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, 2011, 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, 2011, 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 country. 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 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 private client and institutional group businesses.

Stifel Financial Corp. (the "Parent"), through its wholly owned subsidiaries, principally Stifel, Nicolaus & Company, Incorporated ("Stifel Nicolaus"), Stifel Bank & Trust ("Stifel Bank"), Stifel Nicolaus Europe Limited ("SNEL"), Century Securities Associates, Inc. ("CSA"), and Stifel Nicolaus Canada, Inc. ("SN Canada"), 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 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.

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.

On October 1, 2011, we acquired 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, a portion paid at closing and a portion to be paid over the next three years, and stock based on the value of net assets at closing. In addition, we may be required to pay a contingent earn-out over a five year period after the close based upon revenue goals, as established in the purchase agreement. The public finance, institutional sales and trading, and retail businesses were integrated with Stifel Nicolaus immediately after the acquisition. Stone & Youngberg remains a wholly owned broker-dealer subsidiary of the Parent.

Results for the three months ended March 31, 2012

For the three months ended March 31, 2012, our net revenues increased 9.2% to $400.3 million compared to $366.6 million during the comparable period in 2011. Net income increased 10.7% to $34.8 million for the three months ended March 31, 2012, compared to $31.4 million during the comparable period in 2011.

The increase in net revenues from the prior year was primarily attributable to higher investment banking revenues as a result of the improved performance of the capital markets; increased principal transactions revenues as a result of strong trading volumes and tightening credit spreads; increased net interest revenues as a result of the growth of net interest-earning assets at Stifel Bank; and growth in asset management and service fees as a result of an increase in investment advisory revenues. The increase in revenue growth was offset by a decline in commission revenues, which was down from the record high during the first quarter of 2011. While market conditions improved during the first quarter 2012, the lack of volatility in the capital markets limited trading opportunities during the first quarter of 2012.

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, concerns over unemployment levels and economic data in the U.S. lackluster jobs growth, 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 March 30, 2012, the key indicators of the markets' performance, the Dow Jones Industrial Average, the NASDAQ and the S&P 500 closed 8.1%, 11.2% and 6.2% higher than their December 30, 2011 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. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act will have a broad impact on the financial services industry and will impose significant new regulatory and compliance requirements, including the designation of certain financial companies as systemically significant, the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector. The expectation is that this new legislation 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 March 31, 2012 Compared with Three Months Ended March 31,
2011

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
                                                         March 31,                         March 31,
                                                                          %
                                                2012         2011      Change        2012             2011
Revenues:
Commissions                                  $   123,303   $ 155,786     (20.9 )          30.8 %           42.5 %
Principal transactions                           116,233      92,859      25.2            29.1             25.3
Investment banking                                70,438      41,418      70.1            17.6             11.3
Asset management and service fees                 60,818      57,680       5.4            15.2             15.7
Interest                                          25,257      18,856      33.9             6.3              5.1
Other income                                      13,294       6,256     112.3             3.3              1.8
Total revenues                                   409,343     372,855       9.8           102.3            101.7
Interest expense                                   9,010       6,242      44.3             2.3              1.7
Net revenues                                     400,333     366,613       9.2           100.0            100.0

Non-interest expenses:
Compensation and benefits                        254,704     231,166      10.2            63.6             63.1
Occupancy and equipment rental                    30,791      29,325       5.0             7.7              8.0
Communication and office supplies                 20,373      18,845       8.1             5.1              5.1
Commissions and floor brokerage                    7,612       6,649      14.5             1.9              1.8
Other operating expenses                          27,599      29,944      (7.8 )           6.9              8.2
Total non-interest expenses                      341,079     315,929       8.0            85.2             86.2

Income before income taxes                        59,254      50,684      16.9            14.8             13.8
Provision for income taxes                        24,481      19,286      26.9             6.1              5.2
Net income                                   $    34,773   $  31,398      10.7             8.7 %            8.6 %

For the three months ended March 31, 2012, net revenues (total revenues less interest expense) increased $33.7 million to $400.3 million; a 9.2% increase over the $366.6 million recorded for the three months ended March 31, 2011. For the three months ended March 31, 2012, we reported net income of $34.8 million compared to net income of $31.4 million during the comparable period in 2011.

