerage group provides equity sales and trading services to institutional investors, and offers brokerage, advisory services to high-net-worth individuals and corporate clients. The asset management group consists of: private investment funds, public equity investment products and distribution management. The employees of the investment banking, research and institutional brokerage businesses of TWP, a wholly-owned subsidiary of TWPG, were merged into Stifel Nicolaus during the third quarter of 2010. TWP remains a wholly-owned broker-dealer subsidiary of the Parent.

On July 25, 2011, we entered into a definitive agreement to acquire Stone & Youngberg LLC ("Stone & Youngberg"), a leading financial services firm specializing in municipal finance and fixed income securities. Stone & Youngberg's comprehensive institutional group expands our public finance, institutional sales and trading and bond underwriting, particularly in the Arizona and California markets, and adds more than 30 financial advisors in four offices to our Private Client Group. The purchase consideration consisted of cash and stock based on the value of net assets at the close. In addition, we will pay a contingent earn-out over a five year period after the close based upon revenue goals, as established in the purchase agreement. The transaction closed on October 1, 2011.

We plan to maintain our focus on revenue growth with a continued focus on developing quality relationships with our clients. Within our private client business, our efforts will be focused on recruiting experienced financial advisors with established client relationships. Within our institutional group business, our focus continues to be on providing quality client management and product diversification. In executing our growth strategy, we take advantage of the consolidation among middle market firms, which we believe provides us opportunities 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.

Results for the three and nine months ended September 30, 2011

For the three months ended September 30, 2011, our net revenues decreased 1.8% to $334.2 million compared to $340.4 million during the comparable period in 2010. For the three months ended September 30, 2011, net income increased 126.4% to $22.3 million compared to net loss of $84.3 million during the comparable period in 2010. The decrease in net revenues from the comparable period in 2010 was driven by a decline in institutional brokerage and investment banking revenues, which were negatively impacted by the challenging market conditions present during the third quarter of 2011 and lower industry-wide volumes. The decrease was offset by higher commissions revenues as a result of increased client assets coupled with higher productivity, growth in asset management and service fees as a result of an increase in assets under management and positive gains in market performance, and increased net interest revenues as a result of the growth of interest-earning assets at Stifel Bank.

For the nine months ended September 30, 2011, our net revenues increased 8.1% to $1.1 billion compared to $980.4 million during the comparable period in 2010. For the nine months ended September 30, 2011, net income increased 244.7% to $57.1 million compared to net loss of $39.5 million during the comparable period in 2010. The increase in net revenues over the comparable period in 2010 was primarily attributable to higher commission revenues as a result of increased client assets and higher productivity; growth in asset management and service fees as a result of an increase in assets under management through market performance and the merger with TWPG; and increased investment banking revenues, which was primarily related to the merger with TWPG. The increase in revenue growth was offset by a decline in fixed income institutional brokerage revenues, which was negatively impacted by the challenging market conditions present throughout 2011.

The results for the three and nine months ended September 30, 2010 include compensation expense for the acceleration of deferred compensation as a result of the modification of the company's deferred compensation plan and certain compensation and non-compensation operating expenses associated with the merger of TWPG.

The results for the nine months ended September 30, 2011 include litigation-related expenses associated with the civil lawsuit and related regulatory investigation in connection with the ongoing matter with five Southeastern Wisconsin school districts and certain merger-related expenses related to the merger with TWPG. For a discussion of our legal matters, including the OPEB litigation, see Item 1, "Legal Proceedings."

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. Investor confidence has been dampened by the debt concerns in Europe, continued economic turmoil related to the disasters in Japan, weakening employment and economic data in the U.S. and the uncertainty with the U.S. budget.

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, 2011, the key indicators of the markets' performance, the Dow Jones Industrial Average, and the NASDAQ closed 1.2%, and 2.0%, respectively, higher than their September 30, 2010 closing prices. At September 30, 2011, the S&P 500 closed 0.9% lower than its September 30, 2010 closing price.

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. This increased focus has resulted in the Dodd-Frank Act, which was signed into law during the third quarter of 2010. The Dodd-Frank Act will significantly restructure and increase regulation in the financial services industry, which could increase our cost of doing business, change certain business practices, and alter the competitive landscape.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2011 Compared with Three Months Ended September
30, 2010

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

                                                                                  As a Percentage of Net
                                                                                         Revenues
                                        For the Three Months Ended              For the Three Months Ended
                                              September 30,                            September 30,
                                                                   %
                                    2011           2010         Change           2011                2010
Revenues:
Commissions                       $ 143,243     $   96,986          47.7              42.9 %              28.5 %
Principal transactions               76,650        123,194         (37.8 )            22.9                36.2
Asset management and service
fees                                 58,253         50,876          14.5              17.4                14.9
Investment banking                   37,673         51,656         (27.1 )            11.3                15.2
Interest                             24,161         17,718          36.4               7.2                 5.2
Other income                            540          3,656         (85.2 )             0.2                 1.1
Total revenues                      340,520        344,086          (1.0 )           101.9               101.1
Interest expense                      6,306          3,698          70.5               1.9                 1.1
Net revenues                        334,214        340,388          (1.8 )           100.0               100.0