NET REVENUES


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

                                     Three Months Ended March 31,
                                                                 %
                                      2012          2011      Change
Net revenues:
Commissions                       $    123,303    $ 155,786     (20.9 )
Principal transactions                 116,233       92,859      25.2
Investment banking:
Capital raising                         54,833       32,358      69.5
Strategic advisory fees                 15,605        9,060      72.2
                                        70,438       41,418      70.1
Asset management and service fees       60,818       57,680       5.4
Net interest                            16,247       12,614      28.8
Other income                            13,294        6,256     112.3
Total net revenues                $    400,333    $ 366,613       9.2

Except as noted in the following discussion of variances, the underlying reasons for the increase in revenue 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.

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 March 31, 2012, commission revenues decreased 20.9% to $123.3 million from $155.8 million in the comparable period in 2011. The decrease is primarily attributable to a decrease in OTC transactions from the comparable period in 2011.

Principal transactions - For the three months ended March 31, 2012, principal transactions revenues increased 25.2% to $116.2 million from $92.9 million in the comparable period in 2011. The increase is primarily attributable to improved fixed income institutional brokerage revenues as a result of strong trading volumes and tightening credit spreads.

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, merger and acquisitions, private placements and other investment banking advisory fees.

For the three months ended March 31, 2012, investment banking revenues increased 70.1%, to $70.4 million from $41.4 million in the comparable period in 2011. The increase was primarily attributable to an increase in capital raising and advisory fees as a result of improved equity capital market conditions, improving investor sentiment and lower volatility.

Capital raising revenues increased 69.5% to $54.8 million for the three months ended March 31, 2012 from $32.4 million in the comparable period in 2011. During the first quarter of 2012, equity capital raising revenues increased 76.6% to $39.5 million from $22.4 million in the comparable period in 2011. For the three months ended March 31, 2012, fixed income capital raising revenues increased 234.7% to $11.1 million from $3.3 million in the comparable period in 2011.

Strategic advisory fees increased 72.2% to $15.6 million for the three months ended March 31, 2012 from $9.1 million in the comparable period in 2011. The increase is primarily attributable to an increase in the number of completed equity transactions over the comparable period in 2011.

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 March 31, 2012, asset management and service fee revenues increased 5.4% to $60.8 million from $57.7 million in the comparable period of 2011. The increase is primarily a result of an increase in investment advisory revenues, offset by a reduction in fees for money-fund balances due to the waiving of fees by certain fund managers. See "Assets in fee-based accounts" included in the table in "Results of Operations - Global Wealth Management."

Other income - For the three months ended March 31, 2012, other income increased 112.3% to $13.3 million from $6.3 million during the comparable period in 2011. Other income primarily includes investment gains, including gains on our private equity investments, and loan originations fees from Stifel Bank.

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
                                             March 31, 2012                                     March 31, 2011
                                                  Interest                                           Interest
                                                  Income/        Average                             Income/        Average
                              Average Balance     Expense     Interest Rate      Average Balance     Expense     Interest Rate
Interest-earning assets:
Margin balances (Stifel
Nicolaus)                    $         504,287   $    4,885            3.87 %   $         444,443   $    4,587            4.13 %
Interest-earning assets
(Stifel Bank)                        2,385,689       17,476            2.93             1,734,407       11,203            2.58
Stock borrow (Stifel
Nicolaus)                               67,669           26            0.16                96,861            5            0.02
Other (Stifel Nicolaus)                               2,870                                              3,061
Total interest revenue                           $   25,257                                         $   18,856

Interest-bearing
liabilities:
Short-term borrowings
(Stifel Nicolaus)            $         185,342   $      522            1.13 %   $         168,502   $      589            1.40 %
Interest-bearing liabilities
(Stifel Bank)                        2,213,848        4,064            0.73             1,615,049        4,238            1.05
Stock loan (Stifel Nicolaus)           155,986          817            2.09                98,394          330            1.34
Senior notes (Stifel
Financial)                             175,000        2,293            6.94                     -            -               -
Interest-bearing liabilities
(Capital Trusts)                        82,500        1,005            4.87                82,500          977            4.73
Other (Stifel Nicolaus)                                 309                                                108
Total interest expense                                9,010                                              6,242
Net interest income                              $   16,247                                         $   12,614

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 March 31, 2012, net interest income increased to $16.2 million from $12.6 million during the comparable period in 2011.