Non-interest expenses:
Compensation and benefits           210,573        395,936         (46.8 )            63.0               116.3
Occupancy and equipment rental       30,914         29,559           4.6               9.3                 8.7
Communication and office
supplies                             18,838         19,877          (5.2 )             5.6                 5.8
Commissions and floor brokerage       7,400          7,972          (7.2 )             2.2                 2.3
Other operating expenses             27,466         29,600          (7.2 )             8.2                 8.8
Total non-interest expenses         295,191        482,944         (38.9 )            88.3               141.9

Income/(loss) before income
taxes                                39,023       (142,556 )           *              11.7               (41.9 )
Provision for income taxes/(tax
benefit)                             16,719        (58,220 )           *               5.0               (17.1 )
Net income/(loss)                 $  22,304     $  (84,336 )           *               6.7 %             (24.8 ) %

* Percentage is not meaningful.

For the three months ended September 30, 2011, net revenues (total revenues less interest expense) decreased $6.2 million to $334.2 million; a 1.8% decrease from the $340.4 million recorded for the three months ended September 30, 2010. For the three months ended September 30, 2011, we reported net income of $22.3 million compared to net loss of $84.3 million during the comparable period in 2010.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

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

                                                                                    As a Percentage of Net
                                                                                           Revenues
                                          For the Nine Months Ended                For the Nine Months Ended
                                                September 30,                            September 30,
                                                                      %
                                     2011            2010          Change           2011               2010
Revenues:
Commissions                       $   437,344     $   305,655          43.1             41.3 %             31.2 %
Principal transactions                249,250         363,537         (31.4 )           23.5               37.0
Asset management and service
fees                                  172,914         136,117          27.0             16.3               13.9
Investment banking                    143,509         127,129          12.9             13.5               13.0
Interest                               64,246          47,019          36.6              6.1                4.8
Other income                           11,352           9,358          21.3              1.1                1.0
Total revenues                      1,078,615         988,815           9.1            101.8              100.9
Interest expense                       18,931           8,388         125.7              1.8                0.9
Net revenues                        1,059,684         980,427           8.1            100.0              100.0

Non-interest expenses:
Compensation and benefits             671,678         819,085         (18.0 )           63.4               83.5
Occupancy and equipment rental         89,962          81,012          11.0              8.5                8.3
Communication and office
supplies                               56,198          50,220          11.9              5.3                5.1
Commissions and floor brokerage        20,943          18,988          10.3              2.0                1.9
Other operating expenses              127,321          78,168          62.9             12.0                8.0
Total non-interest expenses           966,102       1,047,473          (7.8 )           91.2              106.8

Income/(loss) before income
taxes                                  93,582         (67,046 )           *              8.8               (6.8 )
Provision for income taxes/(tax
benefit)                               36,464         (27,559 )           *              3.4               (2.8 )
Net income/(loss)                 $    57,118     $   (39,487 )           *              5.4 %             (4.0 ) %

* Percentage is not meaningful.

For the nine months ended September 30, 2011, net revenues (total revenues less interest expense) increased $79.3 million to $1.1 billion; an 8.1% increase over the $980.4 million recorded for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, we reported net income of $57.1 million compared to net loss of $39.5 million during the comparable period in 2010.

NET REVENUES


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

                              For the Three Months Ended                  For the Nine Months Ended
                                    September 30,                               September 30,
                                                        %                                            %
                          2011          2010          Change          2011           2010         Change
Net revenues:
Commissions             $ 143,243     $  96,986           47.7     $   437,344     $ 305,655          43.1
Principal
transactions               76,650       123,194          (37.8 )       249,250       363,537         (31.4 )
Asset management and
service fees               58,253        50,876           14.5         172,914       136,117          27.0

Investment banking:
Capital raising            25,254        28,593          (11.7 )        97,301        84,613          15.0
Strategic advisory
fees                       12,419        23,063          (46.2 )        46,208        42,516           8.7
                           37,673        51,656          (27.1 )       143,509       127,129          12.9

Net interest               17,855        14,020           27.4          45,315        38,631          17.3
Other income                  540         3,656          (85.2 )        11,352         9,358          21.3
Total net revenues      $ 334,214     $ 340,388           (1.8 )   $ 1,059,684     $ 980,427           8.1

Except as noted in the following discussion of variances, the underlying reasons for the increase in net revenues can be attributed principally to the increased number of private client group offices and financial advisors in our Global Wealth Management segment and the increased number of revenue producers in our Institutional Group segment. The increase in net revenues for the nine months ended September 30, 2011 is attributable to the previously mentioned factors and the acquisition of TWPG on July 1, 2010. The operations of TWPG were integrated with Stifel Nicolaus immediately after the merger, therefore the results of the business, as acquired, does not exist as a discrete entity within our internal reporting structure.

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, 2011, commission revenues increased 47.7% to $143.2 million from $97.0 million in the comparable period in 2010. For the nine months ended September 30, 2011, commission revenues increased 43.1% to $437.3 million from $305.7 million in the comparable period in 2010. The increases are primarily attributable to an increase in client assets and higher productivity.

Principal transactions - For the three months ended September 30, 2011, principal transactions revenues decreased 37.8% to $76.7 million from $123.2 million in the comparable period in 2010. For the nine months ended September 30, 2011, principal transactions revenues decreased 31.4% to $249.3 million from $363.5 million in the comparable period in 2010. The decreases are primarily attributable to a decline in fixed income institutional brokerage revenues, which was negatively impacted by the challenging market conditions present during throughout 2011.

The increase in commissions and a corresponding decrease in principal transactions is primarily attributable to a change in classification of certain equity trades that were recorded as principal transactions during the three and nine months ended September 30, 2010 that are now being recorded as commission revenues as a result of regulatory changes.

Asset management and service fees - Asset management and service fees include fees for asset-based financial services provided to individuals and institutional clients. Investment advisory fees are charged based on the value of assets in fee-based accounts. Asset management and service fees are affected by changes in the balances of client assets due to market fluctuations and levels of net new client assets.

For the three months ended September 30, 2011, asset management and service fee revenues increased 14.5% to $58.3 million from $50.9 million in the comparable period of 2010. For the nine months ended September 30, 2011, asset management and service fee revenues increased 27.0% to $172.9 million from $136.1 million in the comparable period of 2010. The increases are primarily a result of an increase in the value of assets in fee-based accounts and the number of managed accounts from September 30, 2010, as a result of market performance, offset by a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers. In addition, asset management and service fee revenues for the nine months ended September 30, 2011 were positively impacted by the addition of the TWPG asset management business starting on July 1, 2010. See "Assets in fee-based accounts" included in the table in "Results of Operations - Global Wealth Management."

Investment banking - Investment banking revenues include: (i) capital raising revenues representing fees earned from the underwriting of debt and equity securities, and (ii) strategic advisory fees related to corporate debt and equity offerings, municipal debt offerings, mergers and acquisitions, private placements and other investment banking advisory fees.

For the three months ended September 30, 2011, investment banking revenues decreased 27.1%, to $37.7 million from $51.7 million in the comparable period in 2010. The decrease is primarily attributable to the volatility and uncertainty that curtailed capital raising during the third quarter of 2011.

For the nine months ended September 30, 2011, investment banking revenues increased 12.9%, to $143.5 million from $127.1 million in the comparable period in 2010. The increase is primarily attributable to an increase in equity capital raising as a result of improved equity capital market conditions during the first half of 2010 and the merger with TWPG, offset by the volatility and uncertainty that curtailed capital raising during the third quarter of 2011.

Capital raising revenues decreased 11.7% to $25.3 million for the three months ended September 30, 2011 from $28.6 million in the comparable period in 2010. During the third quarter of 2011, equity capital raising and underwriting revenues were $16.8 million and $4.4 million, respectively, a decrease of 19.5% and an increase of 208.9%, respectively, from the comparable period in 2010. For the three months ended September 30, 2011, fixed income capital raising revenues decreased 35.2% to $4.1 million from $6.3 million in comparable period in 2010.

Capital raising revenues increased 15.0% to $97.3 million for the nine months ended September 30, 2011 from $84.6 million in the comparable period in 2010. For the nine months ended September 30, 2011, equity capital raising and underwriting revenues were $65.7 million and $19.1 million, respectively, an increase of 11.8% and 158.1%, respectively, from the comparable period in 2010. For the nine months ended September 30, 2011, fixed income capital raising revenues decreased 32.0% to $12.5 million from $18.5 million in the comparable period in 2010.

Strategic advisory fees decreased 46.2% to $12.4 million for the three months ended September 30, 2011 from $23.1 million in the comparable period in 2010. Strategic advisory fees increased 8.7% to $46.2 million for the nine months ended September 30, 2011 from $42.5 million in the comparable period in 2010.

Other income - For the three months ended September 30, 2011, other income decreased 85.2% to $0.5 million from $3.7 million during the comparable period in 2010. The decrease is primarily attributable to unrealized investment losses recognized during the quarter compared to investment gains during the comparable period in 2010.

For the nine months ended September 30, 2011, other income increased 21.3% to $11.4 million from $9.4 million during the comparable period in 2010. The increase is primarily attributable to an increase in mortgage fees due to the increase in loan originations at Stifel Bank, offset by lower investment gains recognized during the nine months ended September 30, 2011.

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, 2011                                      September 30, 2010
                                                Interest                                                Interest
                                                 Income/          Average                                Income/          Average
                          Average Balance        Expense       Interest Rate      Average Balance        Expense       Interest Rate
Interest-earning
assets:
. . .