For the three months ended March 31, 2012, interest revenue increased 33.9% to $25.3 million from $18.9 million in the comparable period in 2011, principally as a result of a $6.3 million increase in interest revenue generated from the interest-earning assets of Stifel Bank. The average interest-earning assets of Stifel Bank increased to $2.4 billion during the three months ended March 31, 2012 compared to $1.7 billion during the comparable period in 2011 at average interest rates of 2.93% and 2.58%, respectively.

For the three months ended March 31, 2012, interest expense increased 44.3% to $9.0 million from $6.2 million during the comparable period in 2011. The increase is primarily attributable to the interest expense associated with our January 2012 issuance of $175.0 million of 6.70% senior notes.

NON-INTEREST EXPENSES

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


                                      For the Three Months Ended March 31,
                                                                          %
                                        2012              2011         Change
Non-interest expenses:
Compensation and benefits          $      254,704    $      231,166       10.2
Occupancy and equipment rental             30,791            29,325        5.0
Communications and office supplies         20,373            18,845        8.1
Commissions and floor brokerage             7,612             6,649       14.5
Other operating expenses                   27,599            29,944       (7.8 )
Total non-interest expenses        $      341,079    $      315,929        8.0

Except as noted in the following discussion of variances, the underlying reasons for the increase in non-interest expenses can be attributed principally to our continued expansion and increased administrative overhead to support the growth in our segments.

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 March 31, 2012, compensation and benefits expense increased 10.2%, or $23.5 million, to $254.7 million from $231.2 million during the comparable period in 2011. The increase is principally due to the following:
1) increased variable compensation as a result of increased revenue production and profitability; 2) increased fixed compensation for the additional administrative support staff; and 3) an increase in deferred compensation expense as a result of the acceleration of the vesting period for all unit grants awarded to retirement-eligible employees in February 2012.

Compensation and benefits expense as a percentage of net revenues was 63.6% for the three months ended March 31, 2012, compared to 63.1% for the three months ended March 31, 2011. Excluding the acceleration of deferred compensation expense, compensation and benefits expense as a percentage of net revenues was 62.7% for the three months ended March 31, 2012, compared to 62.9% for the three months ended March 31, 2011.

A portion of compensation and benefits expenses includes transition pay, principally in the form of upfront notes, signing bonuses and retention awards in connection with our continuing expansion efforts, of $18.4 million (4.6% of net revenues) for the three months ended March 31, 2012, compared to $18.8 million (5.1% of net revenues) for the comparable period in 2011. The upfront notes are amortized over a five to ten year period.

Occupancy and equipment rental - For the three months ended March 31, 2012, occupancy and equipment rental expense increased 5.0% to $30.8 million from $29.3 million during the three months ended March 31, 2011. The increase is primarily due to the increase in rent and depreciation expense due primarily to an increase in office locations. As of March 31, 2012, we have 326 locations compared to 311 at March 31, 2011.

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 March 31, 2012, communications and office supplies expense increased 8.1% to $20.4 million from $18.8 million during the first quarter of 2011. The increase is primarily attributable to our continued expansion through the addition of revenue producers and support staff.

Commissions and floor brokerage - For the three months ended March 31, 2012, commissions and floor brokerage expense increased 14.5% to $7.6 million from $6.6 million during the comparable period in 2011. The increase is primarily attributable to costs associated with the conversion of customer accounts to a new omnibus platform during the first quarter of 2012, offset by lower clearing . . .